FedEx Net Income Up 1.3% in 2Q, Tempered by Decline in LTL Profit
This story appears in the Jan. 2 print edition of Transport Topics.
FedEx Corp. reported profits rose 1.3% for its fiscal second quarter versus one year ago, as growth was hampered by a decline in profitability at the less-than-truckload division, according to the company’s Dec. 20 earnings release.
Net income was $700 million, or $2.59 per share, for the three months ended Nov. 30. In last year’s comparable quarter, the Memphis, Tennessee-based carrier earned $691 million, or $2.44.
“FedEx increased revenues and operating income despite continued low growth rates in the global economy. We are in the home stretch of our peak shipping season, and our service levels are high,” said FedEx Chairman and CEO Frederick Smith. “The integration of TNT Express into our broad portfolio of global business solutions is proceeding smoothly and according to plan.”
Quarterly earnings results fell 9 cents short, based on a survey of analysts by Bloomberg News.
Quarterly revenue rose 20% to $14.93 billion from $12.45 billion, year-over-year, including gains in each of the company’s four major divisions. FedEx Express, which delivers airfreight and express parcels, reported revenue rose 2% to $6.7 billion, while FedEx Ground, truck-borne parcels, reported a 9% jump to $4.4 billion.
FedEx Freight, the LTL division, reported a 3% increase to $1.6 billion.
“We are making major systems investments at FedEx Freight which will result in significant margin improvement by year-end FY2020. We believe this initiative will change the LTL landscape in a major way,” Smith said.
“[The improvements] are both in safety systems installed in our company and also some legacy systems, which we expect to greatly improve overall efficiency and productivity,” said Mike Ducker, Freight’s president.
Automation is part of the upgrades. “We will tell you that it’s not a switch, where all of a sudden, boom in 2020, we have this nirvana. We will be improving every year, all the way up and through ’20 and beyond.”
FedEx Freight produced mixed results for the quarter. Average daily LTL shipments handled rose 3.7%, but weight per shipment dropped 1.5%, year-over-year, affecting both priority and economy freight. Revenue per shipment remained relatively unchanged, but revenue per hundredweight increased 1.6% to $20.25.
“Freight’s competitive advantage having the fastest published transit times in the LTL industry is driving higher growth in its priority service,” said Chief Financial Officer Alan Graf. “Freight continues to face a difficult macro environment and is working to manage costs and increase yields.”
“In general, volume growth fell short of our estimates, while yields typically exceeded our estimates across the FedEx divisions,” analyst Dave Ross of Stifel, Nicolaus & Co. wrote. “This points to improved pricing discipline, which is important in an asset-intensive network with volume constraints and ultimately (although it did not this quarter) should lead to higher margins.”
Domestic package revenue at Express rose to $3 billion compared with $2.9 billion one year ago, and yield per package rose 3% to $17.39, although volume dropped 1% to 2.7 million for the quarter. International package revenue and yield rose between 1% and 2% to $2.05 billion and $54.37 respectively, and overall volume rose 1% to 4.3 million packages in the quarter.
For FedEx as a whole, operating income rose 2.6%, year-over-year, to $1.17 billion, but much of the addition came from the $70 million contributed by TNT Express, the acquisition of which was completed in May. Excluding TNT, operating income fell 3.5% to $1.1 billion.
Express was the sole winner with a 2% increase to $636 million. Freight had a 13% decline, year-over-year, to $88 million because of higher information technology expenses, the company told investors. FedEx Ground operating income fell 12% to $465 million.
“FedEx management has been clear about cost pressures on Ground results in FY17 as the company completes significant capital and capacity additions,” Barclays Capital analyst Brandon Oglenski wrote. “The company has elected to add upwards of 10% or more Ground network capacity (our rough estimate) in FY17, which includes major hub openings and requires significant employee training and start-up costs.”
FedEx projected that U.S. gross domestic product will increase 2.2% in 2017 and globally will rise 2.6%. However, the company didn’t provide a fiscal 2017 full-year forecast, citing the inability to predict adjustments in the market value of pension contributions it makes for retirees.
FedEx ranks No. 2 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers, behind UPS Inc.
