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FedEx reaps the rewards of cost management

David HarrisbyDavid Harris
March 26, 2015
in Archive, Express
0
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A huge jump in profitability, despite a relatively modest gain in revenue, indicates FedEx’s cost-management program is bearing fruit.

FedEx 3QFY15 for webFedEx reported net income up 53.4% y-o-y in its fiscal third quarter (ended 28 February) to US$580 million, as revenue rose 3.7% to $11.72 billion. Operating income for the quarter was up 50.1% to $962 million. FedEx’s fiscal year is askew from the calendar year, and in the words of founder, president, chairman and CEO Fred Smith, the strong performance came in a “demanding quarter” that, in addition to including the December holiday peak, “included the Chinese New Year, Valentine’s Day, tough winter weather and labor disruptions in West Coast ports.”

As can be seen in the accompanying charts, all three of the company’s transportation segments performed well, reporting solid volume growth and, in the case of the Express and Freight segments, spectacular increases in operating income.

Looking first at the Express segment: Despite a slight (0.3%) decline in revenue to $6.66 billion, FedEx Express reported operating income up almost 130% to $384 million. The company said the revenue decline was due to the negative impact of lower fuel surcharges and unfavorable exchange rates, although these were partially offset by base rate increases and by increasing volume. Regarding the jump in operating revenue, FedEx said fuel expense decreased 31% in the quarter, leading to “a significant benefit.” Also, operating and maintenance costs are much lower for the new 767-300Fs FedEx is acquiring than for the MD-10-10Fs they are replacing; and, according to FedEx, the result was also boosted by “improved productivity and great cost performance.”

If there was a weakness in the overall Express performance, it was in International Priority shipments, the only Express product to report a decline in average daily volume – although that decline was very small. It is interesting to compare this with the most recent statistics from UPS, which reported strong growth in international export volumes in its most recent quarter, but a decline in US domestic overnight volumes.

In the Ground segment, revenue was up 11.9% to $339 billion. Core Ground revenue was up 9.8% to $3.02 billion, while the much smaller SmartPost contribution was up 1.8% to $285 million. Total revenue was boosted by the acquisition of third-party logistics provider GENCO partway through the quarter. Volume was down for SmartPost, but this was more than offset by strong growth in core Ground volume.

FedEx Freight reported modest 3.5% growth in shipment volume, a solid 6.9% increase in revenue to $1.43 billion, and a huge 94.3% jump in operating income to $66 million. Regarding the huge increase in operating income, FedEx said only that it “benefited from higher less-than-truckload revenue per shipment and 3% higher average daily LTL shipments.”

During discussion of the quarterly results in a conference call, FedEx executives made a couple of interesting comments, not directly related to the results themselves, but of significance to the overall state of the air freight and express industry. Fred Smith was asked whether, since the labor strife at the West Coast ports had bumped up demand for air freight in the quarter, FedEx expected to see a corresponding drop in the future as shippers shifted back to ocean. His reply was interesting: “I think that’s really hard to see given the appreciation of the dollar against a number of the foreign currencies and lower fuel prices. I think on the margin, obviously, elasticities will make people use air more than they would have otherwise. But having said that, since the great recession, the big trend has been a de-coupling of world trade growth from world GDP growth, which prior to that time was about 2 times, 2.5 times GDP growth, and now it’s actually on parity or a little bit lower.” He also added: “The main thing that drives things that go by air versus sea is value per pound, or perishability, or something of that nature. And the reality is that most manufactured products are going down in terms of value per pound, particularly electronics, which account for about half of all the tonnage moved by air. So I don’t think that things are going to change materially because of these things.”

The other subject of interest was the impact of FedEx’s shift to dimensional weight pricing. Executive VP Mike Glenn pointed out that there had been plenty of advance warning, and that customers had responded well by being willing to adopt more space-efficient packaging. Fred Smith pointed out that “e-commerce is inherently less cube-efficient than business-to-business traffic… We could tell you about boxes that have a 2-ounce or 3-ounce small device that just have incredibly bad cube-to-weight ratios. What we really sell is cubic space, and almost all of our equipment cubes out before it weights out.” No real surprise there, but then he added: “For those of you who are environmentally concerned, dimensional pricing is probably one of the most important environmental initiatives in corporate America, because it incents people not to waste fuel to move air.”

Gain greater insights into macro air cargo trends at Cargo Facts Asia, 21-22 April in Hong Kong. Click here for details.

Tags: 767Express Air CargoFedExmodal shift
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