FedEx is to park up some aircraft and perform further consolidation of its network after seeingUS domestic express volumes decline by 4% in its third quarter to 31 December, although the group’s
overall results for the quarter were strong.The weak volumes through its US express business contrasted with a strong performance in thequarter overall, particularly from its Ground division, which was boosted by continued increaseddemand for its Home Delivery service.
Overall group revenue in the quarter grew 9% to $10.56 billion, with operating profit more thandoubling to $813 million (€616 million), and operating margin climbing to 7.7%, up from 4.1% theprevious year. Net profit of $521 million was up 126% year-on-year.
Chairman, president and CEO Fred Smith commented: “The FedEx Corp. results were driven byimproving yields, record holiday package shipping and exceptional performance at FedEx Ground. Weexpect our solid performance to continue in our fourth quarter, capping off a strong fiscalyear.”
Operating income improved due to the continued strong performance of FedEx Ground, driven byhigher yields and volumes, as well as significantly improved results at FedEx Freight. Operatingincome also reflected the positive year-over-year benefit, predominately at FedEx Express, of thetiming lag that exists between when fuel prices change and when indexed fuel surchargesautomatically adjust. The company also benefitted from a lower tax rate and mild winterweather.
FedEx Express reported revenue of $6.54 billion, up 8% from last year’s $6.05 billion, withoperating income of $349 million, up 96% from the previous year. Its operating margin reached 5.3%,up from 2.9% the previous year. US domestic revenue per package grew 9% due to higher rate perpound and fuel surcharges, while average daily package volume decreased 4%. International priority(IP) revenues per package grew 5% due to higher fuel surcharges and package weights, while averagedaily package volume decreased 1%.
IP freight average daily pounds increased 4%, with revenue per pound up 2% due to higher fuelsurcharges. In total, IP average daily package and freight pounds increased 2% and revenueincreased 6% year-over-year. Operating income and margin improved in the quarter, reflecting theyear-over-year benefit of the fuel surcharge timing lag and the reversal of a $66 million reserveassociated with a legal matter. One additional operating day benefitted this year’s results, whileprior-year results were negatively impacted by severe winter weather.
Alan Graf, executive vice president and chief financial officer, commented: “We are pleased withthe improved performance at FedEx Ground and FedEx Freight during our third quarter. We areevaluating actions to adjust our FedEx Express US domestic network capacity and improveefficiency.”
He said the number of full-time equivalent (FTE) staff within the US express business hadalready been reduced by 3,500 people, due to natural attrition, and this attrition would be allowedto continue to help right-size the company’s express operations in the US.
As well as parking up some aircraft in the desert, Smith said the new B767s that FedEx hadordered were smaller than the aircraft they are replacing, as well as being far more efficient,also helping to match capacity better with demand.
Graf said the decline in US express volumes had been due to a combination of factors, includingweaker demand from the finance and construction sectors, electronic substitution of documentshipments, and weaker volumes from mobile phone producers. He said there had also been someintentional modal shift from Express to Ground, in order to improve cost-competitiveness forcustomers, which had also helped improve the margins for FedEx’s Ground business.
Graf said the decline in US express volumes had been due to a combination of factors, includingweaker demand from the finance and construction sectors, electronic substitution of documentshipments, and weaker volumes from mobile phone producers. He said there had also been someintentional modal shift from Express to Ground, in order to improve cost-competitiveness forcustomers, which had also helped improve the margins for FedEx’s Ground business.
“There were also some losses of volumes to competitors due to our own yield-improvementprogrammes, although these losses were significantly lower than we expected. So we are pleased tohave been able to execute this programme within our original parameters.”
Graf said demand from Asia had seen some improvements since Chinese New Year, compared with thevolumes before the Lunar New Year holiday in Asia. “On a sequential quarter-over-quarter basis, wehave improved from -4% in Q1 to -3% in Q2 to -1% in Q3,” he added. “We are also seeing somemix-change there, very much like we are seeing in the US, where we have some consumer electronicsproducts going into our FedEx Trade Networks system, to go on the ocean. But I would say there issome modest growth in demand for services in Asia Pacific right now.”
Smith declined to comment directly on the planned acquisition of TNT by FedEx’s great rival UPS,although he appeared to rule out any imminent major European acquisition activity by FedEx. Hesaid: “Over the years, there have been lots of rumours that have surfaced periodically aboutpotential acquisition candidates for TNT, and we have consistently declined to comment on them. Ourpolicy in this regard, and about corporate development activities, remains unchanged.
“But I will say that FedEx has a profitable, multi-billion operation in Europe that is growingstrongly. I am extremely pleased with our operation there, and we are very confident about ourplans to continue expanding, primarily through organic growth. I believe these plans will continueto improve our competitiveness in Europe and further contribute to our international growth.”
