Business Gained From UPS is ‘Really FedEx’s to Lose’
A soft market didn’t stop FedEx from accomplishing what it set out to do to start 2023—cut costs. Despite first-quarter revenue declines of 7 percent to $21.7 billion, the Memphis, Tenn.-based shipping company reported a 23 percent increase in net income to nearly $1.1 billion—and said it’s on track to save $1.8 billion in fiscal 2024.
But can America’s second-biggest package carrier keep the volume it gained from UPS and Yellow this summer?
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FedEx added approximately 400,000 in average daily packages across its Ground and Express divisions when the UPS-Teamsters labor negotiations spooked shippers. UPS lost 1 million packages to other carriers, costing the company $200 million.
The new businesses benefited FedEx’s Ground division, where revenue rose 3 percent to $8.4 billion on a 1 percent increase in total volume.
“Volumes could have been down low-single digits if it wasn’t for the UPS share gains that they were able to get,” said Lee Klaskow, senior freight transportation and logistics analyst at Bloomberg Intelligence. “Management noted on the call that they felt that it was very sticky. It’s really FedEx’s to lose. If they’re not able to provide the service that the shippers are expecting, some of them might go back to UPS. But they do have an opportunity to keep a lot of that market share that they won.”
FedEx will probably keep most of the new share it gained in the near term, but “that’s a big unknown” a year from now, Klaskow told Sourcing Journal.
The delivery giant also capitalized on problems at Yellow, the bankrupt less-than-truckload (LTL) firm that shuttered in July. The FedEx Freight division added 5,000 average daily shipments “at attractive rates” by the end of the quarter, according to FedEx executive vice president and chief customer officer Brie Carere.
Weak demand at the freight division resulted in revenue dropping 16 percent to $2.3 billion driven by a 13 percent decline in volume. Like other carriers in the LTL space, FedEx Freight saw an improvement in volume in August when Yellow closed down. While average daily volume was down 16 percent in June and 14 percent in July, that improved to down 8 percent in August, after the trucking firm ceased operations.
Unlike the UPS scenario, the stickiness of the volume depends on how selective FedEx wants to be with the freight now in its system, Klaskow said.
“It has to be profitable,” Klaskow said. “Yellow was known for having low-cost freight in the network. I’m not saying that all of it was low quality, but a good chunk of it was low quality. FedEx and Old Dominion and XPO, for that matter, are going to be focused on freight that’s palletized, freight that tends to have low cargo claims associated with it and freight that’s more importantly, profitable.”
Revenue at the FedEx Express priority shipping and air freight division declined 9 percent to $10.1 billion on a 2 percent decrease in daily package volume.
The company’s downgraded full-year outlook forecasts flat year-over-year revenue performance, from an initial range of flat to low-single-digit percentage growth. The adjusted fiscal 2024 earnings projection calls for $17 to $18.50 per share, 50 cents higher at the low end of the range.
Wall Street investors sent FedEx stock up more than 5 percent in after-hours trading on Wednesday.
The company’s Drive program is expected to cut $4 billion in costs by 2025.
In the Ground division, FedEx cut $130 million in costs in the quarter. It got much of those savings from using a new bid system to achieve lower third-party transportation rates. It also optimized rail usage and reduced Sunday deliveries.
The Freight division closed 29 terminals in August, while the Express unit increased cost efficiencies by operating fewer flights, aligning staff with volumes and sticking to just one delivery wave per day in the U.S. It had added a second wave, or shift, of afternoon deliveries some time ago.
“If they’re able to improve the overall efficiency and productivity of their network, that’s going to bode well in terms of what they can do with pricing,” Klaskow said. “They may not have to raise rates further and they may be able to be more competitive on pricing, because they’re still making the margins and the returns on invested capital that they need to.”
