Lower demand and volumes drive down FedEx fiscal second quarter earnings

Still faced with what it described as continued demand weakness, fiscal second quarter earnings for Memphis-based freight transportation and logistics services bellwether FedEx resulted in annual declines for both revenue and net income.

Quarterly revenue—at $22.8 billion—was off 3% annually, and net income—at $788 million—fell 25%. Operating income—at $1.176 billion—was off 26%. Diluted earnings per share—at $3.07—dropped 21%, topping Wall Street estimates of $2.83.   

Despite the declines, Raj Subramaniam, FedEx Corp. president and chief executive officer, painted an optimistic picture for the company’s quarterly earnings.

“The FedEx team moved with urgency to make rapid progress on our ongoing transformation while navigating a weaker demand environment,” he said in a statemen. “Our earnings exceeded our expectations in the second quarter driven by the execution and acceleration of our aggressive cost reduction plans. At the same time, we continue to focus on delivering excellent service for our customers.”

As was the case in its fiscal first quarter earnings announcement, the company explained that quarterly results were impacted by demand weakness, especially at FedEx Express.

FedEx Express operating income—at $341 million—fell 64% annually, with the company pointing to lower global volumes, which it said were partially offset by an 8% increase in composite package yield, to $23.54. FedEx Express revenue—at $10.8 billion—was down 6%. FedEx noted that the company had previously implemented previously planned and incremental cost reduction actions in the fiscal second quarter “to mitigate the impact of volume declines, including structural air network changes and the temporary parking of aircraft.”

FedEx Ground operating income—at $598 million—increased 24%, with the company attributing the gain to a 13% yield increase, as well as cost reduction actions, which were partially offset by increased purchased transportation rates, lower package volume, and higher other operating expenses. Revenue for the segment—at $8.4 billion—rose 2%. 

The company’s less-than-truckload unit, FedEx Freight, saw operating income rise 32% annually, to $440 million, paced by an 18% yield increase, with revenue—at $2.4 billion—up 8%. Total average shipments per day—at 104,300—fell 9%, and revenue per shipment—at $377.53—headed up 19%.

Total quarterly package revenue—at $8.5 billion—fell 5% annually, and total U.S. package revenue—at $3.9 billion—decreased 2%. Total international export package revenue—at $3.5 billion—was off 7%, and international domestic—at $1 million—was down 10%.

Total average daily package volume—at 5.754 million—was down 12% annually, with average daily U.S. package volume—at 2.7 million—down 15%. U.S. revenue per package—at $22.61—saw a 16% annual gain. Total average daily international export package volume—at 1 million—was down 9%, and total daily international domestic package volume—at 1.9 million—was down 9%, with revenue per package for the former at $54.93, a 2% increase, and the latter at $8.43, for a 1% decrease.

On the company’s earnings call, Subramaniam explained that volume weakness in the quarter was partially offset by higher yield and cost management actions.

“We knew coming into this quarter that we would continue to be challenged by volume softness and high inflation,” he said. “I'm exceptionally proud of the team's execution to-date, which enabled us to exceed the second quarter earnings and cost targets. A great example of our meticulous focus on cost actions was a result at FedEx Ground, where, despite volume being down 9% in the quarter, we were able to grow both operating income and margin.”

In September, 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

Addressing the company’s plans to reduce costs, Subramaniam said in September that for fiscal year 2023, it was prioritizing cost actions to generate $2.2 billion to $2.7 billion of savings, of which about $1 billion will be permanent. That estimate was updated yesterday to around $3.7 billion in savings relative to the company’s initial fiscal 2023 business plan.

And the company noted it is keenly focused on DRIVE, its program geared towards improving long-term profitability and achieving its financial targets, with a goal of realizing more than $4 billion in annualized structural cost reductions by fiscal 2025. It added that fiscal year 2023 capital spending has been reduced to $5.9 billion, down from its previous forecast of $6.3 billion.

On the earnings call, he said FedEx achieved more than $900 million of savings, for the quarter, exceeding its initial cost target, bringing its total year-to-date progress to $1.2 billion.

“As we execute these cost actions, we are also laser-focused on delivering upon the superior service that has defined FedEx throughout our nearly 50-year history,” he said. Our team is performing exceptionally well this peak season, with ground time in transit in the U.S. at just two days. FedEx Ground is delivering holiday shipments faster to more locations than our nearest competitor. Our ground service is now back to pre-pandemic levels, supported by continued enhancements to our route optimization and package handler scheduling technologies.”

FedEx Executive Vice President and Chief Customer Officer Brie Carrere said on the call that. As was expected, the operating environment in the second quarter was challenging.

“The trends we saw toward the end of the first quarter persisted through November,” she said. “As a result, we experienced lower demand for FedEx products and services, but we acted with urgency to adjust our network while continuing to deliver for our customers.”

As observed in its numbers, with volumes down and revenue per package up, Carrere explained that the company’s initiatives to improve revenue quality remain a core focus, noting it is focused on growth in the right segment to optimize network profitability.

“We announced a 6.9% general rate increase in September, and I remain confident in a continued high capture rate,” she said. “We are also continuing to leverage surcharges to align our pricing to cost. Our recent announcement for demand-based large package and U.S. export fuel surcharge are good proof points.”

Jerry Hempstead, president of Orlando-based Hempstead Consulting, observed that in order for FedEx to make up for the gap in lower volumes, FedEx keeps raising rates.

“They have to grow packages. They have to feed the beast,” he said. “They are addicted to rate increases. As long as UPS does it as well, they are co-dependent and enabling each other. UPS thus far is not seeing the demand declines that FedEx is experiencing, but they, too, are seeing a softening as is DHL and USPS. Someone has to break ranks and realize they need to improve market share and then the negotiating advantage returns to the shippers.”