FedEx Continues To Focus On Express Segment To Boost Revenues
Logistics operator FedEx Corporation (NYSE:FDX) reported Q1 results in September that beat industry estimates and highlighted management’s efforts to sustain top-line growth despite the under-performing Express division. The Express segment represents the largest operating division for FedEx with revenues of approximately $26.5 billion in FY13. Persistent weakness in consumer spending in a sluggish logistics market combined with FedEx’s large footprint in the costlier air freight service sector has resulted in subdued top-line growth in recent quarters. In Q1FY14, the segment continued to show softness; however, increased offerings of cheaper transportation services helped it keep pace with the changing logistics industry dynamics.
Here we look at the recent developments within FedEx’s Express segment and their near-term implications on our forecast drivers.
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U.S. Express Revenues To See Uptick With Holiday Season Demand, USPS Agreement
On a revenue percentage basis, FedEx derives approximately 48% of its revenues from air freight logistics services. FedEx’s reliance on premium air freight services has impacted the company’s growth in recent years compared to its peers. Over a span of five years, revenues from the Express segment increased by approximately 7.3%. However, the company’s Ground segment witnessed organic growth of 43.3% in revenues during the same period with increased customer migration towards cheaper ground-based transportation services.
To bolster growth prospects from the Express segment, FedEx recently announced a new shipping service within the U.S. called ‘FedEx One Rate’. The new service has a flat rate policy across a range of shipment weights and 12 packaging options depending on customer needs. With the One Rate service, customers can ship faster by booking their packages online through the new FedEx Ship Manager. [1]
Additionally, the company also inked an agreement with USPS for a majority of USPS’ air line-haul traffic. The seven-year mutual agreement, valued at $10.7 billion, is expected to reduce operational expenses for FedEx Express, giving it an incentive to reduce air freight pricing going forward. [2]
With the holiday season around the corner, FedEx expects shipments to see a 11% y-o-y increase on the peak day of December 2, 2013 driven by higher B2C shipments from e-retailers feeding the Ground and SmartPost divisions. [3] We believe that the new One Rate service presents customers with a quick and affordable shipping option for the holiday season. Although the weak consumer sentiment globally should continue to weigh on discretionary spending levels in the near term, we expect top line growth to accelerate for the Express segment going forward through the USPS agreement.
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Notes:- FedEx Introduces FedEx One Rate, FedEx Newsroom, October 2013 [↩]
- FedEx Corp. Reports Fourth Quarter Earnings, FedEx Investor Relations, June 2013 [↩]
- Online Shopping Boosts FedEx Holiday Volume, FedEx Newsroom, October 2013 [↩]