Cost management and e-commerce result in good fourth quarter for FedEx

The latest earnings from FedEx depict rising revenue, improving operating income and increasing volumes. For fiscal year 2014 (June 1, 2013 – May 30, 2014) overall revenue increased 2.9% to $45.6bn and operating margin was 7.6%. For the fourth quarter (March – May 2014), overall revenue increased 3.5% with operating margin of 10.0%. It appears that there are improving economic signs, particularly as weather improvements in the US domestic market from January and February brought forth the need to clear shipper backlogs. Although, perhaps even more so, the company is benefitting mostly from rate increases and its reorganisation and cost management programmes.

The company’s largest division, Express noted a slight 0.2% increase in revenue for the quarter but thanks to higher package volumes and improved yields, operating income increased 3.0% to $475m from an adjusted $460m from previous year. Average daily international volumes increased 2.0% while those for US domestic increased 3.0%.

The Freight division also noted good numbers with revenue increasing 12.0% to $1.5bn for the quarter and operating income up 51.0% to $122m from an adjusted $81m same period last year.

As with previous quarters, e-commerce was credited with increased volumes and revenue for the Ground division. Revenue increased 8.0% to $3.0bn from $2.78m the previous year. Average daily volumes increased 8.0%. Its SmartPost service reported an 8.0% decline in volume but management noted that this was due to one customer opting to go directly to USPS instead.

FedEx’s outlook for the new fiscal year includes aircraft deliveries to support its fleet modernisation and to continue expansion of the FedEx Ground network which management attributed to market share gains. For all its divisions, the company will continue to focus on revenue quality and improve yields.

Meanwhile, FedEx noted on its earnings call that it implemented two pricing changes during the fourth quarter. The Freight division increased its published fuel surcharge indices by three percentage points effective June 2 and perhaps what could prove contentious is its plan to expand its dimensional weight pricing to all Ground package shipments effective January 2015. While it currently applies such pricing to packages over three cubic feet in size, management noted by expanding such pricing to all Ground package shipments will align its pricing with its cost to deliver. As such, FedEx management commented that the move to dimensional pricing will give FedEx the opportunity to work with customers to make better packaging decisions.

To conclude, FedEx reported a good fourth quarter thanks mostly to cost management, restructuring and rate increases. The company is optimistic in regards to improving global economic conditions and highlighted on its call its investments it has made to its Japanese and Mexican infrastructure as well as its acquisition in Africa. According to CEO Fred Smith, the company’s strategy in the Express business is “to operate an unduplicated backbone priority network that allows people to move door-to-door express shipments of parcels and light freight between almost any two points on the planet within one to two business days”. Indeed, it appears the company is heading in the right direction.