Report points to lower holiday season volumes for FedEx

Late last week, a Reuters report stated that the FedEx Ground subsidiary of Memphis-based global freight transportation and logistics services provider FedEx is expecting lower volumes, reflecting how its customers anticipate shipping fewer holiday packages.

The report cited an internal company memo sent to the company’s 6,000 U.S.-based independent contractors whom handle delivery and trucking for FedEx Ground.

“We expect there to be downward adjustments to volume forecasts,” Paul Melander, a FedEx Ground senior vice president, said in internal memo, according to Reuters, adding that the new forecasts will be released on or about Oct. 21.  “These changes will reflect the latest information from customers about how they anticipate current conditions are likely to decrease their volumes this holiday season.” The executive also stated in the memo that “FedEx will further revise volume forecasts as warranted leading up to the start of the Christmas package delivery season.”

This development follows the company’s mixed fiscal first quarter earnings issued last month, which were preceded by negative preliminary first quarter earnings results in which it highlighted global volume softness and worsening macroeconomic trends. FedEx said quarterly results were adversely impacted by global volume softness that accelerated over the final weeks of the quarter due to weakening economic conditions. And the company added that it has implemented cost actions in tandem with a continued focus on yield management and revenue quality in order to mitigate volume declines.

A FedEx spokesperson told LM that it would not comment further on communications intended for its internal audiences but did say that as described in the company’s first quarter earnings release, weakening macroeconomic conditions are causing volume softness.

“We are constantly collaborating with customers on their projected shipping needs and making adjustments as necessary to ensure our network is prepared to deliver outstanding service for this year’s Peak season and beyond,” said the spokesperson.

What’s more, the Reuters report said that in recent weeks more than a dozen delivery providers indicated their respective volumes were off between 5%-to-15% compared to last year at this time, with the FedEx holiday forecast viewed as “overly optimistic,” as was also the case last year. And the report also pointed to how FedEx attributed its recent financial challenges to economic conditions that started to deteriorated towards the end of August, whereas the investment community attributed it to the company’s slow response to softening demand.

On its recent earnings call, FedEx said it is taking various cost actions through the end of fiscal 2023, with a focus on mitigating the effects of reduced demand, including:  

• Reduction in flight frequencies and temporarily parking aircraft;
• Volume-related reductions in labor hours and other linehaul expenses;
• Consolidation of certain sort operations to drive productivity;
• Reduction of Sunday operations at a number of FedEx Ground locations;
• Cancellation of certain planned network capacity and other projects;
• Deferral of staff hiring;
• Closure of over 90 FedEx Office locations; and
• Identification of five corporate office facilities to be closed, with additional real estate rationalization planning under way

“We saw a decline in our volumes during the first quarter, which accelerated in the final weeks,” said CEO Raj Subramaniam on the company’s earnings call. “Our softening volumes in Asia and the U.S. were predominantly due to the economy while the shortfall in Europe was both economic- and service-related. Therefore, we had costs in the system for volumes that didn't materialize. While we immediately took action, savings from these cost efforts lagged the volume decline due to the scale of our operations. As a result, while revenue was up 6% year over year, these dynamics translated to volumes being down year over year at all our transportation segments.”

Paul Yassy, senior consultant for San Diego-based parcel consultancy Shipware observed that recently, when bidding on new business, FedEx has been more aggressive and offered higher incentives than UPS.

“At the same time, they’ve introduced clauses that allow them to reduce those incentives if inflation is too high, the international mix changes, or other factors,” he said. “This suggests they are struggling to refill the network and may even be back in recession mode. It also calls into question the validity of the peak/demand/seasonal surcharges, potentially spelling trouble for UPS too. FedEx announced a 6.9% general rate increase, their highest ever, which should help offset this concern and recapture some of the profit they lost as package volumes declined. This approach, however, could exacerbate the issues FedEx Ground has with its thousands of Independent Service Providers, which are usually paid per piece they deliver, unless they can find a way to bring the volume back.”

And Jerry Hempstead, president of Orlando-based Hempstead Consulting, noted that every year, every carrier, has its sales force meet with the major retailers to get projected volumes for peak, which is then followed by staffing decisions

“So, the Fedex reps came back with numbers that were less than projected,” he said. “We already saw declining numbers in their most recent quarterly earnings report. There may be other things going on. First, the merger of LaserShip and Ontrac has allowed a third major player to strengthen and gain market share. Second, much of the fourth quarter volume came from the ground economy product (that was originally SmartPost) a hybrid FedEx/USPS product. FedEx decided to cut the USPS out and deliver the packages themselves and also significantly increase the price of this product. That sent shippers looking and, as most know, there are additional players in the hybrid space like DHL eCommerce. As I said before, some of FedEx problems are self-inflicted. So, contrast this story to the [recent] Amazon announcement that they are about to add 150,000 seasonal workers. I think it’s their largest ever staffing increase for the fourth quarter. But then again FedEx does not participate in any of Amazons success (but amazon has also mothballed its terminal expansion plans recently).”

Rick Watson, president of New York-based RMW Commerce Consulting, pulled no punches in assessing this situation.

“The economy has been known to be declining for the last eight months, and just now FedEx is revising their ground forecast?” he said. “To say that FedEx leadership has their head in the sand is an understatement. Unit volume will be down this holiday.  To the extent it can remain even, it will be due to higher promotional activity and as a result at lower margin.”