On Thursday, March 22, 2012 FedEx published results and held a financial analysts conference call to discuss their fiscal third quarter. The subtitle on the release reads, “FedEx Ground Operating Income Increases 43%” and the overall strong financial performance is also indicative of FedEx’s successful focus on yield management, operational efficiencies as well as record holiday season volume.

    Financial Highlights

    • Earnings per share were $1.55 (diluted) versus $0.81 last year. Analysts’ consensus was for EPS of $1.35.
    • Revenue was up 9% to $10.56b for the quarter. Through nine-months of the fiscal year revenue is $31.7b versus $28.8b last fiscal year, an increase of 10%.
    • Operating income up 107%, Net income up 126%, and Operating margin for the quarter was 7.7% versus 4.1% last year.

    Comments on the Economy

    As a bellwether of leading activity, people listen to FedEx’s observations on the economic front. While there was little written in the press release there were comments made in the conference call telling us that they anticipate moderate to below trend economic growth. They’re currently estimating domestic GDP growth of 2.1%, a number below blue-chip consensus, Industrial Production at 3.9%, and global GDP of 2.3%, a downgrade from a previous estimate.

    Taking a deeper look into their volume numbers we see domestic Express package volume was down 4%. Mentioned in the release and reiterated on the conference call was discussion of adjusting domestic Express network capacity. Furthermore, they stated that traffic patterns were weaker in the technology sector, especially cell phones, and also in financial services.

    Regarding the UPS Acquisition of TNT

    If FedEx has any thoughts of making a bid they did not show their cards on this call nor did they make any comments about their competition.

    One of the driving forces of change is the globalization of trade, particularly with supply chain networks. While Europe is an integral part of global commerce it appears that FedEx’s focus is on facilitating inter-continental trade, not intra-continental. They stated that their European business is growing, multi-billion dollar, profitable, and they intend to focus on organic growth.

    They mentioned that the growth ratio in the Eurozone is low given policies being pursued by countries on the continent that do not stimulate GDP growth. In addition, they view European transportation as a highly fractionated market. While they emphasize the inter-continental segment there are numerous intra-continental challenges as well as intra-country competitive factors to consider.

    Given the commentary, it would be a surprise to see FedEx make an offer for TNT. In case you’re wondering- there was no mention nor any questions asked regarding a FedEx-DHL relationship that had been speculated on recently.

    Yield Management Story Continues

    FedEx has maintained a highly disciplined approach to their yield management initiative. Management complimented their sales team’s effort to increase yields. At one point there were comments of the Ground division getting to a margin target of 20%. For reference, Ground margin in Q3 was 18.8% and 17.9% for the first nine-months of this fiscal year.

    The components of yield improvement mentioned during the call were base rates, discount changes, product mix, surcharge management, and changes to the dim calculation. They are managing contract renewals and getting above trend increases. They are looking to derive value for service and may be willing to put volume at risk in order to obtain their yield targets. And in my opinion they’re not the only carrier focused on this, they just seem to make a stronger statement about it.

    Some Thoughts for Shippers

    In this sellers’ environment, how you use a carrier’s full portfolio of services, provide consideration to alternative sources, and most importantly, identify and implement internal process improvements you can make before presenting your business to an incumbent or opening a bid to the marketplace is what will separate you from the new competition. That competition is not the carriers- it’s other shippers who are also seeking the best available deals in the market. How you take your business to the marketplace really does matter.

    Have you considered or implemented any of the following:
    • Downgraded service level selection due to cost increases?
    • Shifted modes due to the impact of fuel surcharges?
    • Changed your business forecast up or down due to economic forecasts?
    • Evaluated your shipping operation to identify process improvements?

    If so, did you also take a close look at the structure of your current contracts to determine how it will stand up to the impact of these changes? While this may not be a “good” time, it may certainly be “the” time to conduct a thorough evaluation prior to sitting down for a business review with your carrier partners.

    Our next look at industry results comes with UPS, scheduled to release their first quarter earnings on Thursday, April 26th.

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