FedEx Spends 25%, 35% Or 45% of Its Money On Purchased Transportation?

by Trefis Team
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A quarter of FedEx’s (NYSE: FDX) total expenditures goes toward purchased transportation, which includes the costs of services purchased from contractors. This figure has been going up for the company over the last few years, as it partnered with third party vendors to meet the volume growth. In fact, it is even higher than that for its peer, UPS. Also, FedEx expanded its operations to six days per week starting in January 2019, thereby increasing its purchased transportation costs as well. However, this is not the biggest expense item for FedEx. Salaries & employee benefits accounted for over one-third of the company’s total expenditure in fiscal 2019. Over the recent years, FedEx has seen steady revenue and expenses growth. However, its total expenses as a percentage of revenue has largely declined, except for fiscal 2019, when the figure was high, due to the mark to market loss of $3.8 billion on post retirement pension and healthcare benefit plans. In this note we discuss the key drivers of FedEx’s total expenses. You can look at our interactive dashboard analysis ~ How Does FedEx Corporation Spend Its Money? ~ for more details.

Salaries & Employee Benefits And Purchased Transportation Combined Account For 60% of FedEx’s Total Expenses.

FedEx’s Total Expenses As Percentage of Revenue Has Increased Recently Due To Certain Mark To Market Losses

Breaking Down FedEx’s Total Expenses

Salaries & Employee Benefits:

  • Salaries & Employee Benefits, which accounted for over one-third of the company’s total expense in fiscal 2019, includes employee related costs, and post-retirement benefits.
  • Salaries & Employee Benefits as % of revenue has declined from 36.9% in fiscal 2016 to 35.6% in fiscal 2019. Trefis estimates the metric to hover around the 35% mark in the near term.

Purchased Transportation:

  • Purchased Transportation, which accounted for 24% of the company’s total expense in fiscal 2019, includes the costs of services purchased from contractors.
  • Purchased Transportation as % of revenue increased from 19.8% in fiscal 2016 to 23.9% in fiscal 2019. This can primarily be attributed to increased contractor settlement rates, and growth in overall volume. Trefis estimates the metric to grow to 24.3% in fiscal 2021.

Others:

  • Others, which accounted for 15% of the company’s total expense in fiscal 2019, includes the costs associated with security, facility services, cargo handling, professional fees, insurance, uniforms and taxes and licenses, among others.
  • Others as % of revenue declined from 17.4% in fiscal 2016 to 14.9% in fiscal 2019. Trefis estimates the metric to hover around the 15% mark in the near term.

Fuel:

  • Fuel accounted for 6% of the company’s total expenses in fiscal 2019. It refers to the cost of locomotive fuel as well as other fuel used in day-to-day operations.
  • Fuel as % of revenue increased from 4.8% in fiscal 2016 to 5.6% in fiscal 2019, following the growth in average fuel prices. WTI prices averaged $51 in 2017 and $65 in 2018. Trefis estimates modest increase in fuel expenses going forward.

Interest & Other Expenses:

  • Interest & Other Expense accounted for 5% of the company’s total expenses in fiscal 2019. Interest & Other Expense as % of revenue has fluctuated in the recent years. The jump in fiscal 2019 can be attributed to mark to market loss for post retirement pension, and healthcare plans. We estimate the figure to be under 1% going forward, in line with the historical trend.

Rentals & Landing Fees:

  • Rentals & Landing Fees, which accounted for 5% of the company’s total expense in fiscal 2019, includes the costs of equipment rentals, among other items.
  • Rental & Landing Fees as % of revenue declined from 5.7% in fiscal 2016 to 4.8% in fiscal 2019. Trefis estimates the metric to decline slightly to 4.6% in fiscal 2021.

Depreciation & Amortization:

  • Depreciation & Amortization accounted for 5% of the company’s total expenses in fiscal 2019.
  • Depreciation & Amortization as % of revenue has declined slightly from 5.2% in fiscal 2016 to 4.8% in fiscal 2019. We expect this trend to continue and forecast a modest decline to 4.6% in fiscal 2021.

Maintenance & Repairs:

  • Maintenance & Repairs accounted for 4% of the company’s total expenses in fiscal 2019. It refers to costs associated with the repair and maintenance of the assets, primarily aircrafts.
  • Materials & Repairs as % of revenue has hovered around the 4% mark in recent years, and we expect it to remain around the same level going forward.

Income Taxes:

  • Income Taxes saw a sharp decline in fiscal 2018, due to the impact of the tax reform. The effective tax rate for FedEx stood at 18% in fiscal 2019, and we estimate it to be around 17% in fiscal 2021.

 

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