FedEx Faces $1 Billion Annual Headwind Due to End of De Minimis Exemption

FedEx faces a $1 billion headwind in its current fiscal year due to the global trade environment, the company said in a presentation released Thursday (Sept. 18).

During the company’s quarterly earnings call held Thursday, executives said the headwind was largely driven by the United States ending the de minimis exemption on smaller packages.

The de minimis exemption, which allowed packages valued at less than $800 to enter the U.S. duty free, ended for packages from China and Hong Kong on May 2 and for packages from all other countries on Aug. 29.

During the quarter ended Aug. 31, which was the first quarter of its fiscal year, FedEx faced a $150 million headwind, executives said during the call.

“What we saw in the first quarter is, the vast majority of that $150 million was impact from reduction in top-line revenue — specifically, the majority of that is de minimis impact in coming out of the China lane,” FedEx Chief Customer Officer Brie Carere said.

For the full fiscal year, the company expects headwinds of $150 million per quarter for that reason, $100 million of bottom-line pressure throughout the year due to the global de minimis change that took place at the end of August, and $300 million of incremental expense, Carere said.

“To be really clear, that $1 billion of headwind is predominantly an impact of top-line revenue reduction, because China-to-the-U.S. is a very profitable lane for us,” Carere said.

FedEx will offset that headwind with $1 billion in cost savings gained through its ongoing transformation effects, according to the presentation.

In addition, the company saw its U.S. domestic business drive year-over-year total package volume growth of 3.5% during the quarter. While total international export package volume was down 3% and international domestic volume was down 0.9%, U.S. domestic volume was up 4.7%, according to financial and operating statistics released Thursday.

“We delivered a solid quarter in line with the Q1 outlook we shared in June, despite significant volatility and uncertainty around the global trade environment,” FedEx President and CEO Raj Subramaniam said during the call.

The company adjusted its network to match changes in demand caused by global trade shifts, reducing its capacity in the China-to-U.S. lane and increasing that of its Asia-to-Europe lane, Subramaniam said.

“With a full removal of the de minimis exemption in the United States last month, we have been working closely with our customers, helping them maintain effective and efficient access to the vital U.S. market,” Subramaniam said. “Given a significant portion of our de minimis volume exposure previously came from China, we were able to use learnings from our experiences in May to help shippers elsewhere navigate the more recent exemption elimination.”

Looking ahead to FedEx’s peak season, the holiday shopping season, Carere said the company expects a “modest,” mid- to high-single-digit year-over-year increase in average daily volume, with growth driven by its largest B2C customers.

“We are cautiously optimistic about peak season growth based on what we are hearing from our customers currently,” Carere said during the call.

FedEx is accelerating its development of artificial intelligence (AI) capabilities fueled by the data it gathers from the 17 million packages it handles every day and its position in global commerce, Subramaniam said.

“We will continue accelerating two key priorities: scaling AI across the enterprise, from enterprise function to how we operate and serve our customers, and exploring new revenue models that leverage our unique assets,” Subramaniam said.