Inflation and Double-Digit Volume Declines Push FedEx to Realign Its Air Operations

In the face of macro headwinds, FedEx is pulling on the operational levers it can pull.

And that involves throttling back on some operations — including air and international activity.

To that end, the shipping giant reported fiscal third quarter earnings that showed lingering weakness in demand, offset by cost-cutting that’s led to a sanguine outlook by management about earnings. Wall Street’s a crowd that likes to see positive execution (and game plans) on those metrics, and so the shares were bid up 11% after hours.

In one example of belt-tightening actions, the company is reducing its headcount by about 25,000 positions.

As to the macro headwinds,  the slides that accompanied earnings showed that, in detailing volume trends, monthly volumes during the fiscal third quarter into February were down double digits and off 11% in its FedEx Express U.S. Domestic Package unit last month (as measured year over year); similar metrics saw 10% declines last month in FedEx Ground, and off 14% in FedEx Freight.

Some Puts, Takes, Pressures

The volume declines have been somewhat offset by higher shipping rates (which softened some of the revenue impact), and other earnings materials from the company show that average revenues per piece, on a consolidated basis, were up 5.2% through the December period. Overall revenues were down 6% on a year-over-year basis in the latest fiscal quarter, to $22.2 billion.

The pressures were most pronounced at Express, which includes the air cargo operations — and the reductions here, where the company made the determination to retire six aircraft this past quarter and “park” nine planes, reduced flight hours by 8%. Those actions, management said on the call, have helped mitigate nearly half of the company’s revenue declines. And per information from the question-and-answer session during the call, Express has the highest cost structure among the company’s units, so paring back there should help margins.

The pressures are hardly FedEx’s alone to bear. As reported late last year, Amazon Air was reportedly trying to sell excess air cargo capacity amid slowing consumer demand.

Headwinds to Continue

Thursday, CEO Raj Subramaniam said on the conference call with analysts that the headwinds in place — lower volume and inflation — would continue. The company’s also removing some domestic pickup and delivery routes.

Chief Customer Officer Brie Carere said on the call that in Asia “market demand is rebalancing,” and despite current softness in yield and demand for priority services, the reopening of FedEx’s international economy service will help stabilize volumes in the region.

CFO Mike Lenz said on the call that looking ahead into the fiscal fourth quarter, volume declines should moderate.

During the question-and-answer session with analysts, management noted that transit times are back down to pre-pandemic levels, at about two days, where that metric had been 2.3 days in the previous fiscal year.

Thursday’s earnings report builds on FedEx’s strategy that’s been building in recent months and bearing some operational fruit as it is closing offices and grounds flights.  As detailed last summer,  the CEO noted the challenges confronting the company. “We have dealt with economic crises before,” Subramaniam said back in June. “Cycles come and go. To be very clear, we are not assuming a deep economic recession. If the economy slows down to a mild recession, we can manage through it.”