FedEx reported net income up 6.0% y-o-y in its fiscal first quarter, to $692 million, as total revenue rose 5.1% to $12.28 million. Operating income for the quarter rose 7.7% to $1.14 billion. However, adjusting for a one-time gain of $64 million in the first quarter of FY2015, the result was even stronger: net income rose 13.1% and operating income was up 14.9%.
FedEx said the gains were due to “sharply increased operating income at FedEx Express, the benefit from one additional operating day [in the quarter], and continued positive impacts from the company’s profit improvement program.”
All was not rosy, however, as the company faced higher operating costs and higher self-insurance reserves at FedEx Ground, and lower-than-anticipated volume at FedEx Freight. FedEx also noted that “fuel had a slightly negative net impact to operating income.”
Before we look at the results by operating segment, we point out that while the pending acquisition of TNT is at the center of most FedEx news these days, FedEx CFO Alan Graf said: “the cost related to the pending acquisition of TNT Express were immaterial for the quarter.” But while the TNT acquisition may not have impacted the recently completed quarter, it is certainly occupying minds in Memphis. Mr. Graf said: “We are making timely progress on the necessary regulatory steps required. We have started the planning for the integration of TNT and Express after completion of the acquisition. This planning includes addressing the issues that must be ready for day one implementation such as financial reporting, treasury, compliance, and governance as well as the planning for the longer-term aspects of the integration. Our integration plans currently assume that the acquisition will close in the first half of calendar 2016.
Now we turn to segment operating results:
Express Segment: Operating income in the Express segment jumped 44.6% y-o-y in the quarter to $545 million, despite a 3.9% dip in Express revenue to $6.59 billion. Also of note was that average daily package volume fell 4.9% for the International Priority product – a product that once could be counted on for strong growth, but which has stalled in recent years. On the domestic side, average daily Overnight Box volume was down slightly (0.1%), while Overnight Envelope volume increased 2.7% and deferred volume was up 2.2%.
The decline in Express revenue, which came despite improved base rates, was partly attributable to unfavorable exchange rate effects, and partly to a decline in fuel surcharges. However, as we have pointed out in the past, declining fuel surcharges are the result of declining fuel prices, and do not impact bottom line results.
Regarding the big jump in operating income, FedEx said the increase was “due to higher base rates, the benefit from one additional operating day, and lower international; expense due to currency exchange rates, more than offsetting higher incentive compensation accruals.” And further, “profit improvement program initiatives continued to improve revenue quality and constrain expenses.”
Ground Segment: Operating income in the Ground segment declined 1.5% y-o-y in the quarter to 537 million, despite an almost 30% increase in revenue to $3.83 billion. This disparity is the result of several factors. First, FedEx acquired third-party logistics provider GENCO in early 2015, and GENCO revenue is now recorded in the Ground segment. Second, the company now reports FedEx SmartPost revenue on a gross basis, rather than the net basis it has used in the past. Third, as mentioned above, the current year quarter had one more operating day. All of these were factors in the big jump in revenue, but operating income declined “due to increased self-insurance reserves, and higher-than-expected operating costs (due in part to larger package sizes).”
Freight segment: Operating income in the Freight segment fell sharply, down 21.4% y-o-y to $132 million, as revenue declined 0.5% to $1.60 billion. Daily shipment volume was down 0.9%, and FedEx said the big fall in operating income was the result of this lower-than-anticipated volume combined with increases in salaries and employee benefits.
Commenting on the quarter, FedEx said the overall positive results came despite weaker-than-expected economic conditions, indicating that “our profit improvement program is on track and delivering impressive results.”
Looking ahead, FedEx said it was lowering its full year outlook slightly, “due primarily to weaker LTL industry demand and higher-than-expected self-insurance reserves and operating costs at FedEx Ground.” However, CFO Alan Graf was quick to point out that, even after this modest decrease in outlook, “we still are looking at the midpoint of the range being 19% higher than what we achieved last year in terms of earnings per share.”
Get more air cargo insights at the 2015 Cargo Facts Symposium, Oct. 26-28 in Miami. Click here for details.