FedEx to subcontract out more international
03-21-2013, 01:14 PM
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FedEx to subcontract out more international
FedEx Customers Like Slower and Cheaper (WSJ, March 20)
Things that absolutely positively have to be there overnight don't absolutely positively have to be there overnight anymore.
Nowhere was that more evident than when FedEx Corp. on Wednesday reported that its quarterly profit plunged 31% as its international customers and shippers flocked to slower, cheaper delivery options instead of its premium-priced express service.
Now the company whose name is synonymous with overnight delivery—and has built the world's largest air express fleet—must make even deeper changes that take it farther away from its roots. It has already tweaked capacity and deferred plane purchases. Now it will shrink its global network, possibly its air fleet and direct more business via third-party alternatives like ships, commercial airlines and third-party shippers.
The news sent the company's stock down 6.9% as Wall Street appeared to come to grips with the idea that package delivery has significantly changed. It used to be that if customers didn't get a package overnight, they didn't know when it would arrive. Supply chains are now so reliable that customers and shippers are willing to forego the certainty of next-day delivery, knowing the packages will arrive when they are supposed to, says BB&T Capital Markets analyst, Kevin Sterling.
Part of the surprise is how quickly business has shifted. FedEx Chief Executive Fred Smith said the latest quarter was "very challenging for FedEx Express" due to continued weakness in international airfreight markets, industry overcapacity and customers opting for less expensive and slower international transit.
Revenue at Express, the operating unit that includes international, was about $100 million less than the company expected in the quarter, said FedEx Chief Financial Officer Alan Graf. That caused the company's third-quarter results to come in below Wall Street's expectations and prompted FedEx to reduce its full-year earnings outlook.
A long-awaited rebound in the international export business appears to be under way. International export package volume rose 4% in the quarter, the company said, continuing a trend that began in the first quarter. But it wasn't enough to turn the quarter around. The segment's operating income plunged by two-thirds as express segment operating margins tumbled to 1.8% from 5.3%.
Though you would think this "was a good problem to have," Dave Bronczek, CEO of FedEx Express, told analysts in an earnings call, the latest gain was driven by a 12% growth in deferred international export traffic, mainly led out of Asia and Europe. So while the company had "a lot of freight on our planes; our high load factors, quite frankly, were driven by the deferred traffic. So we had lower yields. We had more traffic, higher pounds—all in deferred traffic," Mr. Bronczek said. International export priority volume inched up only 2%.
As a result, FedEx's CEO said the company will begin reducing capacity to and from Asia on April 1, and "aggressively managing the traffic flows to place lower yielding traffic in lower cost networks." The moves will include reducing flights and potentially retiring some older aircraft, a move that could result in future charges, the company said. To do that, it will work through FedEx Trade Networks, its own freight-forwarding organization, third-party shippers, ships, commercial airlines and a variety of other third parties, a company spokesman said.
Mr. Graf, FedEx's finance chief, said the latest changes at Express should yield positive results by its fiscal fourth quarter ending in May. Results for the express division should "be a whole lot better" in the fourth quarter, he said.
These newly announced cost-cutting moves are in addition to a $1.7 billion profitability improvement program already under way, that include voluntary buyouts, modernizing aircraft, and a number of other initiatives designed to boost profitability through 2016.
The rapidity of the change surprised BB&T Capital's Mr. Sterling and, he thinks, many of his colleagues. "It's not like the economy rolled over. Their volumes are fine," he said. "They're still flying a lot of stuff around. It's just that they're getting paid a lot less to fly stuff around. It happened a lot faster than they realized."
For the fiscal quarter ended Feb. 28, FedEx said profit came to $361 million, down from $521 million a year earlier.
Revenue increased 4% to $11 billion. Revenue from the express-shipping business—by far the largest top-line contributor—increased 2% to $6.7 billion thanks to acquisitions.
International export revenue per package fell 3% due to the demand shift to lower-yielding international services, lower rates and lower fuel surcharges.
For the fiscal year, the company lowered its earnings estimate and now expects $6 to $6.20 a share before restructuring-related expenses. In December it forecast fiscal-year earnings of $6.20 to $6.60 a share.
