Higher volumes and rates propel FedEx earnings

Higher volumes and rates propel FedEx earnings

Strong domestic volumes in the air and on the ground delivered double-digit profit growth for FedEx in the first quarter of its new fiscal year. The second-largest U.S. transport operator today reported a 24 percent year-over-year increase in net profit to $606 million. Total FedEx revenue rose 6 percent from a year ago to $11.7 billion in the quarter that ended Aug. 31.

As higher package and freight demand filled planes, delivery trucks and tractor-trailers, FedEx announced across-the-board rate increases for early 2015. Shipping rates on average will rise 4.9 percent at FedEx Express, FedEx Ground and FedEx Freight on Jan. 5. At the same time, FedEx will apply dimensional weight pricing to all FedEx Ground shipments.

FedEx’s expectations-beating performance reflected a stronger U.S. economy, with industrial production, construction and consumer confidence increasing. U.S. gross domestic product increased 4.2 percent in the second quarter, and JOC Economist Mario Moreno predicts GDP will expand by about 3 percent in the last two quarters as consumers spend more.

However, slower growth overseas is creating a “multispeed world,” Mike Glenn, president and CEO of FedEx Services, said in a conference call with investment analysts today. “The U.S. is leading the way, and emerging markets are picking up,” Glenn said, according to a transcript of the call published by Seeking Alpha. “We expect global (GDP) growth of 2.6 percent in 2014 and 3.1 percent in 2015,” compared with 3 percent U.S. growth in 2015.

FedEx’s largest operating segment, FedEx Express, increased revenue 4 percent to $6.86 billion as U.S. domestic package and envelope volume rose a combined 5 percent. Package volume rose 8 percent, but was offset by lower envelope growth, the company said. FedEx international priority volume grew 1 percent, and international economy volume, 3 percent.

The express division’s operating profit increased 35 percent from a year ago to $369 million. Operating margin expanded from 4.1 percent a year ago to 5.7 percent. Higher U.S. domestic package volume, improved international export yield and benefits from profit improvement programs more than offset higher aircraft maintenance costs, the company said.

Ground operations — both package delivery and freight — roared in the quarter, with FedEx Ground increasing revenue 8 percent to $2.96 billion and FedEx Freight boosting sales 13 percent to $1.61 billion. Growth in e-commerce pushed FedEx Ground average daily volume up 6 percent in the quarter, with revenue per package rising 3 percent. FedEx SmartPost volume fell 10 percent because of reduction in volume from a major unnamed customer, but revenue per package increased 10 percent because of higher rates and a better customer mix.

FedEx Freight, the smallest FedEx division and the largest trucking company in the U.S. and the $32 billion less-than-truckload sector, reported the biggest gains of all. In addition to the 13 percent increase in revenue, the $5.1 billion LTL carrier boosted operating profit 70 percent to $168 million. The carrier’s operating margin was 10.4 percent, compared with a 5.4 percent operating margin at flagship division FedEx Express and an 18.4 percent operating margin at FedEx Ground. The LTL unit’s operating ratio or OR dropped to 89.6.

LTL freight volume increased 11 percent year-over-year in the quarter, with a 13 percent increase in demand for FedEx Freight’s priority service. Operating results improved because of increased LTL revenue per shipment, higher average daily LTL shipments and solid cost management, the company said.

“This is confirmation that the market for LTL is tight,” said Satish Jindel, president of transportation research firm SJ Consulting Group. “Demand is in balance with supply and that means the LTL carriers, all of them, should be targeting a 90 or lower OR for the rest of this year.”

Contact William B. Cassidy at wcassidy@joc.com and follow him on Twitter: @wbcassidy_joc.