FedEx reports fiscal Q1 earnings decline, amid challenging market conditions

Trade downs to more cost-effective services were a key factor in declining fiscal first quarter earnings, Memphis-based global freight transportation and logistics services provider FedEx reported late yesterday.

Quarterly revenue, at $21.6 billion, was down 0.5% annually, and operating income, at $1.21 billion, was off 24%. Earnings per share, at $3.60, were down from $4.55 a year ago and fell short of Wall Street expectations of $4.64.

Company officials explained that quarterly results were impacted by a “mix shift,” reducing demand for priority services and increasing demand for deferred services, and constraining yield growth. They also noted that higher operating expenses and one fewer operating day negatively results, with a reduction of structural costs from the company’s DRIVE program initiatives (focused on consolidating its operating companies into one organization) partially offsetting these factors.

“Despite a challenging quarter, we remain focused on transforming our network, improving our efficiency, lowering our cost-to-serve, and enhancing our ability to adapt with speed to evolving market dynamics,” said Raj Subramaniam, FedEx Corp. president and chief executive officer. “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 said that on June 1, 2024, FedEx Ground and FedEx Services were successfully merged into Federal Express, in turn, becoming a single company operating a unified, fully integrated air-ground express network, with FedEx Freight continuing to provide less-than-truckload freight transportation services as a separate subsidiary. And it explained that Federal Express and FedEx Freight stand as the company's major service lines and represent its reportable segments. FedEx Custom Critical earnings results are now included in the FedEx Freight segment and not the Federal Express segment.

Federal Express revenue, at $18.3 billion, was off 0.7% annually, with results impacted by one fewer operating day and lower U.S. domestic package volume, which was partially offset by higher International Economy package volume, as well as increased wage and purchased transportation rates negatively impacting operating results. FedEx Freight revenue, at $2.3 billion, was essentially flat, with operating results down, due to a decline in weight per shipment, reduced priority shipments, and fewer operating day, partially offset by base yield. And it added FedEx Freight remains focused on streamlining its network, having closed seven small-market facilities in the quarter.

Total quarterly package revenue, at $16.4 billion, was off compared to $16.6 billion a year ago, and total U.S. package revenue, at $11.8 billion, was down 1.7% annually.

Looking at average daily package volume growth rates on an annual basis, FedEx reported the following: U.S. priority was down 4.8%; U.S. deferred was down 0.2%; U.S. ground commercial was flat; U.S. ground home/delivery economy was up 0.4%; total U.S. domestic was up 0.4%; International priority was down 5.5%; International economy was up 34.5%; total International export was up 8.8%; International domestic was off 3.9%; and total package volume growth was down 0.2%

Subramaniam said on yesterday’s earnings call that these results reflect a challenging demand environment, which was weaker than FedEx expected, particularly in the U.S. domestic package market.

“Looking at our performance on a year-over-year basis, there are several factors at play,” he said. “Weakness in the industrial economy pressured our B2B volumes, particularly in the U.S. We saw increasing demand for our lower-yielding services, and some of this demand increase was driven by a shift in customer preference worldwide from priority to deferred services. And we continued to execute on structural cost reductions via DRIVE, which partially offset revenue and expense pressure. That said, we now expect the cadence of DRIVE-related savings throughout the year to increase sequentially by quarter. Notwithstanding this difficult quarter, with the actions we are taking, we remain confident in the trajectory ahead. We are on track to deliver the $4 billion of savings through DRIVE in FY '25 compared to the FY '23 baseline. We have recently implemented significant new pricing actions relating to both demand and fuel surcharges, which will benefit us in the coming quarters.”

Brie Carere, FedEx Executive Vice President, Chief Customer Officer, said on the call that FedEx maintained its focus on revenue quality and continued to grow the yield in the first quarter but at a lower rate than it expected, especially in the United States.

“We announced several pricing actions that we expect to improve yield in the coming quarters,” she said. “Last week, we shared plans for a 5.9% general rate increase effective in January. We expect a high GRI capture this year. We have increased our U.S. and international fuel surcharge tables and announced new demand surcharges, which take effect in the coming days and weeks. The broader approach to demand surcharges reflects the requirement to cover our incremental peak costs to deliver an outstanding service during the holiday season. Looking at FY '25, we now expect revenue to grow at low single-digit rate. We previously expected low to mid-single-digit revenue growth this fiscal year.”

Jerry Hempstead, president of Hempstead Consulting, described the recent rate increases issued by FedEx as significant, with a lot of moving parts.

“History has shown that its major competitor [UPS] has followed its lead and has shown from time to time to boldly raises prices more or introduce some new and improved fee,” he said. “This is very evident in this FedEx earnings announcement, where packages declined in every service except deferred international, yet revenue did not drop as much as the declines in packages. So, apparently the solution at FedEx for declines in packages is to raise prices. We shall see if this turns out to be a rule of diminishing returns. FedEx faces a huge revenue hit when they lose the contract to haul the USPS package volume. This business was well integrated into the FedEx network and has been for a long time. FedEx will have to find a way to take a lot of cost out of its business. This usually comes with some pain. Conversely, I don’t think it will cost UPS much to absorb this USPS business and use it to fill excess capacity. For the shipper, the outlook of this announcement is that there are higher prices.”