Things that absolutely positively have to be there overnight don't absolutely positively have to be there overnight anymore.
Nowhere was that more evident than when FedEx Corp. on Wednesday reported that its quarterly profit plunged 31% as its international customers and shippers flocked to slower, cheaper delivery options instead of its premium-priced express service.
Now the company whose name is synonymous with overnight delivery—and has built the world's largest air express fleet—must make even deeper changes that take it farther away from its roots. It has already tweaked capacity and deferred plane purchases. Now it will shrink its global network, possibly its air fleet and direct more business via third-party alternatives like ships, commercial airlines and third-party shippers.
The news sent the company's stock down 6.9% as Wall Street appeared to come to grips with the idea that package delivery has significantly changed. It used to be that if customers didn't get a package overnight, they didn't know when it would arrive. Supply chains are now so reliable that customers and shippers are willing to forego the certainty of next-day delivery, knowing the packages will arrive when they are supposed to, says BB&T Capital Markets analyst, Kevin Sterling.
Part of the surprise is how quickly business has shifted. FedEx Chief Executive Fred Smith said the latest quarter was "very challenging for FedEx Express" due to continued weakness in international airfreight markets, industry overcapacity and customers opting for less expensive and slower international transit.
Revenue at Express, the operating unit that includes international, was about $100 million less than the company expected in the quarter, said FedEx Chief Financial Officer Alan Graf. That caused the company's third-quarter results to come in below Wall Street's expectations and prompted FedEx to reduce its full-year earnings outlook.
A long-awaited rebound in the international export business appears to be under way. International export package volume rose 4% in the quarter, the company said, continuing a trend that began in the first quarter. But it wasn't enough to turn the quarter around. The segment's operating income plunged by two-thirds as express segment operating margins tumbled to 1.8% from 5.3%.
Though you would think this "was a good problem to have," Dave Bronczek, CEO of FedEx Express, told analysts in an earnings call, the latest gain was driven by a 12% growth in deferred international export traffic, mainly led out of Asia and Europe. So while the company had "a lot of freight on our planes; our high load factors, quite frankly, were driven by the deferred traffic. So we had lower yields. We had more traffic, higher pounds—all in deferred traffic," Mr. Bronczek said. International export priority volume inched up only 2%.
As a result, FedEx's CEO said the company will begin reducing capacity to and from Asia on April 1, and "aggressively managing the traffic flows to place lower yielding traffic in lower cost networks." The moves will include reducing flights and potentially retiring some older aircraft, a move that could result in future charges, the company said. To do that, it will work through FedEx Trade Networks, its own freight-forwarding organization, third-party shippers, ships, commercial airlines and a variety of other third parties, a company spokesman said.
Mr. Graf, FedEx's finance chief, said the latest changes at Express should yield positive results by its fiscal fourth quarter ending in May. Results for the express division should "be a whole lot better" in the fourth quarter, he said.
These newly announced cost-cutting moves are in addition to a $1.7 billion profitability improvement program already under way, that include voluntary buyouts, modernizing aircraft, and a number of other initiatives designed to boost profitability through 2016.
The rapidity of the change surprised BB&T Capital's Mr. Sterling and, he thinks, many of his colleagues. "It's not like the economy rolled over. Their volumes are fine," he said. "They're still flying a lot of stuff around. It's just that they're getting paid a lot less to fly stuff around. It happened a lot faster than they realized."
For the fiscal quarter ended Feb. 28, FedEx said profit came to $361 million, down from $521 million a year earlier.
Revenue increased 4% to $11 billion. Revenue from the express-shipping business—by far the largest top-line contributor—increased 2% to $6.7 billion thanks to acquisitions.
International export revenue per package fell 3% due to the demand shift to lower-yielding international services, lower rates and lower fuel surcharges.
For the fiscal year, the company lowered its earnings estimate and now expects $6 to $6.20 a share before restructuring-related expenses. In December it forecast fiscal-year earnings of $6.20 to $6.60 a share.
