What’s the Deal with FedEx?

 In Industry News

There’s a lot going on for shipping giant FedEx. The company’s been in the news a lot lately, and not for anything all that positive. Its public “break-up” with Amazon and a recent poor earnings call brought to light many issues the carrier is currently facing.

Taken all together, it looks like FedEx could be heading for a significant inflection point in its business. The global shipping industry continues to change very quickly.

The Financials

The company’s Q4 2019 earnings report indicates there is reason for concern. FedEx announced a quarterly loss of almost $2 billion, as compared to a profit of $1.13 billion at the same point last year. At the same time, FedEx’s Express business has experienced a 12% fall-off in revenues per package in the past year as the carrier tries to understand and meet the demands of the growing ecommerce market. Still, FedEx stated that adjusted profit was $5.01 per share, which although down $5.91 from the previous year, was better than predicted.

The Reasons

Slow growth in the global economy contributed to the poor performance in FedEx’s Express segment. Compounding matters, as has been widely reported, FedEx will not be renewing an air delivery contract with Amazon. Additionally, the trade dispute between the U.S. and China is hurting the carrier’s package volume in several key lanes. Even the U.S. government doesn’t seem to be helping — FedEx recently sued the Commerce Department to try to cease export rules it feels are unreasonable.

These challenges and market changes translate into FedEx having air freight capacity that needs to be filled, and they are indicative of longer term problems. FedEx’s air network is geared more toward businesses than ecommerce. But online retail and B2C delivery are where the growth in small parcel delivery is strongest. Ecommerce customers are concerned with delivery speed, but not necessarily the level of precision FedEx has built its business on. And not at the premium cost points the carrier has to charge. Without a change in the trend toward more residential vs. business delivery, which is extremely unlikely, the carrier will continue to lose delivery market share and profit margin if its planes are not at capacity enough to offset the operating expense of air transportation.

There is a lot of conjecture about what is happening internally at the carrier, too.

The Wall Street Journal reported that due to these changes in the industry, FedEx would be lowering its prices on two-day Express shipping in an attempt to gain more market share. In response, FedEx CEO Fred Smith stated that FedEx had not made any recent pricing changes or changes to its strategy, calling the WSJ report “erroneous and misinformed reporting.” A spokeswoman for the company also clarified that its Express service is successful and adds value to the company and its customers.

Even if FedEx does not make any changes to its pricing strategy, the carrier is trying to grow its ground network to shorten the “last mile” of delivery for ecommerce packages. FedEx is expecting that ecommerce business will double the number of packages shipped in the U.S. to 100 million per day in the next seven years.

As a result, FedEx is planning to expand its delivery schedule to seven days a week next year and to increase the number of part-time drivers it employs, as well as to set up more pick-up and drop-off locations in retail stores. The company already has in place the Extra Hours service, in which its drivers make pick-ups at retail stores at night to be sorted and go out on Express vans the following day.

Whether FedEx makes any definitive changes to its pricing structure remains to be seen. In the meantime, however, expect to see more adjustments from the delivery giant as it tries to figure out how to best service its growing ecommerce business while keeping its air capacity filled.

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