Three Key Strategies Driving FedEx In 2015

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2014 was a bit rough for FedEx (NYSE:FDX). Its annual earnings were tempered by the impact of harsh winter weather and overwhelming package volumes during the holiday season. The increase in e-commerce packages led to an unfavorable mix that presented headwinds to margin growth. Additionally, declines in fuel prices led to a decrease in fuel surcharge revenue, which led to FedEx missing market expectations. It seems that 2015 will likely be a good year for the company. In this article, we take a look at the three most important strategies implemented by FedEx that will help drive growth this year.

See our complete analysis of FedEx here

FedEx’s Holiday Season Performance Improves Significantly

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FedEx had forecast an 8.8% year-over-year increase in its package volumes for the holiday season between Black Friday and Christmas Eve. [1] In order to handle the 290 million packages, FedEx had taken measures which included increasing seasonal workers, using six-sided cameras to read package labels, investing in improving its network and capping deliveries of retailers. Looking at its significantly improved delivery rates, it seems that FedEx’s preparations paid off.

According to ShipMatrix, a logistics software firm, FedEx achieved a 91% on-time delivery rate during Thanksgiving week, compared to 83% last year. [2] The company’s performance through the days leading up to Christmas was exceptional. On December 22 and 23, FedEx delivered 99% of the packages on time, compared to a low 90s delivery rate a year ago. [3] Even on December 24, FedEx managed to reach a delivery rate of 98%, compared to 90% last year. [4]

Though FedEx has had to incur some expenses to ensure that its package delivery rates remained high, it has been able to save itself from the bad press and millions of dollars in refunds it suffered last year.

Change In Pricing Mechanism To Drive Revenue, Margins

In May 2014, FedEx had announced that it would be applying dimensional weight pricing for all FedEx Ground packages. [5] Instead of charging for a package simply based on its weight, FedEx will be charging its FedEx Ground customers on the basis of dimensional weight, which can be calculated by multiplying the length, breadth and height of the package, and then dividing by 166. The change in pricing mechanism could result in a 30-50% increase in package shipping costs for bulky-yet-light products ordered online such as toiler paper rolls, towels, shoes, diapers and purses. These packages occupy a lot of space in trucks but fetch lower revenues due to their light weight. The new pricing mechanism allows FedEx to charge a fair value for its most important asset, the space in its trucks, and also more efficiently cover operating costs. This should help drive improvement in the company’s revenue and margins in 2015.

Revised Fuel Surcharge Rates To Counter Impact Of Falling Fuel Prices

FedEx recently announced its revised fuel surcharge rates, which will be effective from February 2. [6] The revision came after FedEx announced a decline in its fuel surcharge revenue in the second quarter of fiscal 2015, as a result of the falling prices of U.S. on-highway diesel fuel and U.S. Gulf Coast kerosene-type jet fuel.

In addition to increasing fuel surcharge rates, FedEx has also widened the range over which rates remain static. Under the revised rates, if fuel prices remain at their current levels, FedEx Ground’s fuel surcharge rates will increase by 1.5% and those of FedEx Express will increase by 1%. The difference in fuel surcharge becomes wider at lower prices. The higher rates and broader price ranges will allow FedEx to capture higher fuel surcharge revenue if fuel prices continue to decline.

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Notes:
  1. FedEx Forecasts Record Holiday Volume, October 22, 2014, www.fedex.com []
  2. FedEx and UPS are doing a better job of delivering your Christmas gifts, December 8, 2014, www.shipmatrix.com []
  3. ShipMatrix: FedEx, UPS deliver 99% of packages in time for Christmas, December 30, 2014, www.fox6now.com []
  4. FedEx, UPS step up their holiday shipping performance, January 1, 2014, www.washingtonpost.com []
  5. FedEx announces pricing Changes, May 2 2014, www.fedex.com []
  6. FedEx Feb. 2, 2015, Fuel Surcharge Changes, www.fedex.com []