FedEx growth and profits constrained by inflation


For a company that saw a 14% rise in revenue year-on-year in the first quarter (FY22), FedEx is not that happy. The problem is that its operating profit fell, from $1.59bn in Q1 2020/21 to $1.40bn in Q1 2021/22, with operating margins diluting by 1.8 percentage points to 6.4%.

Although demand is strong, with what the company describes as “higher package and freight yields, increased international export express shipments and a favourable net fuel impact”, the volume of US airfreight business declined due to competition from an increase in charter flights.

However, the big problem is increasing costs. Even though FedEx has clearly been able to pass on the jump in fuel costs, the increase in labour costs has been a different matter. The company says that staff costs have risen by $450m year-on-year, not only resulting in higher direct costs but also “network inefficiencies, higher wage rates, and increased purchased transportation expenses”.

Raj Subramaniam, FedEx’s Chief Operating Officer, commented that “the impact of constrained labour markets remains the biggest issue facing our business, as with many other companies around the world, and the estimated $450m in additional year-over-year costs was a key driver of our lower than expected results in the first quarter.”

In addition, FedEx said that “continued supply chain disruptions have slowed U.S. domestic parcel demand compared to the company’s earlier forecast”. It is worth noting that the impact has been uneven, with FedEx Express and FedEx Ground suffering falling profits but FedEx Freight seeing a “record operating margin of 17.3% for the quarter, with average daily shipments growing 12% and revenue per shipment increasing 11%”.

What might be observed is that FedEx has hit some sort of growth ceiling, as rises in volume result in both inflated costs and in a physical inability of logistics networks to handle more consignments. An expression of such an inflationary environment is rises in FedEx’s prices, with FedEx Express, FedEx Ground and FedEx Home Delivery shipping rates increasing by “an average of 5.9%, while FedEx Freight rates will increase by an average of 5.9% to 7.9%”. Yet the downside is that what FedEx calls “growth in U.S. industrial production and global trade” may grow less rapidly than expected.

Source: Transport Intelligence, September 23, 2021

Author: Thomas Cullen