FedEx

Since commencing operations in 1973, FedEx has grown to become one of the world’s largest integrated air express carrier in revenue terms, and a pioneer in the implementation of expedited services on a global basis. FedEx’s Express division, which accounts for most of its international revenues, offers time-critical, door-to-door delivery in over 220 countries and territories, featuring customs clearance and money-back guarantees. FedEx Corp’s principal business segments, after its 2023 restructuring, include: FedEx Express, FedEx Ground, and FedEx Services, which are now integrated into a single company under Federal Express Corporation, operating a unified air-ground network. FedEx Freight continues as a separate entity, providing less-than-truckload freight transportation services within Federal Express Corporation. Figure 1 provides a current overview of FedEx hubs and focus cities across its air express network. Recently the focus has been on modernizing existing hubs throughout the US as well as building new technologically advanced facilities in India, Italy, and Dubai.

Figure 1 – FedEx Hubs and Focus Cities – 2022

For an update from our last report, as of spring 2023, the TNT integration has been finalized and the impact of FedEx’s acquisition has been significant in Europe. The acquisition enabled FedEx to compete more effectively in the European market, where it had previously lagged major rivals like DHL and UPS. The integration of TNT unlocked an improved scale for FedEx, multiplying their market share in the intra-European economy market by five times. This was partly due to TNT’s expansive road network, which allowed operations at more than half the cost of FedEx’s previous network. However, FedEx faced a prolonged struggle in the TNT integration, with overhead expenses impacting its labor cost advantage over competitors like UPS.

One of the most significant changes at FedEx is its recent restructuring plan. They have introduced two new initiatives, DRIVE and Network 2.0. DRIVE was introduced as an initiative in the first quarter of 2023 and on June 29th, during an Investor Day event, FedEx’s then-newly installed CEO, Raj Subramaniam, announced the Network 2.0 initiative. As part of these initiatives, on April 5, 2023, FedEx announced a significant restructuring plan to consolidate its operating companies into a single organization. This new structure is designed to create efficiencies that will enhance FedEx’s ability to meet evolving customer needs and build a more profitable enterprise. The restructuring under the DRIVE program and Network 2.0 is expected to facilitate a multi-year effort to improve the efficiency with which FedEx picks up, transports, and delivers packages in the U.S. and Canada. The DRIVE program is meant to increase efficiency and reduce costs across the company, with a focus on automation and infrastructure modernization, targeting $4.0 billion in cost reductions by fiscal 2025. Network 2.0, on the other hand, is designed to optimize FedEx’s network by consolidating stations and routes, aiming for $2.0 billion in savings by fiscal 2027. Both programs are part of FedEx’s strategy to cut costs and improve operational efficiency. The success of these initiatives is crucial for FedEx’s financial performance and competitive standing in the logistics industry, which is of significant interest to investors.

During the current fiscal year’s third quarter, FedEx cut aircraft utilization by 8%, grounded nine cargo jets, and downsized to smaller aircraft on certain routes, contributing to $1.2 billion in savings. The global cost to move a pound of freight through the system is already down 2.5% to 3% since flight reductions were implemented last fall due to weak demand. FedEx aircraft will be reserved for high-margin, time-critical routes, while commercial freighter and passenger aircraft will move deferred parcels and freight on routes with fluctuating demand. This will allow for optimized and densified hub-and-spoke networks. FedEx’s cost-reduction strategy also involves parking 25 aircraft by the end of the fiscal year, accelerating the retirement of MD-11 freighters, increasing point-to-point flying, and leaning more on contractors, commercial airlift, and trucking. 40% of global air savings will come from using less jet fuel, with crew and maintenance each contributing 20% of the value associated with reduced flight hours. FedEx estimates the combined impact of the air network overhaul to translate to $250 million in reduced spending per year. However, concerns have been raised about potential operational reliability issues and service level impacts due to these changes.

FedEx reported revenues of $90.2 billion in FY2023, a 3.5% decrease from FY2022 while the consolidated operating income also rose by 10% to $6.87 billion year-over-year. FedEx Express faced a decline due to lower global volumes but managed to offset some of this with decreased expenses and higher U.S. domestic yields. In the fourth quarter of FY23, FedEx demonstrated strong momentum across the business, attributed to effective expense management and execution of DRIVE initiatives. FedEx will also implement a General Rate Increase (GRI) of 5.9% for its Express segment in U.S. domestic, export, and import services, effective from January 1, 2024. The company marked its 50th year of operations, handling approximately 14.5 million packages per day across a global network that includes over 500,000 employees.

