FedEx sees modest demand growth but higher costs

FedEx reusable packaging

It might have been thought that, with US consumer demand quite strong and a tighter air freight market due to strikes by pilots in other companies, FedEx would be seeing exciting growth. Yet this is not really the case. The second quarter numbers that have just been published showed only modest growth in sales and a hit to profits from higher costs.

For the core FedEx Express business, revenue was up 2%, driven by both higher volumes and higher prices. US Domestic traffic was up 3% but international traffic was hit by the stronger dollar and saw only a 1% increase. The good news was that revenue per pound in the US was up 6% and that resulted in the underlying profit margin rising to 9.7%, with operating income at $636m. Bolted on to the side of this essentially American business is now TNT Express in Europe. The integration process is on-going but the company is still profitable with a 4.7% profit margin before write-offs.

It might have been expected that FedEx Ground would have reaped the biggest benefit from e-commerce growth and certainly revenue grew by 9% year-on-year. But profits took a significant hit, down 12% to $465m. This was despite a 4% rise in rates. The problem appears to be an inflating cost base with property, labour and sub-contracted transport all increasing in price.

Yet despite the increase in transport rates generally FedEx Freight has also had a tough quarter. Revenue rose year-on-year by 3%, but operating profit fell by 13% to $88m. Shipments were smaller on average and the organisation has been investing in IT, driving-up costs.

Overall revenue was up, heavily influenced by the acquisition of TNT, however despite income edging-up to $700m, margins fell noticeably from 9.1% in Q2 2015 to 7.8% in Q2 this year.

There is a significant amount going-on at FedEx with Alan Graf, the company’s CFO, commenting that the company continued “long-term investments in our networks” which were “impacting FedEx Ground’s near-term profitability”, the most significant of which must be the purchase of TNT Express. Yet it was the increase in the short-term cost base that appears to have driven-down profits hardest.

Source: Transport Intelligence, December 21st 2016