FedEx today reported an 8% decline in operating income in its second quarter to 30 November,despite an increase in revenues and strong performances from its Freight and Ground divisions, as
persistent weakness in the global economy and increased demand for lower-yielding internationalservices limited profits at FedEx Express.However, the company reported an “unbelievable” holiday peak season, with record-breakingvolumes of more than 19 million shipments per day on three Mondays in November and December, drivenby growth in e-commerce volumes that surpassed the expectations of FedEx and its customers.
The company said its second-quarter operating income and margin “were lower due to the demandshift towards lower-yielding international services, the negative year-over-year impact of net fuelchanges, increased depreciation expenses, the effects of Superstorm Sandy and higher pension costs”.
FedEx said these “headwinds” were partially offset by the favourable impact of the company’scost-containment actions, and president and CEO Fred Smith said he was confident that the companywas on track towards achieving the “ambitious” targets of its recently announced profit-improvementprogramme, which aims to improve profitability by $1.7 billion (€1.28 billion) by 2016, primarilythrough realigning its FedEx Express network and headcount to match current demand patterns.
Alan Graf, executive vice president and chief financial officer, said this was expected togenerate “significant” benefits in fiscal year 2014, although the main effects would not be seenuntil fiscal year 2015.
Revenue for the quarter ending 30 November increased by 5% to US$11.1 billion, whileoperating income of $718 million was down 8% from the same period last year. The company’soperating margin of 6.5% declined from 7.4% the previous year, and net income of $438 million wasdown 12%. The results of the quarter also reflect, primarily at FedEx Express, the netyear-over-year negative impact from the timing lag that exists between when fuel prices change andindexed fuel surcharges automatically adjust, the company said. Fuel costs were up by 3% in thequarter, while surcharges were down by 0.7%.
Revenue at FedEx Express was up 4% to $6.86 billion, but operating income declined 33% to $230million, and operating margin dropped to 3.4%, down from 5.2% the previous year. Revenue increasedprimarily due to acquisitions and growth at FedEx Trade Networks, with core express revenue growth “ constrained by global economic conditions and the impact of Superstorm Sandy”.
US domestic revenue per package grew 1%, as higher rates per kilogramme were partially offset bylower fuel surcharges, although US domestic average daily package volumes declined 2%. FedExinternational export average daily package volumes grew 6%, driven by increases in the company’sInternational Economy (IE) product volumes from Europe and Asia and by increases in itsInternational Priority (IP) traffic from Asia.
Higher growth in international deferred services continued, with IE volume growing 14%, while IPvolume increased 3% during the quarter. International export revenue per package fell 4% dueto the demand shift toward lower-yielding international services and lower fuelsurcharges.
FedEx Ground reported revenue of $2.59 billion, up 11%, while operating income of $412 millionwas up by 4% year-on-year. The operating margin of 15.9% was down from 17% the previous year.Average daily volume grew 8% for FedEx Ground in the second quarter, driven by increases in bothFedEx Home Delivery and business-to-business services. Revenue per package increased 2% due toincreased rates and higher extra service revenue.
FedEx SmartPost average daily volume increased 17%, primarily due to growth in e-commerce. SmartPost net revenue per package increased 2% due to a change in service mix and rate increases,partially offset by higher postage rates.
Meanwhile, FedEx Freight reported revenue of $1.38 billion, up 4% year on year, and operatingincome of $76 million, up 90% from a year ago, “primarily due to higher yield, volume growth andoperational efficiencies within the company’s integrated network”.
In terms of the company’s holiday season peak traffic volumes, Graf said the company hadexceeded its prediction of surpassing 19 million shipments in a day on 10 December, achieving 19.8million shipments through its network, but had also exceeded 19 million shipments on 26 November –so-called ‘Cyber-Monday’ – and 17 December.
“Our biggest customers are having seasons that are higher than even they forecasted, which meantthat we had to add some late additional capacity in November and December to be able to handle thevolume surges that we had not forcasted, and still make the service commitments that we made,” saidGraf. “So that has meant some non-recurring additional costs, because we have really had anunbelievable peak so far.
“The weather has been good, and I think we will have a great service week this week and I expectthat we will continue our expansion with Ground. Generally speaking, the margins of Ground aresolid and are going to stay solid, and their growth is going to continue,” he added.
In terms of the general outlook, Graf said: “We continue to see modest growth in the globaleconomy, and our forecast for the US is for 1.9% GDP growth.” FedEx’s industrial-productionforecast is for 2.4% growth, “which is slightly lower than forecast, primarily due to a lower entrypoint due to Superstorm Sandy”, while the global GDP forecast is for 2.5% growth.
Graf said the calendar 2013 forecast could swing one way or the other, depending on the outcomesof political decisions, “especially due to the fiscal cliff situation on the US and theuncertainties in Europe. The mounting uncertainty in the US related to fiscal policies and theirpotential to impact earnings by further restraining economic growth is a concern.”
