Declining Demand for Premium Delivery Services Impacts Revenue
FedEx Corp. reported disappointing first-quarter earnings after Thursday’s market close, with results falling significantly short of expectations as customers shifted towards more economical delivery options. This decline in demand led to an 11% drop in the company’s share price during late trading.
The express logistics provider has revised its fiscal year guidance, now anticipating low-single-digit percentage revenue growth, down from a previous forecast of a low-to-mid-digit increase. Additionally, it has narrowed its adjusted earnings-per-share projection to a range of $20 to $21, decreased from $20 to $22.
Under the leadership of CEO Raj Subramaniam, FedEx is undergoing a major transformation aimed at cutting costs and merging two separate delivery networks to enhance efficiency and customer service. However, the latest quarterly results indicate that this transition may be challenging.
A rising trend of shippers opting for cheaper delivery methods is also affecting UPS. Businesses are increasingly moving from express air services to ground options and further to lower-cost hybrid services, which involve handing off parcels to the U.S. Postal Service for final delivery. The profitability of deferred services is notably lower than that of premium express offerings. FedEx reported a decline in its operating margin, from 7.3% to 5.6%.
For the quarter ending August 31, FedEx posted an adjusted operating income of $1.2 billion, a decrease of nearly 24% from the same period a year prior, with total revenue of $21.6 billion. This represented a drop of $100 million in revenue compared to the previous year. The adjusted earnings per share of $3.60 was 21% lower than the previous year and nearly 25% below analysts’ expectations, with revenue missing consensus estimates by $170 million.
The results were further impacted by weaker-than-expected demand, particularly within the U.S. domestic package market. Subramaniam noted that a sluggish industrial economy has affected business-to-business volumes this quarter, although he expressed cautious optimism for improvement in industrial production later in the fiscal year.
The decline in air service for the U.S. Postal Service has also affected revenue, as contract work shifts to UPS, which will assume the air cargo contract after September 30. Management indicated a plan to reduce daytime flight hours by approximately 60% in October as it exits the postal services sector.
Management anticipates achieving significant cost reductions and enhanced flexibility as domestic air operations are streamlined in response to lower aircraft requirements. Exiting the Postal Service partnership is expected to reduce operating income by $500 million this fiscal year.
A primary focus for FedEx is the elimination of excess capacity. Structural cost reductions during the last quarter mitigated a more severe earnings decline. FedEx realized $160 million in cost savings from restructuring its air and international networks, as well as $90 million from improvements in its surface network. The company remains on track for $2.2 billion in permanent savings this fiscal year, following $1.8 billion saved in the previous year.
CFO John Dietrich commented, “Our revised outlook reflects our continued confidence in the execution of our Drive initiatives and the effects of our recent pricing actions, which we expect to help offset weaker-than-expected demand trends. We will continue to manage our capital prudently and remain committed to our goal of returning $3.8 billion to shareholders this fiscal year.”
Investment bank Morgan Stanley has downgraded FedEx’s stock rating to underweight, citing persistent headwinds such as lower parcel demand, competition from budget-friendly operators, and shifts in e-commerce that are structural rather than cyclical. Analyst Ravi Shankar noted in a research report that the integration of package facilities may become increasingly complex as the Drive program expands to larger metropolitan areas. He estimates savings this year could be around $500 million, rather than the targeted $2 billion, given that FedEx achieved $390 million in savings after about $550 million in cost cuts in previous quarters, and considering the historical challenges of streamlining operations in Europe.
FedEx’s latest earnings announcement marks the first report under a new corporate structure that consolidates the Ground and Services segments into a newly formed Federal Express segment. Additionally, FedEx Custom Critical, a specialized delivery service, is now reported under FedEx Freight.
The full integration of operational units at the field level is taking longer than expected but is making significant progress in Canada. Subramaniam highlighted that the integration of nearly 200 facilities in Canada, capable of handling both express and ground volumes, is set to complete by early 2025. The already combined facilities have recorded a 10% reduction in pickup and delivery costs while maintaining service levels that meet or exceed the network’s overall average.
The merging of the Express and Ground networks is anticipated to yield an extra $2 billion in savings over the next two years. Dietrich noted that the end of the Postal Service contract will provide opportunities to redesign the air network, allowing for better matching of aircraft sizes to freight demand. The shifts in market demand underline the importance of refining air operations, according to company
