FedEx Earnings Preview: Fuel Price Decline, Pricing Mechanism To Drive Earnings

FedEx (NYSE:FDX) is set to release its fiscal fourth quarter earnings on June 17. We expect to see an improvement in the company’s top and bottom lines driven by the declining fuel prices and change in pricing mechanism for e-commerce packages. Non-cash charges will likely impact the company’s reported earnings.

In the fiscal third quarter, FedEx’s net income grew 53%. ^[1] The company also beat consensus earnings per share estimates of $1.88, reporting earnings per share of $2.01, an increase of 63% year-on-year, as lower fuel costs and increase in pricing drove operating margins. FedEx’s third quarter revenues crossed $11.7 billion, growing 4% year-on-year, but missed consensus estimates of $11.8 billion. On account of foreign exchange headwinds, the company had narrowed its full year earnings per share guidance from $8.50-9.00 to $8.80-8.95.

See our complete analysis of FedEx here

Fuel Prices To Affect Revenues and Margins

In the previous quarter, FedEx’s fuel surcharge declined as a result of the decline in fuel prices. We expect the trend to have continued in the fourth quarter. Though the decline in fuel prices would have helped reduce FedEx’s fuel bills, the decline in fuel surcharge would have eroded some of the benefit, leading to a net positive impact.

FedEx Ground’s fuel surcharge is based on the two month lagged average price of the U.S. on-highway diesel fuel, which declined 26.3% year-on-year in the 3 months ended March. ^[2] FedEx Express’ fuel surcharge is based on the two month lagged U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel, which declined 44.3% year-on-year in the 3 months ended March. ^[3]

In order to curb the impact of the declining fuel prices on its surcharge revenue, FedEx recently announced revised fuel surcharge rates. ^[4] In addition to increasing fuel surcharge rates, FedEx widened the range over which rates remain static. The higher rates and broader ranges will allow FedEx to capture higher fuel surcharge revenue if fuel prices continue to decline.

Accelerated Retirement Of Aircrafts

One of the major profitability improvement programs undertaken by FedEx includes replacing old inefficient aircrafts. To this end, FedEx recently announced that it has expedited the retirement of aircrafts and related engines, which will likely be replaced by new aircrafts with greater efficiency. ((FedEx Corp. Accelerates Aircraft Retirements, June 1, 2015, FedEx News Release)) Each such replacement can boost the company’s bottom line by $10 million. ^[5] However, the move has led to an impairment charge of $246 million in the fourth fiscal quarter. While this does not impact the company’s cash flows, as the charge is non-cash, it should temper FedEx’s reported earnings.

Another non-cash charge that will likely impact reported earnings is the adoption of mark-to-market pension accounting for its defined benefit pension and other postretirement plans. FedEx will record an estimated $1.4 billion, non-cash charge, net of tax, or $4.81 per diluted share for fiscal year 2015 because of the change in pension accounting. ^[6]

Dimensional Weight Pricing To Boost E-Commerce Package Revenues And Margins

In May 2014, FedEx announced that it would be applying dimensional weight pricing for all FedEx Ground packages, effective from January 5, 2015, as opposed to absolute weight based priced. ^[7] Dimensional weight can be calculated by multiplying the length, breadth and height of the package, and then dividing by 166. The change in pricing mechanism was aimed at generating higher revenues from lightweight e-commerce packages which occupy a large space in FedEx trucks. When charged simply on the basis of their weight, these products would generate revenues which did not justify the space they occupied. In order to charge a fair value for its most important asset, the space in its trucks, FedEx decided to move on to a dimensional weight based pricing.

The impact of the change in pricing mechanism proved to be beneficial for FedEx’s Ground segment in the third fiscal quarter. The segment’s revenue per package grew 3% as dimensional weight pricing charges and increases in base rates more than offset fuel surcharge headwinds. ^[1] Since the pricing mechanism covers operating costs more efficiently, it should not only increase revenues but also help improve margins.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. FedEx Q3 FY 2015 Earnings Release, March 18, 2015, www.fedex.com [↩] [↩]
2. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), www.eia.gov [↩]
3. U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB, www.eia.gov [↩]
4. FedEx Feb. 2, 2015, Fuel Surcharge Changes, www.fedex.com [↩]
5. FedEx: Fleet Retirement Keeps 10% Margin Target in Sight, June 2, 2015, www.barrons.com [↩]
6. FedEx Corp. Adopts Mark-to-Market Pension Accounting, June 12, 2015, FedEx New Release [↩]
7. FedEx announces pricing Changes, May 2 2014, www.fedex.com [↩]