FedEx Corporation (NYSE:FDX) announced its first quarter earnings on September 18 that beat industry estimates. Revenues for the quarter stood at $11 billion against analyst estimates of $10.97 billion. Overall revenues grew 2% from $10.79 billion in Q1 2013 as FedEx’s Ground services segment continued to perform strongly. Globally, there has been a shift for deliveries from the faster and the more expensive air express segment to the slower and the cheaper ground/sea transportation. Although FedEx has historically had a stronger presence in the air express segment, shifting business dynamics mean that the company is having to adjust to the changing external environment. This has impacted revenues from its Express segment, which showed no q-o-q growth over Q1 2013, at $6.6 billion in the quarter. 
Strong restructuring operations have positively affected the company’s operating and net income margins. Operating income grew 7% to $795 million, while net income grew 7% over Q1 2013 to reach $489 million. The weak economic situation has forced FedEx to quicken its airline phase-out plan to reign in operating expenses. The company is on-track with its announcement in June 2013, to permanently retire or accelerate the retirement of 86 older aircraft and 308 engines. The older Boeing 727-200 aircraft will be replaced with Boeing 767-300 and 757-200 aircraft that are 30% more fuel-efficient and have 20% lower operating and maintenance costs. 
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FedEx Ground Continues Strong Performance
FedEx Ground and Smart Post revenues jumped 11% and 19% to $2.5 billion and $224 million respectively, helped by a 11% volume gain in the traditional ground services and a 26% volume surge in the Smart Post services.  FedEx Ground offers small-package ground delivery services and low-cost, day-certain service in the U.S. and Canada. It also includes the Smart Post service that uses a hybrid delivery mechanism leveraging the delivery networks of U.S. Postal Service or Canada Post Corporation for final delivery.
With growing expectations of free shipping of goods purchased through the fast-growing electronic market, e-retailers are increasingly adopting the low-cost “hybrid” alternatives like the Smartpost offered by FedEx, to cut down on shipment costs. We estimate that FedEx’s ground operations account for more than three-fourth of the company’s valuation.
Express Segment Margins See Improvement From Restructuring Operations
Revenues from the Express segment were flat at $6.6 billion over Q1 2013. However, the phase out of its existing fleet to cut down fuel expenses and operational costs improved operating profit from the segment by 14%. For Q1 2014, operating profit from the Express segment stood at $236 million compared to $207 million in Q1 2013. The 14% increase in operating profit for the Express segment expanded operating margins by 50bps.
FedEx Express contributes more than 60% to the company’s top line, but there has been a downward pressure on the revenue per package (also known as yields) for quite some time due to a shift towards cheaper logistics’ services. Although the domestic yield remained steady at Q1 2013 levels, international yields dropped 4% leading to a 3% decline in overall Express segment yield. Additionally, Q1 2014 witnessed a 4% increase in volumes in low-cost packages such as U.S. Deferred Delivery services and a 15% increase in International Economy package volumes while overall daily average volumes grew 4% over Q1 2013.
Downward pressure on the overall yields combined with a slow volume growth forecast are the reasons why we think the division’s top line contribution to the total company will be limited in the future. We however believe that cost cutting measures such as the accelerated phase out of its existing fleet and lower pension contributions could expand operating margins for the company in the short term.
We are revising our estimate of $112 for FedEx to incorporate Q1 2014 results.
- FedEx 8-k, FedEx Investors Relations, September 2013 [↩] [↩]
- FedEx CEO Discusses F1Q 2014 Results – Earnings Call Transcript, Seeking Alpha, September 2013 [↩]