FedEx revenues rise, while Express trends worsen in 2QFY19

This week, Memphis-based FedEx reported a 9.3% year-over-year increase in revenue for its 2QFY19, ended 30 November, to US$17.82 billion. Operating income during the quarter was up only 4.8%, compared to a double-digit increase reported for 1Q, to $1.17 billion, and net income rose 20.6% to $935 million.

The Express segment presented substantial headwinds for FedEx that are likely to continue beyond peak season. During its earnings call to discuss results, President and COO Dave Bronczek said “international economic weakness” contributed to revenue challenges in the segment. Specifically, concerns over contractions in Germany’s gross domestic product (GDP), unrest in France, and uncertainty related to Brexit slowed the company’s international revenue growth beyond what it expected. To address the weakness in its international business, FedEx intends to pursue cost-reduction initiatives including a voluntary employee buyout program, capacity reductions in its international air network, limited hiring, and reduced discretionary spending.

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While the company is making some reductions to its operations, it is unlikely to significantly slow its fleet renewal strategy, as EVP and CFO Alan Graf noted, “The maintenance aspects of new planes versus used planes is absolutely unbelievable, not just from a cost standpoint, but from a reliability standpoint.” The integrator’s current backlog of expected deliveries, based on its most recent 10-Q filing, includes twenty-two 777Fs, sixty 767Fs, fifty Cessna SkyCourier 408 aircraft, and thirty ATR 72-600Fs.

FedEx is also pursuing growth in new areas, including with this week’s launch of the “FedEx Extra Hours” expansion to its e-commerce delivery portfolio. The Extra Hours product will allow participating retailers to fulfill e-commerce orders into the evening, with late pickup by FedEx Express offering next-day local shipping and two-day shipping throughout the continental US. Raj Subramaniam, EVP and Chief Marketing and Communications Officer, who will replace FedEx Express’s outgoing president and CEO, David Cunningham, at the end of this year, noted that “e-commerce continues to drive business” and spur investment in FedEx’s retail network.

During the call, Chairman and CEO Fred Smith also addressed speculation that Amazon Air could emerge as a rival to FedEx and other integrators, acknowledging the e-commerce giant as a “wonderful company in service and… a good customer of [FedEx],” and adding, “We don’t see them as a peer competitor at this point in time for many reasons. We think it is doubtful that that will be the case.” Growth in FedEx’s US Domestic Package average daily volumes, which increased 6.9% during 2Q, confirm the integrator’s current strength in US domestic operations, apart from its Overnight Envelope segment.

To more closely examine the results by segment:

FedEx Express: On the Express side, revenues increased 5.8% y-o-y during the quarter to $9.6 billion, while operating income increased by 3.2% to $620 million – down from stronger year-to-date growth of 7.7% and 7.2%, respectively, for the first two quarters of FedEx’s FY19. Meanwhile, package volumes were up for most segments except U.S. Overnight Envelope, where average daily volumes declined 2.7% during the quarter, and the International Domestic segment (covering international intra-country operations), where volumes were 1.3% lower, y-o-y. Total package volume increased only 2.9%, compared to the stronger year-to-date increase of 3.7%.

FedEx Ground: FedEx’s Ground segment revenue rose 13.6% to $5.14 billion during 2QFY19, as operating income increased 18.1% to $586 million. Both average daily package volumes and yield per package increased, by 7.7% and 5.5%, respectively. The segment was profitable despite the opening of two new hubs, and FedEx expects the segment to continue increasing in profitability with ongoing improvements in automation.

FedEx Freight: The Freight segment also recorded exceptional y-o-y growth during the quarter, with revenue climbing 13.6% to $1.92 billion and operating income rising 37% to $148 million.

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