FedEx drives profits upwards through cost control

FedEx reusable packaging

FedEx’s strategic cost reduction project seems to be working. The latest first quarter results from the Express giant show that despite falling sales, profits increased.

For the whole company, revenue for the first quarter was $21.7bn, down US$1.5bn compared to the first quarter last year. Operating income rose by $300m year-on-year, to $1.49bn and operating profit margins hardened substantially to 6.8%, up from 5.1% last year.

For the largest part of the business, FedEx Express, revenue declined by 9%, driven by a 7% fall in ‘US Domestic’ volumes and a wider 2% fall in total traffic including international volumes. Yet operating income increased by 18% due, according to FedEx to “structural flight reductions, the alignment of staffing with volume levels, parking aircraft, and shifting to one delivery wave per day in the U.S.”

FedEx Ground saw revenue 3% higher year-on-year over the first quarter, however operating profit rocketed up by 59%, apparently due to “yield improvement and cost reductions”. This increase in profits was despite a mere 1% increase in package volumes handled, and even a small fall in home delivery volumes. FedEx said that “cost per package declined more than 2%, driven by lower line-haul expense and improved dock and first- and last-mile productivity”.

FedEx Freight on the other hand saw quite a violent fall in revenue of 16% and a 26% fall in operating profits. FedEx only partially explained this drop by stating that it was “driven by lower fuel surcharges and shipments, partially offset by base yield improvement”. It may be the case that FedEx is rationalising its operations in the face of a tough market. The company said that it was closing depots through the quarter.

The CEO of FedEx, Raj Subramaniam, commented that “expense controls across the organization, led to our better-than-expected overall financial performance”. Certainly, increasing profits to the degree that FedEx is doing would suggest that it is on top of its costs, although it is unclear if there has been a price to be paid in terms of market-share. However, there may have been short-term boost to sales as customer sought to reduce reliance on UPS, although this does not leap out of the results. What might be more of a reason for caution is the low-level of demand apparent from the revenue numbers.

Author: Thomas Cullen

Source: Ti Insights

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