FedEx reported net profit up 3.3 percent, year-over-year, to US$715 million in the first quarter of its 2017 fiscal year, driven primarily by the strong performance of its U.S. domestic overnight services, which saw substantial volume increases and stable yields.
It should be noted that, for the first time, FedEx has added a new heading to its earnings report, to reflect income and revenue from TNT Express, which it acquired last year. Even though integration costs related to the TNT integration totaled $68 million, FedEx’s overall revenues swelled by almost 20 percent.
Alan Graf, FedEx Corp.’s executive vice president and CFO, said regarding the TNT acquisition, it is “the largest acquisition in FedEx’s history,” which “transformed the world’s transportation logistics industry.” The merger also rapidly accelerated the integrator’s European and global growth strategy. “One-third of total FedEx Corporation revenue now touches a country outside of the United States,” Graf added.
FedEx’s reported that operating income rose 10.5 percent to $1.26 billion, as revenue swelled by 19.4 percent to $14.7 billion. Revenue attributed to TNT Express was $1.8 billion.
Looking specifically at the FedEx Express segment, operating income, as reported, was up 14.5 percent to $624 million. Total package volume was up 1.3 percent, driven by strong U.S. domestic demand. High-yield products in the U.S. Overnight Box and Overnight Envelope segments posted significant average daily volume increases of 3.7 percent and 5.4 percent, respectively. Composite U.S. Package yields, meanwhile, were up 1.5 percent, and International Package yield was “slightly negative,” down 0.6 percent.
The company said Express operating results improved due to “higher package volume and increased freight pounds,” which, in turn, “more than offset lower fuel surcharges and unfavorable currency exchange rates.”
It was also another solid quarter for FedEx’s Ground unit, which continued to “grow nicely, driven in large part by e-commerce.” The unit saw revenues increase 12 percent, y-o-y (12.6 percent accounting for the impact of fuel costs). Daily average FedEx ground volumes rose 10 percent, “driven by robust growth in both residential and commercial segments.” FedEx Freight also reported strong increases to revenue which increased 4 percent in Q1, and average daily shipments which jumped 8 percent, compared to the same period in FedEx’s 2016 fiscal year.
Turning away from the numbers, FedEx executives had some interesting comments during a conference call following publication of the quarterly results. Of particular interest, was a focus on the current and future impact of e-commerce, and the TNT integration. FedEx said its customers were increasingly purchasing larger items through e-commerce channels.
Mike Glenn, president and CEO of FedEx Services, said, “We’ve engineered our network’s sortation and delivery capacity for these larger packages, including entire temporary facilities dedicated to the sortation of oversized packages, which will be critically important this upcoming peak season.” To account for the added cost of handling such packages, and to encourage shippers to use more appropriate packaging, FedEx said it will increase rates for oversized parcels beginning next January.
Earlier this week, FedEx announced it will implement the following rate increases beginning on Jan. 2, 2017:
- FedEx Express rates will increase by an average of 3.9 percent for U.S. domestic, import and export services.
- FedEx Ground and FedEx Home Delivery standard list rates will increase an average of 4.9 percent.
- FedEx International Premium rates, FedEx Express minimum rates and FedEx Ground Multiweight rates will also change, as will FedEx SmartPost rates.
- The FedEx Express and FedEx Ground U.S. domestic dimensional weight divisor will change from 166 to 139.
- The FedEx Freight Extreme Length surcharge will change from $85 to $150, and will be applied to shipments with dimensions of 12 feet or greater, versus the prior 15 feet.
Returning to the integration of TNT Express, the company said it expects the entire integration process will take about four years, although by FY18 the company expects “TNT will be accretive, including integration and restructuring costs.” In North America, FedEx Express has already begun taking over TNT volumes previously handled by third-party delivery partners. Across the Atlantic, FedEx is also planning to inject initial volumes into five TNT Europe road network lanes beginning sometime this month.
Also of interest, during the call an analyst asked for an update regarding FedEx’s position on disruptive technologies, like unmanned aerial vehicles (UAVs). CEO and president Fred Smith said that, indeed, like other companies, FedEX was experimenting and had five ongoing UAV and robotics related experiments, mostly within the Ground segment. Unlike many other companies, however, Smith said that FedEx prefers “to keep working those issues, and tell you about them when they make a meaningful difference in the company.”
Smith went on to illustrate the capabilities of the autopilot system in the company’s 777 freighter fleet, noting that “they can take off, land the plane and taxi to the gate and turn themselves off if that’s what we chose to do so.” That being said, he added, “it’s very difficult in the foreseeable future to substitute for the well trained pilot or driver or person. And we look at the use of automation more as an opportunity to improve the productivity of those types of experts within our system to make their job more comfortable and easy and above all to increase safety.”