Ahead of this year’s planned spin-off of FedEx Freight, cost reductions from the FedEx strategic plan DRIVE helped operating income to improve by 10.1% y-o-y to $1,292m in the third quarter of the current financial year. Revenue grew by 1.9%, in a large part as the US integrator kept pace with the US economy.
FexEx Express keeps pace with FedEx Corp
Due to the rationalisation of the business under the 2023 DRIVE plan, FedEx now reports in two major segments – Express and Freight with the old Ground segment now absorbed into Express.
Though the LTL business FedEx Freight has by far higher margins, FedEx Express is in the order of 10 times the size of the LTL business, which is why its operating profit grew by as much as the consolidated profit – 10.1% y-o-y – and its operating profit was just $2m different at $1,294m. Revenue in the segment grew by 2.7% y-o-y to $19,181m.
The DRIVE strategic plan has resulted in massive changes in FedEx as much of its network has been rationalised and reorganised with the eventual aim of saving $4.0bn in costs. The company stated however, “We incurred costs associated with our business optimisation initiatives [which] were primarily related to professional services and severance.”
Where DRIVE was the main reason for income growth at the FedEx Express segment, this was helped by higher volumes in all sub-segments – US Domestic volumes were up 8.0% y-o-y and at the other end of the scale, International Domestic volumes were up by 5.4% y-o-y. Offsetting these were higher wage and purchased transport costs as well as the expiration of the USPS contract that was handed over to UPS this year.
FedEx Freight spin-off into uncertainty
In Q3, FedEx Freight reported operating income down by 23.5% y-o-y to $261m on revenues that fell by 5.3% to $2,089m. Margin fell 2.9 basis points y-o-y to 12.5%, still just under double that of FedEx Express but a significant fall nonetheless. According to the company, the operating income fell due to a combination of lower fuel surcharges, reduced weight per shipment and fewer shipments in the quarter.
When the decision was made to spin-off FedEx Freight in December last year, CEO Raj Subramaniam said, “Through this process we will unlock value for our Freight business and position FedEx to create even greater value for stockholders.” The new Presidential administration was in place by that stage and the watchword for every major US LTL company’s CEO was ‘uncertainty’ about what 2025 will bring. It will retain its close commercial relationship with FedEx Express through agreements being drawn up ahead of the separation, so it will benefit from its former parent company, a lifeline that other LTL businesses in the US may be envious of given the economic issues faced by US industry.
However, with margins as they are and in terms of revenue, the largest LTL company in the US ($9.4bn in 2024), the leadership seems to be comfortable in letting it go even now. At FedEx HQ an office has been set up to both improve FedEx Freight and to unpick it ready for full separation later this year.
In the earnings call, FedEx CFO John Dietrich said “It’s important to remember that a large percentage, roughly 90%, of the LTL revenue is linked to B2B. The B2B business in industrial production has been softer, and that’s put pressure on the industry, frankly. So we’re confident in our ability and are well positioned once the B2B business rebounds. So yes, we’re highly confident in expanding the margins, for sure.” Subramaniam chimed in, “Weakness in the industrial economy continued to pressure our higher-margin B2B volumes. Similar to last quarter, this dynamic was most pronounced at Freight where fewer shipments and lower weights continue to negatively affect our results, albeit to a lesser extent than last quarter.”
Short term pain for long term gain?
The majority of FedEx’s improvement in income has come from the radical reorganisation at the company, which will set it up well for any recovery that does come in the next few years. The US manufacturing economy could well come into a boom should the plans of the current Presidential administration come to fruit, and as such the B2B business at both FedEx businesses will benefit. If these plans (at national and company level) work out, the short term pain may well lead to long term gain.
Author – Richard Shrubb
Source: Ti Insight
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