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How FedEx Is Dealing With Lower Demand in Its Earnings Report

FedEx announced last week that it would be taking additional measures to improve productivity and cut costs. The company has already announced plans to fly planes less frequently, close more than 90 of its FedEx Office locations, and cancel some network expansion projects.

September 22, 2022
9 minutes
minute read

FedEx Corp. has acknowledged that a slowdown in the global economy has impacted its business. However, investors, analysts and customers are still seeking clarity on how much the company’s own operating strategies are contributing to the problem and what response it will have.

The carrier will report its first-quarter earnings after U.S. stock markets close on Thursday. This is a week after the company cut its full-year financial outlook and revealed that package-delivery volumes in Europe, Asia and the U.S. were weaker than expected in recent months.

FedEx announced last week that it would be taking additional measures to improve productivity and cut costs. The company has already announced plans to fly planes less frequently, close more than 90 of its FedEx Office locations, and cancel some network expansion projects.

The recent announcements from FedEx have prompted a selloff in shares of the company and other parcel carriers. Investors are questioning the U.S. economy’s health and the resilience of other companies’ earnings amid stubbornly high inflation. However, at FedEx’s annual shareholders’ meeting on Monday, executives sought to assuage jittery investors. They stated that despite the company’s performance in the recent quarter, the overall strategy is sound. United Parcel Service Inc. also affirmed its 2022 financial targets at an analyst meeting on September 6.

Raj Subramaniam, who became FedEx's CEO on June 1, is likely to be questioned about the progress of recent efforts to improve the efficiency of the company's delivery network. D.E. Shaw, an activist investor, has been pressuring FedEx to increase profits, and Subramaniam has promised to make the company's operations more efficient and boost profit margins.

As FedEx's peak delivery season approaches, customers and industry observers are eager to learn more about the company's plans for cost-cutting measures. With approximately 547,000 full- and part-time employees, and 6,000 contractors working for FedEx Ground delivery, there is potential for significant changes in shipping prices and services. It remains to be seen how these cost-cutting measures will affect the company's operations during its busiest time of year.

According to Satish Jindel, president of research firm SJ Consulting Group, delivery companies including FedEx, UPS, the U.S. Postal Service and Amazon.com Inc. have the capacity to handle around 110 million parcels a day during the holiday-shopping season. However, they are only expecting to receive around 92 million parcels during this time.

As businesses dealt with a surge in online purchases in the early months of the pandemic, carriers scrambled to increase package-handling capacity. However, a pullback in online orders occurred faster than carriers and many retailers expected. This spring, Walmart Inc. and Target Corp. sounded alarms that their stores and warehouses were holding too much inventory, after they had stepped up orders to avoid supply-chain delays.

FedEx Express, the company's largest revenue-generating unit, specializes in flying time-critical packages overnight for customers. However, the recent slowdown in spending and order reductions has meant that customers don't need to pay as often for fast air shipping. As a result, FedEx Express' revenue for the August quarter was about $500 million lower than the company had anticipated.

According to Ravi Shanker, a transportation-industry analyst at Morgan Stanley, the problem lies with the market, not FedEx. People had unrealistic expectations about how long the pandemic-related gains would last.

The possibility of package carriers having extra capacity could reduce the pricing power that they have and allow shippers to request lower rates. Jack King, from Bristol, Tenn., said that his firm, L.C. King Manufacturing, used to only ship with FedEx Ground because the delivery company helped his company move from being only a wholesaler to becoming an e-commerce retailer as well. “It brought us to the dance,” Mr. King said.

Mr. King's company ships more than 100 packages every day, and the recent increases in fuel and peak delivery surcharges were putting a strain on their budget. Stamps.com, a partner of both USPS and UPS, helped them save $4.50 per package. "We were stunned by how much cheaper it was," he said.
A spokesperson for FedEx declined to comment when reached for comment.

FedEx's plans to adjust to weaker demand levels may mean fewer seasonal hires. Carriers typically hire thousands of people during peak season to handle increased parcel volumes, adding more drivers and extending hours at their sortation facilities. Last year, FedEx said it planned to add 90,000 seasonal workers.

Although it may not have much room to maneuver, FedEx may be forced to reduce costs on drivers in the near future. This is because FedEx Ground contractors have been requesting more compensation to cover increased fuel and wage costs since the beginning of the year. Most Ground contractors are small businesses that hire their own drivers and purchase their own trucks to deliver packages on their assigned routes. Recently, Amazon announced that it would raise pay and introduce some new benefits for its drivers.

Some investors have called for the company to consolidate its Ground and Express businesses into one unit, a move that Mr. Smith, who now serves as executive chairman, had long resisted. However, each FedEx unit operates as an independent business with its own CEO, so it remains to be seen if this consolidation will actually take place.

Company executives have said they plan to integrate some operations between Express and Ground that provide overlapping service. However, they have also said that there are limitations to this integration. For instance, certain Ground facilities are not equipped to handle air cargo. Additionally, Ground relies on independent contractors, while Express owns the planes it uses and directly employs its staff.

Cara Lombardo contributed to this article.

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