Figure 2 shows how in FY2011, approximately 59% of FedEx corporate-wide revenue came from the Express unit, but as the new initiatives continued to make an impact, the Express share found itself dropping to about 48% in FY2023, the lowest it has been in more than a decade. This was also, in part, due to low cargo demand, high fuel prices, and overcapacity in the market, and as a result, Ground now accounts for a significant increase to 39%, up from 31% in 2019. Another clear trend is how the International Express revenue has risen and it is now larger than the Domestic revenue share within the division and the significant gain between FY2010 and FY2022 was partly due to the TNT acquisition.

Figure 2 – FedEx Revenue by Business Segment FY2011 – FY2023

Figure 3 shows the profit margin (EBIT) development by division where the Express unit has seen margins between 4% and 10% in the last twelve years. The growth has not been consistent among its business segments with FedEx Freight now accounting for 20%, up from 13% in 2021 and Ground falling 1% within the same time. Of note is the fact that the Ground unit profit margin has begun to stagnate at around 9% over the past 3 years while the freight margin has seen significant growth. This shift aligns with the e-commerce boom brought on by the COVID-19 pandemic and is expected to continue.

Figure 3 – FedEx Profit Margin (EBIT) by Business Segment FY2006 – FY2023

Figure 4 shows the volume share by product and how this has changed over time. FedEx introduced its International Economy product in 2011 and its International Domestic services in 2007, which consists of the transportation of packages within a country excluding the US. Over the years FedEx has increased its international domestic business through acquisitions, which have helped drive increases in international domestic revenues and volumes and in the last fiscal year, the International Domestic product represented a 32% share of the total annual shipments in the Express division. However, it is important to note that International Domestic shipments are often low-yield and are transported via ground.

Figure 4 – FedEx Express Volume Distribution by Product FY2011 – FY2023

Much of the recent International sector increase has come from acquisition-induced growth in the International Domestic category. The TNT acquisition disrupted FedEx Express product volume share and the International Domestic volumes grew considerably at the expense of the US domestic overnight and deferred services. However, international package (Economy & Priority) volume growth has slowed across most regions due to the weakening economic conditions and investment priorities across other products.

Regarding FedEx Express’s international economy shipments, as of 2023, there are a few changes in the company’s strategy and service offerings. FedEx Express has significantly enhanced its international economy presence, especially in the Asia Pacific region. Effective in May, these services now connect the Asia Pacific to 170 markets globally, with delivery times ranging from two to five business days within the region and four to five business days to major markets in Europe and the U.S. Additionally, there has been a shift in customer preferences, with a greater emphasis on less urgent, day-defined delivery services, particularly among small businesses. This shift is in response to an evolving economic environment where businesses seek more efficient and cost-effective shipping solutions. As a result, FedEx is adapting its services to align with these changing needs, providing options that prioritize efficiency over speed.

In a year-over-year comparison, FedEx Express U.S. Domestic Package volume decreased by 3% in August, following a 9% decline in June. Figure 5 summarizes the revenue per package development by Product Line. The total express composite package yield for all products at $23.85 continues to equal to international composite package yield since 2021.

Figure 5 – FedEx Express Yield by Product FY2006 – FY2023

Historically, the overall composite yield for the Express division was higher than the US Domestic but the yield drop that we have seen in the International segment in the last few years has resulted in a decline of the overall composite product yield. The highest yield comes from the International Export shipments, at $55 in FY2023.

Even though its profit margins are lower than the other two integrators, FedEx Express continues to be an established profitable business and it is now implementing a series of initiatives to reduce costs and improve efficiency. Investing in AI and automation technologies is a way to cut costs in the current market environment. These investments include the introduction of DexR, an advanced two-armed robot designed to automate the complex task of loading delivery trucks and expanding its collaboration with Berkshire Grey to develop broader AI robotic automation capabilities for safer and more efficient package handling globally. The company is also focusing on generative AI and employing automated sorters for most of its package volume.