Operation improvements sets FedEx up for a possible strong fiscal year 2016

FedEx ended its fiscal 2015 year on a relatively good note with total revenue up 4.2% to $47.5bn, adjusted net income up 17.4% to $2.57bn and adjusted operating margin improving from 7.9% in fiscal year 2014 to 9.0% for the current fiscal year.

Overall, it was a year focused on cost improvement initiatives and the company appears to have been quite successful in its approach. Even though its largest division, Express, noted an annual revenue decline of 4% to $6.7bn thanks to lower fuel surcharges and currency exchange rates, its adjusted operating income improved 12% to $598m. An increase in US domestic volume, improvements from its profit improvement programme initiatives and lower international expenses due to currency exchange rates contributed to this gain.

Meanwhile, its Freight division noted a 1% gain in annual revenue to $1.57bn and 5% increase in operating income to $137m. According to the press release, LTL revenue per shipment improved 2% due to higher rates from ongoing yield initiatives, but again, like the Express division, lower fuel surcharges negatively impacted the group.

For the Ground division, annual revenue increased 19% to $3.57bn (GENCO revenue was included and contributed to the gain). Yield benefited 2% from dimensional weight pricing as well as from increased rates. Average daily volumes increased 5% for fiscal year 2015 (June 2014-May 2015) in comparison to a 6.4% increase by UPS for its fiscal year (January 2014-December 2014) and a 2.4% increase for its first quarter 2015 (January-February).

Additional investments are planned for its Ground division for the new fiscal year. These investments involve merging SmartPost into its Ground division in September. According to FedEx, this will increase flexibility and leverage the strengths of both Ground and SmartPost networks. A software release is planned within the next couple of months that will allow the group to match addresses in the SmartPost and FedEx Home Delivery networks. When two packages are going to the same address, the SmartPost package will be diverted into Home Delivery for delivery. This is similar to what UPS is already doing with its SurePost packages. Where financially feasible, it will deliver its SurePost packages when there are other packages destined to the same location/locale. These moves by FedEx and UPS will impact USPS as more SmartPost and SurePost packages are likely to stay within FedEx and UPS networks. According to FedEx, it will save about $1.70 per package by keeping SmartPost packages in its network.

And of course, as peak season approaches and news of UPS planning to implement a peak season surcharge, questions were asked on the recent earnings call concerning FedEx’s plan, perhaps hinting for a similar announcement. Instead, the response was that the company plans to monitor peak pricing on a customer by customer basis but emphasized that the key to peak pricing is “to have the right pricing in place 12 months out of the year, not three to four weeks out of the year”.

So, as UPS continues to invest in its US ground network so too does FedEx and it could be shaping up for an even healthier competition between the two. Can USPS or the regionals take advantage? Or will the crowd delivery option which Amazon is currently exploring actually disrupt last-mile delivery?

FedEx expects moderate economic growth through the rest of this year and the next and with all of these cost initiatives in place fully expects to increase revenue and volumes. With its recent acquisitions of GENCO and Bongo and its pending acquisition of TNT, it should be well-placed globally and domestically.