FedEx Corp. will need to keep its cost-cutting blades sharpened if it expects to hit its fiscal 2024 targets, because it’s not going to get much help from the U.S. and international economies.
The company’s (NYSE: FDX) first fiscal quarter results, released late Wednesday, demonstrated the benefits of the cost cuts. FedEx’s adjusted diluted earnings per share of $4.55 came in well ahead of consensus of $3.73 -$3.77 a share. Operating income, net income and operating margins rose well above levels of the prior fiscal year’s first quarter. FedEx’s fiscal first quarter ended Aug. 31.
The cost-cutting was most notable at FedEx Express, the company’s air and internal unit and its largest. Revenue was down 9%, pressured by multiple factors ranging from weak international economies to a move by the U.S. Postal Service, a large U.S. air cargo user, to divert air volumes to the agency’s lower-cost ground network. However, the unit’s operating income rose 18% year on year due to cost reductions that included reducing flight frequencies, parking aircraft and cutting staff.
The cost reductions are part of the company’s DRIVE program, which is expected to result in $1.8 billion in permanent savings this fiscal year, and another $2.2 billion in fiscal 2025.
Wall Street seemed to like the results. Shares were up 5.5% in after-hours trading Wednesday after being up fractionally in the regular session.
FedEx Ground, the company’s U.S. ground unit, had a stellar quarter, posting the most profitable quarter, on an adjusted basis, in its history. Operating income increased 59% due to yield improvement and cost reductions. Costs per package dropped by 2% as line-haul trucking costs declined and the unit got more productive use out of its relationship with the railroads.
The units also benefited from 400,000 additional daily packages courtesy of UPS Inc. customers who diverted volumes to FedEx due to concerns about a possible Teamsters union strike, which never materialized. FedEx executives said they have so far retained virtually all of that business and expressed the intent of keeping it.
It is unclear to what extent the diverted volumes benefited FedEx Ground in the quarter. Executives said they expect the unit’s performance to remain strong in the second quarter as well.
Separately, FedEx Freight, the company’s less-than-truckload unit, received 5,000 additional daily shipments in the wake of the collapse of rival carrier Yellow Corp. About half came directly from Yellow shippers, while the balance was diverted from other carriers that shippers had gone to first but switched to FedEx Freight due to service issues, executives said.
Overall, revenue in the first quarter came in at $21.7 billion, $1.5 billion below the fiscal 2023 quarter but in line with analysts’ estimates. The company does not anticipate a near-term rebound in demand anywhere in its network and said business conditions remain “uncertain.” In response, it downgraded its revenue outlook for the full year to flat over fiscal 2023, from flat to slightly higher.
Including all carriers, U.S. parcel volumes will drop 0.5% for calendar 2023, worse than the company had anticipated. World trade will grow slightly over 1%, lower than originally expected. The latter projection will impact FedEx Express volumes, as will the near-full resumption of lower-priced bellyhold capacity supplied by international passenger airlines. The restart of FedEx’s lower-priced “international economy” service will put pressure on the unit’s overall margins, executives said.
Executives sidestepped an analyst’s question about whether the near-10% wage increases that UPS’ unionized workforce will receive in the first year of its contract will force FedEx to counter with employee increases of its own. In fiscal 2022, a period of severe labor shortages at FedEx Ground in particular, the company raised employee compensation by about $1 billion. FedEx will continue to invest in its workforce, executives said.
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