Perhaps a recent Wall Street Journal blog entry best
describes the main reason behind FedEx’s latest earnings report, “It’s the
economy, stupid”. Even though FedEx pre-warned earnings would be below
expectations, the actual results served as a stark reminder of the uncertain
global economy.
Rate increases appears to have resulted in some positive
gains for the company. While overall revenue increased 3% to $10.79bn, the
Express division, the largest of FedEx’s divisions, reported revenue of less
than 1% to $6.63bn. Overall operating income increased 1% to $742m while the
Express division reported a 28% decline to $207m. The culprit, according to the
company, is the weak global economy and “tepid” manufacturing activity around
the world. As a result, customers traded down from more expensive priority
services to economy services. According to the CEO, Fred Smith, FedEx was not able
to cut costs fast enough to match the decline in demand. This is similar talk
from last year when the company was blindsided with too much capacity in the
transpacific tradelane and was not able to adjust capacity to match demand
quick enough. Interesting side note, Mr. Smith mentioned that despite the
downturn in its Express division, the company is gaining market share in air
cargo.
Still, the economy is playing a harsh role in many transport
and logistics providers’ earnings reports, including FedEx. The company is
reducing flights, taking planes out of service and has offered buyouts to
employees. It is also raising rates effective January 2013. However, this may
not be enough. FedEx will elaborate further on its restructuring plans at its
investor’s conference next month. Until then, we can only speculate.
The Ground division proved a highlight in the earnings
report. Revenue increased 8% to $2.46bn and operating income increased 9% to
$445m. Volumes increased 5% thanks in part to FedEx Home Delivery and FedEx
SmartPost which reported average daily volume increased 18% primarily due to
growth in e-commerce.
FedEx Freight also reported positive financials with revenue
growth of 5% to $1.40bn and operating income increased 114% to $90m thanks to profitable
volume growth, higher yield and continued improvements in operational
efficiencies.
The outlook does not look positive as the company downgraded
its full year earnings forecast. The company’s economist downgraded its GDP
forecast as well. FedEx is not the only provider suffering the consequences of
a weak economy. The economy has and will continue to play a negative role in many
transport and logistics providers’ earnings for this year and likely into 2013.
