Cost cutting measures prove successful as FedEx earnings increase 7%

Despite CEO Fred Smith’s description of “challenging global economic conditions”, FedEx reported a 2.0% increase in total revenue to $11.0bn for its first quarter ending August 31. Operating income increased 7.0% to $795m which resulted in the operating margin increasing to 7.2% from 6.9% last year.

FedEx Express’ revenue dipped 0.3% to $6.6bn due to lower fuel surcharges and one less operating day during the quarter compared to the same period in 2012. However, largely as a result of cost cutting measures, its operating income jumped 14% to $236m. A shift towards the lower cost service, International Economy, continued as the service’s revenue increased 9% and volumes increased 15% during the quarter. Meanwhile, International Priority noted no change in volumes, but a 5% decline in revenue for the quarter. Because of the shift towards International Economy, FedEx has made adjustments in its cost structure and network and is actively promoting this service.

As the Express group continues to undergo realignments, it announced it would increase rates by an average of 3.9% for US domestic, export and import effective January 6, 2014. It is also evaluating further cost reduction actions to ensure that it achieves its $1.6bn profit improvement goal by the end of fiscal year 2016.

FedEx Trade Networks, the group’s freight forwarding arm, reported higher volumes, however yields were slightly weaker. The company has proven successful in moving lower-yielding international economy within its network (mostly via ocean), thus allowing FedEx Express to focus on higher-yielding commodities.

FedEx Ground had a strong quarter with revenue increasing 11.0% to $273bn. Operating income increased 5% to $468m. Average daily volume grew 11% and was attributed to FedEx Home Delivery and commercial business services. FedEx SmartPost also noted strong average daily volume, up 26%, but net revenue per package declined 5.0% because of increases in postage rates and lower fuel surcharges. E-commerce remained the primary driver of volume increases at the company.

Finally, FedEx Freight reported a 2.0% increase in revenue for the quarter to $1.4bn. Operating income increased 1.0% to 91m. Higher weight per shipment, LTL yields, and average daily LTL shipments improved income at Freight. FedEx Freight continued to optimise the line haul network by increased utilisation of rail over the quarter; rail is now responsible for 17% of its total line haul miles.

Overall, fiscal year 2014 has started positively for FedEx. The company should continue to see improvements as it begins to benefit from its network adjustments and improving conditions in China and Europe.

FedEx reaffirmed its fiscal year 2014 earnings per share growth of 7%-13% from the fiscal year 2013 adjusted results. “We remain confident in our full year earnings outlook despite tepid global economic growth,” said Alan B. Graf, Jr., executive vice president and chief financial officer for FedEx.