FedEx Corp. will need to keep its cost-cutting blades sharpened if it expects to hit its fiscal 2024 targets, because it’s not going to get much help from the U.S. and international economies.
The company’s (NYSE: FDX) first fiscal quarter results, released late Wednesday, demonstrated the benefits of the cost cuts. FedEx’s adjusted diluted earnings per share of $4.55 came in well ahead of consensus of $3.73 -$3.77 a share. Operating income, net income and operating margins rose well above levels of the prior fiscal year’s first quarter. FedEx’s fiscal first quarter ended Aug. 31.
The cost-cutting was most notable at FedEx Express, the company’s air and international unit and its largest. Revenue was down 9%, pressured by multiple factors ranging from weak international economies to a move by the U.S. Postal Service, a large U.S. air cargo user, to divert air volumes to the agency’s lower-cost ground network. However, the unit’s operating income rose 18% year on year due to cost reductions that included reducing flight frequencies, parking aircraft and cutting staff.
The cost reductions are part of the company’s DRIVE program, which is expected to result in $1.8 billion in permanent savings this fiscal year, and another $2.2 billion in fiscal 2025.
Wall Street seemed to like the results. Shares were up 5.5% in after-hours trading Wednesday after being up fractionally in the regular session.
FedEx Ground, the company’s U.S. ground unit, had a stellar quarter, posting the most profitable quarter, on an adjusted basis, in its history. Operating income increased 59% due to yield improvement and cost reductions. Costs per package dropped by 2% as line-haul trucking costs declined and the unit got more productive use out of its relationship with the railroads. Revenue rose 3% to $8.4 billion, while volumes increased 4%.
U.S. volume at FedEx Express and less-than-truckload unit FedEx Freight were down year-over-year. However, the pace of declines has slowed considerably on a sequential basis. At FedEx Express, volumes in August were down 3% year-over-year, compared to a 13% decline in March. At FedEx Freight, volumes in August were off 8% year-over-year compared to a 19% drop in March.
FedEx Ground and FedEx Express benefited from 400,000 additional daily packages courtesy of UPS Inc. customers who diverted volumes to FedEx due to concerns about a possible Teamsters union strike, which never materialized. FedEx executives said they have so far retained virtually all of that business and expressed the intent of keeping it.
It is unclear to what extent the diverted volumes benefited FedEx Ground in the quarter. Executives said they expect the unit’s performance to remain strong in the second quarter as well.
Separately, FedEx Freight received 5,000 additional daily shipments in the wake of the collapse of rival carrier Yellow Corp. About half came directly from Yellow shippers, while the balance was diverted from other carriers that shippers had gone to first but switched to FedEx Freight due to service issues, executives said.
Overall, revenue in the first quarter came in at $21.7 billion, $1.5 billion below the fiscal 2023 quarter but in line with analysts’ estimates. The company does not anticipate a near-term rebound in demand anywhere in its network and said business conditions remain “uncertain.” In response, it downgraded its revenue outlook for the full year to flat over fiscal 2023, from flat to slightly higher.
Including all carriers, U.S. parcel volumes will drop 0.5% for calendar 2023, worse than the company had anticipated. World trade will grow slightly over 1%, lower than originally expected. The latter projection will impact FedEx Express volumes, as will the near-full resumption of lower-priced bellyhold capacity supplied by international passenger airlines. The restart of FedEx’s lower-priced “international economy” service will put pressure on the unit’s overall margins, executives said.
Executives sidestepped an analyst’s question about whether the near-10% wage increases that UPS’ unionized workforce will receive in the first year of its contract will force FedEx to counter with employee increases of its own. In fiscal 2022, a period of severe labor shortages at FedEx Ground in particular, the company raised employee compensation by about $1 billion. FedEx will continue to invest in its workforce, executives said.
Midwest Teamster
So the oft-cited ShipMatrix consultant has multiple times provided an estimate of 1 million parcels diverted from UPS to FedEx. Now Fedex itself says 400,000.
Separately, we have an article citing “consultants” saying you can’t just rely on one shipper to do everything, with the clear implication that “consultants” are the basket you should be putting your eggs in.
If consultants (who by the way came from Fedex) cannot even get within 50% of an estimate of package diversion to and from the largest shipppers, how is it that they are going to provide accurate information about the 10,000 drivers in their universe?
What an absolute scam. UPS Teamster drivers are the only drivers in the country who wake up every day acknowledging that this is their CAREER. By all means, you can roll the dice with “consultants,” just a friendly tip to not tell your customers that’s your play.