Labor costs bring down fiscal Q1 earnings results for FedEx

Fiscal first quarter earnings for Memphis-based global freight transportation and logistics services bellwether FedEx issued yesterday reflected the impacts of the tight labor market on its book of business.

Quarterly revenue—at $22 billion—saw a 14% annual increase, and operating income—at $1.398 billion—slipped 12% annually. Diluted earnings per share—at $4.09—were off 13%, falling short of Wall Street expectations of $4.89.

FedEx officials explained that quarterly operating results were negatively impacted by an estimated $450 million annual increase in costs related to a constrained labor market that impacted labor availability and resulted in network inefficiencies, higher wage rates, and increased purchased transportation expenses. The company added that this was partially offset by higher package and freight yields, increased international export express shipments and a favorable net fuel impact. The company also explained that while commercial ground and U.S. domestic express package volume increased annually, continued supply chain disruptions have slowed U.S. domestic parcel demand compared to an earlier forecast it made.]

“The execution of our strategies continues to drive higher demand for our services, despite the disruptive impact of the pandemic to labor availability and global supply chains,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer, in a statement. “I am very proud of our team members around the world who continue to transport lifesaving vaccines and deliver urgently needed supplies to those affected by natural disasters like Hurricane Ida and the recent earthquakes.”

FedEx Express quarterly revenue—at $10.966 billion—increased 14% annually, with operating income down 20%, to $567 million. FedEx Ground revenue was up 9%, to $7.677 billion, with operating income down 20%, to $671 million. Revenue for FedEx Freight, its less-than-truckload segment was up 23%, to $2.251 billion, with operating income up 42%, $390 million.

Total quarterly package revenue—at $8.505 billion, was up 15% annually. And total U.S. package revenue—at $3.883 billion—saw a 15% annual gain, with total international export package revenue up 20%, to $3.508 billion, and international domestic up 2%, to $1.114 billion.

Total daily U.S. domestic package volume increased 7%, to 3.178 million and U.S. revenue per package, at $18.79, was up 7%. Total daily international export packages at 1.034 million rose 8% annually, with revenue per package up 11%, to $52.18.

“The execution of our strategies continues to drive high demand for our differentiated services despite the disruptive impact of the pandemic, the labor availability, industry capacity and global supply chains,” said FedEx President and COO Raj Subramaniam on the earnings call. “As you look at our first quarter results, our performance was highlighted by double-digit increases in yield across all our transportation businesses driven by limited capacity, high demand and the revenue management strategy. The impact of constrained labor markets remains the biggest issue facing our business as with many other companies around the world and was the key driver of our lower-than-expected results in the first quarter.” 

Addressing the 2021 Peak Season, Subramaniam said that FedEx is meticulously planning for it in various ways, including close collaboration with customers to build solutions to enable them to succeed.

And he added that he expects FedEx to have substantially higher ground capacity this peak season due to its investments in FedEx Ground's infrastructure. These investments are comprised of the addition of more than a dozen new automated facilities and several other sortation equipment expansions and various key technology projects are also slated for completion this fall, including the modernization of multiple sortation, transportation management and safety systems, which he said will help to increase FedEx Ground's network capacity, as well as its flexibility and resiliency.

“This brings the total capacity increase of more than 1 million average daily volume compared to last peak,” he said.

Prior to this earnings release, FedEx announced rate increase that are set to go into effect on January 3, 2020, with FedEx Express, FedEx Ground, and FedEx Home Delivery rates to increase by 5.9%, and FedEx Freight rates will head up by an average of 5.9% to 7.9%. And on November 1, 2021, it said there will be a fuel surcharge increase applied to FedEx Express (for U.S. domestic package and freight services), FedEx Ground, and FedEx Freight shipments.  

FedEx EVP, Chief Marketing and Communications Officer Brie Carrere said on the call that the continued constrained capacity in both the US domestic and international markets has led to a very favorable pricing environment.

“We are focused on protecting and growing volume in high yielding commercial segments, including commercial ground and small and medium segments,” she said. “We have an incremental opportunity to improve large customer yields through contract renewals and providing large customers an ability to procure incremental capacity at current market rates. These increases will help us continue to balance capacity with demand and mitigate the impact on the increased [labor] costs that Raj just outlined.”

Jerry Hempstead, president of Hempstead Consulting, said that it would be imprudent for a shipper to budget a 5.9% increase in parcel costs for 2022 based on the FedEx GRI announcement.

“In most cases the impact will be far greater than that,” he said. “This is the largest increase in recent memory. There will also be changes to most of the surcharges on January 3, but a change will be made to the Additional Handling surcharge on January 24 to mirror the direction UPS has already taken to make the determination of the surcharged based on destination zone.”

What’s more, he noted that the increases are nonlinear, as not all rates and zone cells are going up 5.9%.

“As an example, the traditional benchmark 5-pound, zone 5 package will change more than 5.9%,” he observed. “A priority overnight package goes from $94.29 to $100.04. on the surface this would appear to be a 6.1% increase. But if you layer on the change in the fuel surcharge the comparison would be $75.82 will go to $81.73. That’s an increase of $5.91 or 7.80%. Fuel goes from the current 9% to .755 if the price of fuel remains constant. Keep in mind, fuel is not changing in January, its going up November 1. Let’s look at a zone 5, 5-pound ground transaction. On the surface the rate goes from $13.70 to $14.73. That’s 7.52%. But the impact of fuel takes the rate from $15.00 to $16.39 or an increase of $1.39 or 9.24%. Most [shippers] will have hefty discounts but will be subject to a minimum charge. Most discounts to the minimum charge are flat dollar amounts off so the shipper will experience 100% of the increase.”