Consultant’s Insight: Shift to lower-priced delivery services hurts FedEx

Despite cutting costs and combining its FedEx Ground and FedEx Express divisions, FedEx reported disappointing earnings for its fiscal first quarter. Revenue for the quarter, which ended Aug. 31, dipped less than 1% year over year to $21.6 billion. [caption id="attachment_69752" align="alignright" width="251"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo Next columnist[/caption] Much like UPS , FedEx is feeling the brunt of a competitive B2C parcel market that typically favors: Lower rates; Last-mile delivery competitors with lower costs; and Retailers such as Amazon , Target and Walmart , which deliver more and more of their own parcels. However, the more profitable B2B parcel volumes have yet to recover as the industrial economy remains muted. The U.S. manufacturing Purchasing Managers’ Index (PMI) from S&P Global dipped to 47.9 in August, the lowest reading of the year. “Overall, I remain confident in the value-creation opportunities ahead as we focus on reducing our structural cost, growing revenue profitably and leveraging the insights from our vast collection of data as we continue to build the world’s most flexible, efficient and intelligent network,” FedEx President and Chief Executive Raj Subramaniam said in the Sept. 19 earnings report . Shift to economy from premium But the company does not seem quite as prepared for a shift from its premium — i.e., more profitable — air and ground services to its more economical services, a trend that FedEx and UPS have seen for several quarters now. This shift has negatively affected both companies’ margins and will likely continue at least through the peak holiday season. Much of the shift can be attributed to the B2C parcel market, where e-commerce players, particularly Chinese providers Temu and Shein , are driving demand. UPS stumbled during its Q2 , which ended June 30, when it reported lower profit, some of which was attributed to Temu and Shein as customers. However, when FedEx was asked about the two Chinese e-commerce providers, Chief Customer Officer Brie Carere told analysts, “We have very productive relationships with them. … We have really focused on the parts of their business where they do need speed and/or where we have available capacity coming into the United States.” Still, FedEx will need to take more cost out of its network to compete profitably with other global players. In particular, FedEx will need to reduce its purchased transportation costs. During the quarter, it noted higher such costs within its freight forwarding division due to reporting higher revenue and linehaul requirements with its Express division. Years ago, UPS also struggled with higher purchased transportation costs and acquired Coyote Logistics to mitigate such costs. UPS has since sold Coyote and now likely has the necessary technology to manage third-party transportation costs. FedEx will need to make similar technology investments, if it has not done so already, to improve profitability, particularly within its freight forwarding division, which is a significant part of its Tricolor initiative that drives more profitable cargo to its airplanes and other cargo to third-party planes. Outlook FedEx downgraded its fiscal year expectations and now expects revenue growth in low-single-digit rates versus its previously expected low- to mid-single-digit growth. “At the midpoint of our outlook range, we expect the demand environment to moderately improve as we move through the year, driven by a slight recovery in the industrial economy, e-commerce growth and low inventory levels,” Carere said. Indeed, Q2 could be another disappointing quarter for FedEx. It will face costs associated with the end of its U.S. Postal Service contract and a shortened peak holiday season that will likely favor lower-cost, last-mile competitors. However, it could benefit from a potential U.S. East Coast and Gulf port strike. When asked about the possibility, FedEx Chief Financial Officer John Dietrich told analysts, “Any time you have some port disruption, it generally favors airfreight.” FedEx could also see benefits from the tight airfreight market. It recently took MD-11s out of storage in preparation for the peak holiday season.

Consultant’s Insight: Shift to lower-priced delivery services hurts FedEx

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