FedEx relies on internet retailing but air express volumes weak

FedEx saw profit increases across its business over the second quarter as margins hardened. Yet underlying demand was mediocre for the core Express division.

For the whole company revenue edged up by 3% year-on-year whilst profits leapt, with operating income up 15% and net income up 14% driven by a hardening of margins from 6.5% in the same period last year to 7.3% this year.

The core FedEx Express business saw volumes and revenues fall marginally yet higher rates and lower costs pushed up profits. Operating income for the quarter recovered 42% over last year’s depressed results, something which was driven both by hardening margins but also lower costs including lower pension costs.

In contrast FedEx Ground saw revenue increase by 10% year-on-year but profits increased only by 3% as volumes increased but margins fell from 15.9% to 14.9%. However FedEx said that the fall in profitability was in part seasonal, with the benefit of ‘Cyber Monday’ – when internet shopping volumes peak- to be felt in the next quarter.

Even the prospects of FedEx Freight improved with 4% higher volumes driving-up revenue by 4% although operating income increased by 1% due to a weakening of margins from 5.5% last year to 5.4% this year. In part the fall in margins was caused by higher purchased transport costs.

These results owe part of their strength to the success of FedEx’s cost control activities, with areas such as lower expenditure on fuel helped by more efficient aircraft as well as lower staff costs. However it is internet retailing that is now central to the business. If the US consumer spends heavily in the run-up to Christmas the Memphis based company will continue to improve. FedEx’s senior management forecast that retail demand would be slightly stronger than expected. Yet the strength of FedEx Ground only highlights the limp demand situation of FedEx Express, suggesting that one division is competing against the other for internet-retailing volumes whilst the Express business has failed to exploit the strength of inter-continental traffic in the way that DHL Express appears to be doing.