FedEx Exec on UPS Strike Fears: ‘This Has Opened a Lot of Doors’
Soft demand is the culprit for FedEx’s 10 percent revenue decline in the fourth quarter, but the company’s package volume in the March-to-May period is trending in a positive direction—signaling that consumers were buying more ahead of the summer months.
On a Tuesday earnings call, FedEx CEO and president Raj Subramaniam said the rate of volume declines across all transportation segments including Express, Ground and Freight, improved sequentially from March through May.
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Domestically, FedEx Express daily volume saw an 8 percent year-over-year decline last month, improving from March’s steeper 13 percent tumble. Internationally, volume improved in May to a 3 percent dip from March’s 4 percent year-on-year slump.
Ground had the biggest improvement, going from an 8 percent annual decline in average daily volume in March, to just a 2 percent dip from the year-ago period. And Freight saw respective declines contract from 19 percent to 17 percent.
Revenue declined 10 percent to $21.9 billion, in line with quarterly total volume declines. At FedEx Ground, fourth-quarter revenue was down 2 percent year over year, driven by a 6 percent decline in volume. FedEx Freight revenue was down 18 percent, with volume declines matching in kind at 18 percent.
With the expectation that consumer spending could pick up on the horizon, FedEx is maintaining a more positive outlook for the second half of the 2023 calendar year. After three straight quarters of revenue losses, FedEx forecasts the 2024 fiscal year, which began April 1, to see flat to low-single-digit percentage growth.
FedEx is already getting to work on its ambitions to cut $4 billion in costs by fiscal 2025—and an additional $2 billion in the two years after—by delivering a $2 billion year-over-year reduction in fourth quarter operating costs largely related to aligning flight capacity with demand.
The shipping giant plans to take 29 aircraft out of scheduled flights in the upcoming fiscal 2024, permanently retiring nine of them. FedEx permanently retired 18 planes in its fourth quarter.
In total, global flight hours were down 12 percent in the quarter.
The cost cuts kept FedEx margins intact to close out the year, with the logistics company reporting a profit of $1.54 billion, or $6.05 a share. FedEx anticipates $1.8 billion in more cost cuts related to the Drive transformation program in fiscal 2024.
As part of its wider organizational unification into One FedEx by June 2024, the company will consolidate its Ground and Express operations in Canada starting next April. This is expected to save the company $100 million.
FedEx has already started the streamlining efforts in 20 markets including Hawaii, Alaska and Minneapolis.
“We’re not taking a one-size-fits-all approach to our Network 2.0 strategy,” Subramaniam said in the call. “Success depends on a mix of models, including employees and contracting with service providers as all are important pieces of how FedEx moves packages.”
Subramaniam described this “hybrid model” as one that will rely on employee couriers for pickup and delivery in some markets, and contractors in others.
Potential UPS strike hasn’t benefited FedEx, but ‘great conversations’ were had
Although the UPS-Teamsters strike authorization vote is making waves, FedEx didn’t see any material benefit from the ongoing UPS labor negotiations in its most recent quarter, and has not planned for any benefits for the upcoming fiscal year, according to executive vice president and chief customer officer Brie Carere. But she is optimistic on long-term prospects based on sentiment from UPS clients.
“What I can tell you is that this has opened a lot of doors,” said Carere in the call. “We’re having a lot of great conversations with legacy UPS customers—we feel really good about the sales pipeline because of the strong value proposition we have versus our primary competitor.”
Even in the event of a strike, orders at FedEx would likely still take longer than expected, said Chris Creyts, senior director in Alvarez & Marsal’s consumer and retail group.
“There simply isn’t enough capacity in the market with other carriers to replace UPS, especially on such short notice,” said Creyts. “In the short term, options for shippers are limited and shipping delays will spill over to all carriers as USPS, FedEx, DHL and small regional couriers struggle to absorb the additional volume.”
Creyts also pointed out that FedEx and other carriers could institute “surge” shipping fees as they cope with additional costs of the volume spillover, which would likely trickle down to consumers.
“Some retailers may eat these extra fees, but most won’t have deep pockets and will likely pass it on to consumers,” said Creyts.
