How FedEx Weathered its ‘Toughest Winter’

by LJM Group
Despite the severe weather throughout the country over the holidays, shipping behemoth FedEx Corp. still managed to keep most of its deliveries on track, chairman Fred Smith told investors in a call discussing the company’s Q3 earnings today. In fact, in the month of December, the carrier delivered packages on time 99% of the time, added president and CEO Henry J. Maier.
Weather cut the retailer’s earnings for the third quarter ended Feb. 28 by $125 million, with operating income reduced by about $70 million. But revenue was still up 3% year over year, to $11.3 billion from $11 billion in the holiday-encasing Q3 2013, the company reports.
Strong headwinds also contributed to higher-than-average fuel costs, partly offset by reduced growth in staff salaries and benefits, according to FedEx executive vice president and chief financial officer Alan Graf. “We would had a unbelievable quarter had it not been for the weather and the few headwinds,” he said in the call.
“Severe winter weather has been a factor in all of our lives these last several months and it has significantly affected our third quarter earnings. In fact, it’s been the toughest winter in which FedEx has ever operated,” Smith said. “We’re very proud, however, of the FedEx team for delivering outstanding service despite the hardships posed by severe weather during December’s peak shipping season when many team members volunteered to work on Christmas Day, and then in January and February when it really got bad.”
FedEx’s strategy of maintaining separate Ground and Express divisions, with multiple hubs for each, was a large factor in the company’s ability to minimize delivery delays while frigid weather hammered the nation, he continued. Those diversified hubs and shipping capabilities make the company flexible enough so that, when severe whether hits Indianapolis, for example, it can easily move packages from there to Memphis, or vice versa, president and CEO Dave Bronczek explained. FedEx did just that in the quarter when bad weather moved into Indianapolis, and also when storms hit New York, he said.
“We ended up having the flexibility once again, although it cost us the money to move planes around and move customers’ packages around,” Bronczek said. “So we weren’t paralyzed with one hub that would be shut down over a long period of time.”
Smith contends that part of why delivery delays around Christmas this year were such a hot topic is because online social networks amplified individuals’ anecdotes “much bigger than perhaps they are,” he said in the call. In reality, however, FedEx at Christmas had a “very good peak relative to few years past,” he said. “We just plan to continue doing that, and we’re planning very carefully to make sure that we don’t disappoint people.”
Much consumer dissatisfaction regarding e-commerce deliveries, he continued, stemmed from retailers notifying the customer a package was on the way before they actually passed the parcel on to FedEx. And complaints of damaged goods are often because those items weren’t packaged well inside the fulfillment center. “I can promise you that the customers are not going to tolerate those types of things over the long haul,” he said. “So, we’re working very carefully with our customers on these aspects as well, but it’s a big part of the e-commerce business that really didn’t get enough publicity last year—because they were an integral part of the problem even more than the weather and the carrier performance.”
The biggest challenge e-commerce presents in package delivery stems from such a significant portion of volume being concentrated in the short holiday season, Smith continued. “And obviously it is not possible to make these enormous capital investments for two or three weeks out of the year. So, I suspect that what you will see on a go-forward basis is a bit of realism on the part of consumers and providers as to what the infrastructures can provide [to] even the postal service, because remember, the postal service is not geared up to operate for just those two or three weeks either.”
The postal service comes into play because large shipping carriers like FedEx, UPS or DHL have agreements to drop packages off at post offices near consumers for postal carriers to deliver. However, that setup makes it harder for merchants and shipping carriers to satisfy consumers who increasingly track deliveries online, and monitor deliveries more frequently thanks to the proliferation of smartphones, Smith told the investors. “One thing is very clear and that is: the information systems that the consumer-driven mobile society has today are very, very important,” he said. “They actively want to be a part of that process, they want to know when it shipped, they want to be able to redirect it to a location. This is an incredible capability that we have, and UPS also has, and it’s going to become a bigger and bigger feature. So, it’s hard to see the landscape as this thing rolls out, but we’ll take a very disciplined approach in our presence in that business, because you can clearly go broke trying to deliver non-compensatory packages to people’s homes.”
Michael Glenn, executive vice president, market development, added that all these complications makes FedEx highly selective in the investments it makes to support the growth in online retail sales. “You can go after a lot of e-commerce volume and be pretty pleased with your year-over-year growth rates, but that doesn’t necessarily mean it’s going to fall out of the bottom line,” he said in the call. “So, when we are pursuing growth opportunities in e-commerce, we make sure that we have a proper balance between growth in the 11th month of the year versus growth [the rest of the time].”
Glenn declined to comment on the failures UPS reported in its own holiday shipments. But, he said FedEx has already begun working with its clients to improve the “balance between the volume that we carry during non-peak versus the volume that we carry in peak.”
For the third quarter ended Feb. 28, FedEx also reports:
  • Operating income of $641 million, up 9% from $589 million last year.
  • Net income of $378 million, up 5% from $361 million last year.
  • FedEx Express’ U.S. domestic average daily package volume increased slightly.
  • FedEx Ground average daily volume grew 8%.
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