FedEx reports fiscal Q3 earnings growth amid economic concerns

Amid a concerning economic outlook, fiscal third quarter earnings for Memphis-based global freight transportation and logistics services provider FedEx saw growth, the company reported late yesterday.

Quarterly revenue, at $22.16 billion, increased 2% annually, and operating income, at $1.29 billion, rose 4%. Earnings per share, at $4.51, fell short of Wall Street expectations, at $4.56.

Company officials said that quarterly operations saw improvements due to cost reduction benefits seen from FedEx’s DRIVE program initiatives, higher base yield at each transportation segment and higher volume for its Federal Express segment. The DRIVE program includes Network 2.0, a years-long effort focusing on the operational efficiency, in which the company picks up, transports, and delivers packages in the U.S. and Canada.

“The FedEx team delivered improved profitability, while navigating a very challenging operating environment, including a compressed Peak season and severe weather events,” said Raj Subramaniam, FedEx Corp. president and chief executive officer. “I am proud of the team for executing on our transformation efforts while strengthening our value proposition and improving the customer experience. Looking ahead, we remain focused on supporting our customers amid the shifting macroeconomic environment.”

As previously reported, 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 $1.294 billion, increased 10% annually, paced by the aforementioned cost reduction benefits from DRIVE and higher base yield, as well as increased U.S. and international export volume. Which FedEx said was partially offset by higher wage and purchased transportation rates and also the expiration of the company’s contract with the United States Postal Service. FedEx Freight revenue, $2.089 billion, was off 5% annually, with operating results impacted by lower fuel surcharges, reduced weight per shipment, and fewer shipments partially offset by base yield.

Total quarterly package revenue, at $17.66 billion, was up 5% annually, and total U.S. package revenue, at $13.0 billion, was up 6% annually.

Looking at average daily package volume growth rates on an annual basis, FedEx reported the following: U.S. priority was down 3.0%; U.S. deferred was up 5%; U.S. ground commercial was flat; U.S. ground home/delivery economy was up 11%; total U.S. domestic was up 6%; International priority was down 16%; International economy was up 48%; total International export was up 8%; International domestic was up 1%; and total package volume growth was up 5%.

Total quarterly package composite yield, at $15.69, was flat, with U.S. domestic composite flat at $13.95, and international domestic composite package yield flat at $15.69.

On the company’s earnings call yesterday, Subramaniam said that weakness in the industrial economy continued to pressure FedEx’s higher-margin B2B volumes, adding that similar to last quarter, this dynamic was most pronounced at freight, where fewer shipments and lower weights continue to negatively affect results, albeit to a lesser extent than last quarter.

“Considering our B2B mix, we are well-positioned to capture strong incremental flow-through when the industrial economy recovers,” he said. “The current environment, however, is adding uncertainty to demand. We continue to work closely with our customers to help them adapt to this evolving market. Our flexible and unmatched global network, digital tools, and data ecosystem enable us to quickly support our customers' needs. With our vast data on cross-border trade, we are uniquely positioned to create more value for our customers as they navigate change.

The top FedEx executive listed off various ways in which the company is “focused on what we can control,” including: third quarter DRIVE savings in line with expectations and expected to hit its incremental target of $2.2 billion for fiscal year 2025 and $4 billion of its fiscal year 2023 baseline; creating a more flexible, efficient, and intelligent network, with the resumption of Network 2.0 conversions following peak season and optimizing five U.S. stations since the beginning of 2025 with 45 more expected in the fiscal fourth quarter, with the Canadian rollout expected to be completed by the end of April; its Tricolor initiative, geared towards streamlining its air network, with a focus on speed, density and cost-saving efforts as part of DRIVE, is driving better asset utilization with the company improves aircraft density and better leverages its surface network, with payloads across the FedEx air network up 9% annually and a 5% improvement in density; the transition away from the USPS contract and the removal of costs associated with the expired contract; and the previously announced planned separation of FedEx Freight, which was announced in December.

John Dietrich, FedEx Executive Vice President and CFO, said on the call that the soft U.S industrial economy continued to weigh on B2B demand and FedEx Freight weight per shipment.

“Overall, our revenue in Q3 and expectation for Q4 are softer than previously anticipated, with weakness coming primarily from B2B and priority services,” he said. “This further pressures our bottom line. In addition, inflationary pressures on our cost base are expected to be higher than planned, further reducing our full year outlook.”

Addressing the FedEx Freight separation, he explained that the company has set up a separation management office and established a cross-functional team to ensure a smooth transition, with solid progress being made. Dietrich explained that this will create more flexibility for both companies' capital structures as it prepares for the separation, which will come in the form of a tax efficient spinoff.

“As our separation management office continues to advance our spin-related work, it's business as usual for our other team members and all our customers,” he said. “At Freight, this includes the same unwavering focus on safety and discipline approach on revenue quality, network utilization, and operational efficiency that has driven the business's success in recent years,” he said.

Looking ahead, FedEx said it is revising its 2025 forecast for revenue, earnings, and capital spending, with revenue expected to be flat to slightly down annually, whereas its previous forecast called for flat growth, and capital spending at $4.9 billion, down from a previous forecast of $5.2 billion, with a priority on investments in network modernization and efficiency improvement, including fleet and facility modernization and automation.