FedEx fiscal third quarter earnings see gains amid ongoing volume declines

Fiscal third quarter earnings for Memphis-based global freight transportation and logistics services provider FedEx showed some gains amid ongoing volume declines, the company reported late yesterday.

Quarterly revenue, at $21.7 billion, was off 2.3% annually, and operating income, at $1.24 billion, rose 16% annually. Earnings per share, at $3.51, topped the $3.05 from a year ago, topping Wall Street expectations of $3.30. Net income, at $879 million, was up 12% annually.

Company officials said quarterly margin and income increased despite lower revenue quality, due largely to the execution of its DRIVE program (focused on consolidating its operating companies into one organization, coupled with its ongoing revenue quality initiatives.

“FedEx delivered another quarter of improved profitability in what remains a difficult demand environment, reflecting outstanding service and continued benefits from DRIVE,” said Raj Subramaniam, FedEx Corp. president and chief executive officer, in a statement. “We are making meaningful progress on our transformation, while strengthening our value proposition and improving the customer experience. I've never been more confident in our path ahead as we build a more flexible, efficient, and intelligent network.”

Individual segments

• FedEx Express revenue, at $10.0 billion, was down 2.4%, with operating income up 49%, to $233 million. The company said operating results improved due to lower structural costs resulting from DRIVE initiatives and the benefit from one additional operating day, partially offset by lower revenue;
• FedEx Ground revenue, at $8.7 billion, were up 0.6%, with the company saying operating results increased due to lower structural costs resulting from DRIVE initiatives, higher base yield, and reduced self-insurance costs. And it added cost per package was flat, as lower line-haul expense and improved dock productivity offset higher first- and last-mile costs; and
• FedEx Freight revenue, at $2.125 billion, fell 2.8% annually, and operating income, at $942 million, increased 10.5%

Total quarterly package revenue, at $8.26 billion, was flat annually, and total U.S. package revenue, at $3.91 billion, was off 2%. Total international export package revenue, at $3.33 billion, saw a 2.1% annual increase. And average daily package revenue, at $23.96, was up 1.4%. And total average daily volume, at 5.473 million packages, was off 2.9% annually, with average U.S. packages, at 2.738 million, down 4%, with daily International Domestic, at 1.710 million, off 5.3%.

On the company’s earnings call late yesterday, Subramaniam said FedEx delivered operating income growth and margin expansion in a declining revenue environment, for the third consecutive quarter.

“This is a very positive dynamic and a unique one in our industry,” he explained. “It demonstrates clear progress on our transformation and ability to manage what's within our control through DRIVE. We're strengthening our value proposition, improving the customer experience, and increasing profitability. This progress supports our long-term goals for sustainable margin expansion, improvements in ROIC, and value creation for our stockholders.”

Addressing the FedEx Express business, he said it is a top priority for the company to make the necessary changes to align its air network with an evolving demand environment and unlock the full profit opportunities.

“While we have made progress at Express this quarter, there are several areas we're aggressively working to address in order to accelerate profit improvement: service mix, network utilization, continued inflation, and other cost headwinds,” he said. “First, with respect to service mix, we are seeing a clearer international market shift toward deferred services.

This is tied in part to the rapid growth of many of our e-commerce customers, where we are a critical enabler of global trade, offering unique solutions for our customers. More on how we are addressing this mix shift shortly. Second, weakness in global trade continues to constrain demand in international business, which has remained challenge for longer than expected. As such, we're continuing to proactively realign our air network to match capacity to demand. And third, this quarter, Express experienced over $200 million of inflationary pressure on a year-over-year basis. We offset this with benefits from DRIVE as well as responsible headcount management.”

Brie Carere, FedEx Executive Vice President, Chief Customer Officer, said on the call that FedEx continued to execute on its commercial priorities with a focus on revenue quality while maintaining its industry-leading service. A

“As a result, we took profitable share in the quarter at market rates, and we continue to retain the vast majority of the volume we gained from UPS in the second half of 2023,” she said. “Our unmatched value proposition has enabled recent high-value wins in the semiconductor, healthcare, and aerospace industry. We will continue to execute our commercial strategy to compete and grow further in the high-margin areas of the market. Looking now by geography, in the United States, conditions have been weaker than we anticipated, and internationally, we continue to see softness. We, however, remain very focused on strong commercial execution.”

And she added that FedEx continues to operate in a competitive but rational market environment, explaining that during the quarter, yield trends were similar to what it saw the previous quarter with dynamics remaining mixed across the segments.

“At FedEx Express, yields remained pressured due to a tapering of international export demand surcharges and an increasing mix of lower-yielding e-commerce and deferred products,” she said. “Yield was also pressured by increased capacity in the market. A FedEx Ground, yield increased 1% driven by home delivery, partially offset by Ground economy.”