September 16, 2010- FedEx released their fiscal first quarter results this morning. FedEx Corp. reported the following consolidated results for the first quarter:

• Revenue of $9.46 billion, up 18% from $8.01 billion the previous year
• Operating income of $628 million, up 99% from $315 million last year
• Operating margin of 6.6%, up from 3.9% the previous year
• Net income of $380 million, up 110% from $181 million a year ago

During the morning’s conference call, Fred Smith, FedEx Chairman, President, and CEO mentioned that they are seeing signs of improved global economic demand as well as signs of a solid holiday season ahead. Furthermore, during the analysts Q&A session one of the executives from FedEx expects consumer spending to pick up, albeit slightly, by 1.5% this year and 2.6% next year.

Here is a recap of the results by segment:


For the first quarter, the FedEx Express segment reported:
• Revenue of $5.91 billion up 20% from last year’s $4.92 billion
• Operating income of $357 million, up 243% from $104 million a year ago
• Operating margin of 6.0%, up from 2.1% the previous year

The $5.91 revenue number combines domestic and international package, freight and other revenues. 
Package: $2.6b U.S. Package, $2b International Priority, $148m International Domestic; Freight: $523m U.S., $406m International Priority, $70m International Airfreight; Other (includes Trade Networks): $207m. There is relative parity between international and domestic revenues which aligns with FedEx’s continuing comments on being a service provider to the global economy.

During his summary of results on the conference call, Alan Graf Jr., Executive Vice President and CFO commented, “rates per pound are increasing as our yield improvement program is being excellently executed by our sales team.” In addition, U.S. package yields benefited from fuel surcharges, International Priority daily package volume increased 19%, and International Priority Freight pounds increased by 41%. 


For the first quarter, the FedEx Ground segment reported:
• Revenue of $1.96 billion, up 13% from last year’s $1.73 billion
• Operating income of $287 million, up 37% from $209 million a year ago
• Operating margin of 14.6%, up from 12.1% the previous year

Revenues from FedEx Ground were $1.8b for the quarter, up 12.3% from F10Q1 $1.6b; while revenues from SmartPost were $122m, up over 31% from $93m F10Q1. The 14.6% overall operating margin is 2.5 points higher year-over-year. While no competitor has the scale to match the U.S. Postal Service, FedEx SmartPost and UPS Basic can certainly collaborate with the USPS in order to gain delivery efficiency in the residential light-weight market.

On the conference call Fred Smith stated that FedEx ground provides faster service to more U.S. lanes. They improved the delivery speed to 3,700 lanes this year and since 2003 they have sped up over 82,000 lanes. Later in the call Dave Rebholz, President and CEO of FedEx Ground emphasized their competitive advantage and that they still see a lot of runway ahead given UPS’ and the USPS’ current market position. Mike Glenn, President and CEO of FedEx Services, pointed out the strategic advantage SmartPost plays in their overall strategy.


For the first quarter, the FedEx Freight segment reported:
• Revenue of $1.26 billion, up 28% from last year’s $982 million
• Operating loss of $16 million, compared with operating income of $2 million a year ago
• Operating margin of (1.3%), compared with 0.2% the previous year

Other year-over-year numbers include 91,791 shipments per day, up 28.6% over 71,384 in F10Q1; weight per shipment of 1,134 lb compared to 1,109 lb; however, yield was $17.32 (per CWT) compared to $17.87 in F10Q1.

The real news on this call, and the topic that dominated the analysts Q&A session was the announcement that they will combine FedEx Freight and FedEx national LTL operations effective January 30, 2011. FedEx projects the cost of this restructuring to be $150m-$200m including severance costs, lease terminations and other non-cash charges.

Fred Smith mentioned that he knew of no other FedEx project that’s done as much modeling or had as much market research done as this Freight segment consolidation. Bill Logue, President and CEO of FedEx Freight said that this has been studied closely over the last 9-months and that the Freight segment will get back to double-digit margins.

By combining the freight groups FedEx will now provide two choices of service: Priority or Economy through a single, integrated operating company to offer the customer a choice on every length of haul. This represents a significant change on how FedEx Freight goes to market.

What Does This Mean for Shippers?

Obviously, if you are a LTL shipper then today’s news will have implications which you must evaluate. FedEx selected January 30, 2011 as the date so as not to interrupt peak season. In addition, the point was clearly made that FedEx will be taking a more disciplined approach to contract pricing as well as reviewing accounts that are not performing to contract expectations.

That yield management initiative applies not only to Freight but to the Express and Ground groups as well. FedEx’s primary objective in the U.S. is not market share, it is on improving yields. Yields improve through higher fuel surcharges, increased weight per package, and rate/accessorial charge increases. With fuel projected to be relatively flat, if your weight per package is not increasing, then there’s a strong likelihood that you will be seeing rate increases higher then they have historically been.

Let me emphasize a point made in my last quarterly summary. The pendulum continues the swing from a buyer’s to a seller’s market across all transportation modes. With that, the swing from cost reduction to cost control follows.

What steps are you taking to control costs, not only in shipping rates but across your entire supply chain? It’s time to put analytics to work. You can’t manage or improve what you can’t see. Just because you can see it, do you know what to do with it? And if so, share that information in a collaborative manner to help control costs.