Mode shifting seems a strong factor in the fortunes of FedEx. Its premium Express group saw fiscal third quarter revenues fall 18% over the prior-year period (a total of $1.08 billion). The freight unit saw revenues decline by $246 million. Meanwhile, its Ground unit increased by $70 million in the period.
The shift has brought corporate operating margins to 2.2% from 6.8% the previous year. Net income, at $95 million, is down 75%. The company cited lower shipment volumes at FedEx Express and FedEx Freight and a more competitive pricing environment. Also affecting financial results were lower fuel surcharges and unfavorable exchange rates. The results speak to shippers' tendency to move to lower-priced modes when facing cost pressures. But one variable in the mix in this quarter is DHL freight that was moving on its domestic US express network in 2008. DHL phased out its domestic business as of January 2009 to concentrate on international express and freight. What remains of those volumes were principally spread across FedEx and UPS, with some undoubtedly also moving via the US Postal Service in 2009.
FedEx also noted lower shipment weights came into play in its FedEx Freight unit, which handles truckload and less-than-truckload (LTL) shipments. FedEx also incurred costs in closing facilities in the FedEx Freight network.
A series of actions are expected to result in fiscal fourth quarter charges of $100 million, excluding any potential asset impairment charges. For fiscal 2010, the company says, these actions are targeted to reduce expenses by about $1 billion. Included in the actions being taken are network capacity reductions at FedEx Express and FedEx Freight, reduction of personnel and work hours, expansion of previously announced pay actions to include non-U.S. employees, where permitted, streamlining of information technology systems and other internal processes, additional reductions in other spending categories and increased economies in the acquisition of goods and services.
Specific to FedEx Freight, the company said, “Less-than-truckload average daily shipments decreased 13% year over year, as market share gains were more than offset by the worst LTL environment in decades. LTL yield declined 7%, due to lower fuel surcharges and the continuing effects of a competitive pricing environment resulting from excess capacity in the LTL industry.”
The operating loss reflects the extraordinary decline in demand for freight services, said FedEx. In addition, costs related to the consolidation of FedEx Freight regional offices and severance charges from personnel reductions were among the negative factors. They were only partially offset by lower variable incentive compensation and continued stringent cost-containment initiatives, including the personnel and facility reductions, said FedEx.
US domestic package revenue for FedEx Express declined 15%, driven by a 12% drop in revenue per package due to lower fuel surcharges, weight per package and rate per pound, said the company. US domestic package volume declined 3%, despite the benefit of DHL exiting the US domestic package market. FedEx International Priority package volume fell 13%, with declines in every international region. International Priority revenue per package dropped 8% due to lower fuel surcharges and unfavorable exchange rates.
Operating income and margin for the Express unit declined due to revenue decreases, despite a 12% decline in expenses driven by lower fuel prices, significant volume-related reductions in flight hours, labor hours and fuel consumption, and aggressive actions to reduce spending.
On a bright note, the company noted in February FedEx Express began operations at its new Asia-Pacific hub located at Baiyun International Airport in Guangzhou, China. The hub is the company’s largest outside the United States and, says the company, positions FedEx to better serve customers doing business in China and the broader Asia-Pacific markets.
FedEx Ground bucked the trend of market declines. The group's average daily package volume grew 2% year over year, primarily due to continued growth in the FedEx Home Delivery service. Yield improved 2% primarily due to increased extra services and higher base rates. FedEx SmartPost revenue increased 14%, while average daily volume grew 44% largely due to market share gains, including gains from DHL’s exit from the US domestic package market, said FedEx. Operating income and margin increased due to lower fuel prices, higher revenue and improved performance at FedEx SmartPost.