When FedEx reported the busiest day for shipments in its history a couple of weeks before Christmas, the company credited not its flashy signature express delivery but the business segment that once seemed almost tacked on as an afterthought.
“The increase was driven by FedEx SmartPost, as well as increased volume at FedEx Ground and Home Delivery,” said T. Michael Glenn, FedEx executive vice president of market development.
Glenn didn’t say how many of the 17 million shipments that moved through FedEx’s global network on Dec. 12 were in those parcel operations, but recent results suggest they were almost certainly the most profitable and the most prized.
That’s because FedEx Ground delivered more than half of the FedEx group’s overall operating profit in the fiscal second quarter ending Nov. 30, $398 million of the $780 million in earnings from operations FedEx counted in the quarter. That helped FedEx to a $497 million net profit in the three-month period, 76 percent better than the same quarter a year ealier, despite a gain in revenue of only 10 percent.
The revenue, which reached just short of $10.6 billion, improved even though FedEx’s basic expedited delivery business was all but stagnant, especially in the United States. Domestic package delivery for FedEx Express fell 4 percent year-over-year in the quarter, and overnight envelope shipments fell 7 percent and now make up barely a quarter of the express unit’s business.
In its broad outlines, the market for FedEx services, in other words, may be large, but it’s clearly a mature business. Yet in its details, the market is changing and FedEx looks to be riding those changes by shifting its priorities and its network.
FedEx Ground’s average daily volume was more than double the express unit’s traffic, and although the business generates less revenue than express — $6.6 billion for Express compared with $2.3 billion for Ground — the parcel operations revenue grew 13 percent in the fall quarter and the shipment count was up more than 7 percent even though yield was up 6 percent year-over-year, excluding fuel.
To FedEx, it’s all about riding those changes in business trends.
“E-commerce sales have been growing at mid-teen rates for the past two years,” Glenn told investment analysts after the earnings release, “and continue to account for a growing share of retail sales. During the third quarter, e-commerce made up 4.6 percent of total retail sales, up from 4.3 percent in calendar year 2010 and less than 1 percent in the year 2000.
SmartPost shipments grew 17 percent in the quarter over the November quarter last year, and revenue at the service tailored as a kind of medium between express and postal service grew even more sharply, 22 percent.
FedEx seems anything but concerned that shippers may be trading down from the higher-priced express services. Yield at FedEx Express also grew 6 percent and even yield at the FedEx Freight trucking operation long troubled by discounting was up 4 percent in the quarter, excluding fuel surcharges.
“The primary driver (of improved express yield) was an improvement in rate and discount changes followed by a product mix changes and weight per package,” Glenn said, a common theme across the various units. “Yield management will continue to be a top priority for the company as we move into the second half of the year.”
Sidebar: Adding While Subtracting
The demand picture wasn’t much better for FedEx outside the United States. International Priority volume dropped 3 percent, because of declining demand from Asia, FedEx said, one reason the carrier is delaying delivery of several freighters.
FedEx Express operating profit rose 30 percent to $342 million, while revenue increased 10 percent to $6.6 billion. U.S. domestic package revenue grew 12 percent, while international priority revenue per package rose 11 percent.
Meantime, FedEx Freight, the largest less-than-truckload carrier in the U.S. when ranked by revenue, reported quarterly operating profit of $40 million, compared with a $91 million loss a year earlier, and increased its revenue 9 percent to $1.3 billion.
The trucking operation, which implemented a 6.75 percent general rate increase in September, improved its yield 8 percent and cut less-profitable shipments from its network, which FedEx said accounted for the 3 percent drop in LTL shipments.