FedEx cuts air capacity as weak global economy hits international business

FedEx is scaling back its air capacity as a weak macroeconomic climate impacts its international express business and weighs on profitability.

The Memphis-based group, often considered to be  a 'bellwether' of world trade, earlier this week posted “very disappointing” second quarter (September-November 2019) results with its flagship Express business, which has a strong global focus, posting a normally unheard-of decline in revenue and operating income.

The FedEx share price tumbled after the results, closing at $146.86 yesterday, down by more than 10% on the previous closing price.

In a statement accompanying the results, group president and chief operating officer, Raj Subramaniam, said FedEx was “taking immediate actions to address the short-term challenges facing our business, including eliminating multiple international flights to reflect reduced global air freight demand”.

Outlining cutbacks in FedEx’s air network, including the permanent retiring of its fleet of 10 A310s, he said the reduction in flight hours “would allow us to temporarily park 14 aircraft by the end of fiscal year 2020 (ending May 2020)”. He added: “We will also permanently retire another 29 aircraft over the next 30 months.

Subramaniam underlined: “It is imperative that while we reduce our costs, we also drive higher yields to improve profitability. Capacity reductions will bring greater focus on revenue quality as we generate more compensatory volume through the network.”

Speaking at a conference call with analysts, chairman and CEO Fred Smith underlined that FedEx would be “taking down intercontinental capacity right after Christmas as our hopes for a restoration in trade growth, expressed last June, have simply not materialized due to the trade disputes.”

At the call, CFO Alan Graf revealed that FedEx was planning to cut flight hours by 8%, describing it as a “tremendously large move.” He continued: “We’re not going to grow our fleet. We’re just replacing it. We’re tightening it and reducing flight hours. Express’ domestic margins are fine; it’s the International that we’ve got to keep working on. We've been dragged down by TNT – some of it self-inflicted, some of it macro. I think we’re doing everything that we should be doing.”

Ups and downs in trade flows

Commenting on the international picture at the call, FedEx's EVP, chief marketing and communications officer, Brie Carere, highlighted that the avoidance of tariffs on approximately $160 billion of goods scheduled for December 15 and the reduction of tariffs from 15% to 7.5% on the 1 September list of $120 billion worth of products, was “good news”.

She said: “We look forward to continued progress and the signing of a Phase 1 deal in January. Further, we believe that the UK is now in position to manage a more predictable and orderly Brexit.”

Carere noted that in the eurozone, manufacturing production appeared to be stabilizing at a low level but Germany's industrial sector was still in decline, adding: “Looking ahead to calendar year 2020, European GDP growth rates will likely remain in line with where they are now. In Asia, China’s slowdown is expected to continue to the first half of the year but should have some opportunity in the back half of 2020.”

She continued: “Total trade between the European Union and China slowed significantly in calendar year 2019, as slower growth and impacts from trade tensions have weighed on trade flows.

“Global trade volumes contracted year-over-year again in calendar quarter three and will show contraction for the full calendar year. We should see a return to positive growth for calendar year 2020 assuming no re-escalation in trade tensions.”

Full TNT integration in 2021/22

In an update on the integration of TNT, Subramaniam told analysts that FedEx was on track to meet the May 31, 2020 target date for “interoperability” of the intra-European ground networks.

“This will lower costs as the related FedEx Express operations are optimized. In fiscal year '21, the next key milestone will be the completion of the integration of the remaining pickup and delivery operations in Europe, and during the first half of fiscal '22, we will complete the end network integration, bringing to close the physical network integration of TNT into FedEx. They're progressing towards important milestones and we have significant commercial momentum.”

He pointed to a strong sales 'pipeline' and that activation was the best it has been since the integration started.

“As we grow our intra-European parcel business, it will benefit from a lower pickup and delivery cost. And looking ahead, the rationale behind the TNT acquisition remains sound, the value that we estimated at the beginning of the process remains largely achievable. As I've said before, FedEx remains committed to delivering long-term profitable growth.”

In the near-term, FedEx is focused on decreasing costs and improving revenue quality.

“We continue to be very excited about our prospects ahead as we transform the ground company, complete the TNT integration and right-size our network. Given a more stable economic environment, these measures should produce strong results for the corporation,” Subramaniam concluded.

E-commerce ambitions in Europe and Asia amid Amazon US dispute

Carere said she was confident in FedEx's growth prospects in Europe, pointing to “year-over-year momentum” in intra-Europe and Intercontinental-to-the US from Europe volumes.

“Further, we are leveraging our world class US domestic network to penetrate the e-commerce market from Europe to the US. We are far less penetrated in e-commerce outside of the US compared to our competitors.”

But FedEx has “quickly pivoted” to develop the necessary solutions, “which represents a significant opportunity for both our Europe and our APAC regions,” she added.

Separately, according to US media reports, Amazon has informed sellers trading on its platform that it is temporarily restricting FedEx’s ground and home delivery services for Prime orders, marking an escalation in the growing disconnect between the two companies. Amazon sellers can still use FedEx’s Express shipping service for Prime orders, or FedEx’s ground and home delivery services for standard orders.

In a statement sent to CEP-Research, FedEx said: “We believe that small businesses should be able to choose how to best meet the needs of their consumers. This temporary decision limits their ability to manage their business on some of the highest demand shipping days in history. 

“FedEx Ground stands ready to support our customers. That being said, this will only have a nominal impact on our peak volumes. FedEx Express is still a Prime option, FedEx Ground’s services are available for non-Prime shipments, and our understanding is FedEx Ground will again be an option for prime shipments post peak.”