03-21-2013, 02:36 PM
#4
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Assuming that I'm reading correctly ... the article is filled with words like lower "profit" and decreased (but still significant) "earnings per share."
All while in a worldwide economic slowdown. This doesn't seem like the end of the world to me. Maybe just an ordinary business speed bump? Personally, I'm glad we work for a company that is able to adjust to changing circumstances. :-)
MM
All while in a worldwide economic slowdown. This doesn't seem like the end of the world to me. Maybe just an ordinary business speed bump? Personally, I'm glad we work for a company that is able to adjust to changing circumstances. :-)
MM
03-21-2013, 03:23 PM
#5
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Posts: 3,931
It's bad? -
The segment's operating income plunged by two-thirds as express segment operating margins tumbled to 1.8% from 5.3%.
FedEx's CEO said the company will begin reducing capacity to and from Asia on April 1
The rapidity of the change surprised BB&T Capital's Mr. Sterling and, he thinks, many of his colleagues. "It's not like the economy rolled over. Their volumes are fine," he said. "They're still flying a lot of stuff around. It's just that they're getting paid a lot less to fly stuff around. It happened a lot faster than they realized."
Might not be that bad -
International export revenue per package fell 3% due to the demand shift to lower-yielding international services, lower rates and lower fuel surcharges.
For the fiscal year, the company lowered its earnings estimate and now expects $6 to $6.20 a share before restructuring-related expenses. In December it forecast fiscal-year earnings of $6.20 to $6.60 a share.
We are, of course, worried about the Express division. Some of the numbers are for the corporation as a whole. I'm having trouble understanding how a 3% decrease in international export revenue seems to have caused so much trouble.
The segment's operating income plunged by two-thirds as express segment operating margins tumbled to 1.8% from 5.3%.
FedEx's CEO said the company will begin reducing capacity to and from Asia on April 1
The rapidity of the change surprised BB&T Capital's Mr. Sterling and, he thinks, many of his colleagues. "It's not like the economy rolled over. Their volumes are fine," he said. "They're still flying a lot of stuff around. It's just that they're getting paid a lot less to fly stuff around. It happened a lot faster than they realized."
Might not be that bad -
International export revenue per package fell 3% due to the demand shift to lower-yielding international services, lower rates and lower fuel surcharges.
For the fiscal year, the company lowered its earnings estimate and now expects $6 to $6.20 a share before restructuring-related expenses. In December it forecast fiscal-year earnings of $6.20 to $6.60 a share.
We are, of course, worried about the Express division. Some of the numbers are for the corporation as a whole. I'm having trouble understanding how a 3% decrease in international export revenue seems to have caused so much trouble.
Last edited by Gunter; 03-21-2013 at 03:35 PM.
03-21-2013, 03:41 PM
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Costs must have shot up somewhere. The article did mention buyouts and acquisitions.
Management lists the solution as cutting flights as if that was the problem. I don't understand how that big a drop in margins was caused by 3% less revenue per package. International volume was up 4%.
Management lists the solution as cutting flights as if that was the problem. I don't understand how that big a drop in margins was caused by 3% less revenue per package. International volume was up 4%.
03-21-2013, 06:37 PM
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Originally Posted by Gunter
Costs must have shot up somewhere. The article did mention buyouts and acquisitions.
Management lists the solution as cutting flights as if that was the problem. I don't understand how that big a drop in margins was caused by 3% less revenue per package. International volume was up 4%.
Management lists the solution as cutting flights as if that was the problem. I don't understand how that big a drop in margins was caused by 3% less revenue per package. International volume was up 4%.
03-21-2013, 07:43 PM
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03-21-2013, 10:51 PM
#10
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Originally Posted by Gunter
Costs must have shot up somewhere. The article did mention buyouts and acquisitions.
Management lists the solution as cutting flights as if that was the problem. I don't understand how that big a drop in margins was caused by 3% less revenue per package. International volume was up 4%.
Management lists the solution as cutting flights as if that was the problem. I don't understand how that big a drop in margins was caused by 3% less revenue per package. International volume was up 4%.
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