FedEx earnings suffer from TNT Express cyberattack, hurricanes

FedEx’s 2018 fiscal year got off to a rough start, the company reported during yesterday’s conference call, as chairman and founder Fred Smith said, “The TNT Express cyberattack and Hurricane Harvey posed significant challenges to our operations in the first quarter.”

Most of the impact from the June “NotPetya” cyberattack on FedEx’s TNT Express was lost revenue estimated by FedEx at about US$300 million of operating income. First-quarter revenue and operating income were slightly up from FY2017 at $4.64 billion and $626 million, respectively, but that growth resulted mainly from average daily package volume growth of 4 percent and higher base rates for FedEx’s commercial service. Subsequently, FedEx reported lower operating margin of 13.5 percent, down 0.7 points from the same quarter during the 2017 fiscal year. The company’s earnings per share also fell by $0.46 per share compared to a year earlier.

FedEx’s Express segment, which includes TNT Express, took a substantial hit from the cyberattack that could not be completely offset by overall revenue growth. The segment’s operating income fell sharply to $433 million for the quarter, compared with $610 million during Q1 of FY2017, and the operating margin fell to 5 percent, compared with 7.2 percent during the same quarter of FY2017.

Hurricanes Harvey and Irma also impacted FedEx operations during the quarter as airports cancelled flights and logistics operations ground to a temporary halt. However, the company prepared contingency plans ahead of the storms and “recovered very well” thanks to its preparations, said Raj Subramaniam, FedEx’s chief marketing and communications officer.

Despite the challenges, there were also some bright spots in the quarter. Results for the company’s Freight segment were strong, as operating income increased 30 percent, with most of the increase coming from higher less-than-truckload (LTL) revenue per shipment, higher base rates for shipments, increased weight per shipment and higher surcharges for fuel. Revenue and operating income in the segment were both up, with operating income particularly strong at $176 million, marking a 30 percent increase from the same quarter in FY2017 , and the fastest freight growth at FedEx since 2011.

For those wondering what made the quarter such a strong one for the Freight segment, Subramaniam said, “The manufacturing especially in the technology sector is a key driver of this trend for this year,” and added that the trend is likely to continue through the rest of the year.

As usual for this time of year, FedEx announced rate changes to begin with the next calendar year. The company will increase its shipping rates by 4.9 percent beginning on Jan. 1, 2018, for its Express, Ground and Freight segments.

During the rest of the fiscal year, FedEx plans to focus on integrating Dutch TNT Express with its FedEx operations. Plans were already in place to replace TNT systems with FedEx technology before the cyberattack, which prompted FedEx to accelerate the integration of the businesses. FedEx predicts the companies will be integrated by the end of FY2020.

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