Analysts, Mailers React to FDX 2Q Income Report

Analysts, delivery companies and direct marketers are watching FDX Corp. after the company announced this month lackluster income and the possibility of a fuel surcharge on packages.

FDX, Memphis, TN, said its net income in the fiscal second quarter — which ended Nov. 30 — declined 6 percent, from $183 million last year to $171 million.

In a conference call, Alan B. Graf, chief financial officer of FDX, said that higher fuel prices were the single biggest factor in the quarter’s results.

“Our revised fuel forecast indicates that fuel prices could negatively impact expenses in fiscal year 2000 by over $200 million compared to fiscal year 1999,” said Graf. “This includes the effects of hedging actions which limit our exposure to higher fuel prices.”

Graf also said Federal Express, the company’s flagship air-express unit, had low domestic growth and acknowledged that it has lost ground to its rival United Parcel Service of America, Atlanta, in its battle for shipments sent by smaller companies. Graf also said that volume at RPS Inc., FDX’s small parcel business-to-business ground delivery unit, also isn’t growing quickly enough.

To help soften some of these blows, FDX has put cost-cutting measures in place.

For example, to offset higher year-over-year fuel increases, Graf said that FedEx will “restrict continued growth in staff areas, have hard hiring freezes, and question every job replacement all across the company to try to take $75 million out of the second-half cost structure.”

Graf also said FDX is reducing its capital expenditures at FedEx by $200 million, to about $1.75 billion, which will “be the lowest capital expenditure program at Federal Express in a number of years.”

Most importantly to direct marketers, Graf said FedEx may also add a fuel surcharge to the price it charges for delivering packages to help mitigate jet fuel prices.

FedEx is paying about 83 cents a gallon for fuel, up from 51 cents a year ago, Graf said, and “our current set of prices out there did not really consider 80 cent-per-gallon fuel.” The company expects fuel costs to remain in the 80 cents or higher level for the next several months.

Graf said that adding a surcharge when fuel costs go up is not automatic, especially for competitive reasons. UPS said it will not add a surcharge this year based on fuel costs.

“Literally, since our founding, fuel conservation has been a key part of our operation,” said Norman Black, a UPS spokesman. “We have a very aggressive program here designed to save fuel, such as a very active hedging program where we are buying fuel options for all of our fuel supply as far out as 2 years.”

He said UPS also regularly monitors fuel costs that are being charged at airports, “so we track and see if fuel prices are getting out of line and, if need be, avoid buying gas at those airports.”

However, Black said that fuel costs will be a key factor in its annul review this year, and may have an effect on UPS’ rates next year.

Analysts said that FedEx should make their decision about adding a surcharge very carefully because customers, especially large catalogers and Internet retailers — may move to other carriers as a result.

“FedEx’s volumes in general aren’t as robust as maybe they were a few years ago, and there is a lot more competition out there; so they have to be cautious before going to a customer and telling them that they are going to add a surcharge if their competitors don’t do the same,” said Cameron McLennan, a transportation analyst at Scott & Stringfellow, Richmond, VA.

Graf also said that the company will hopefully make up for some its low domestic growth rates through a recently-reorganized sales force, which has a much greater emphasis on small and medium-sized customers.

In addition, Graf said FDX’s financial problems will not affect a plan to expand residential ground delivery service by RPS. That service is currently only available in a Pittsburgh test market, but FDX plans to expand it to cover 50 percent of the U.S. population by March, and thereby enter full-force into a market dominated by UPS and the U.S. Postal Service.

FDX has viewed the low-cost, residential ground — a type of delivery service used by many consumers buying products on the Internet — as a gap in its service offering.

In this program, RPS packages move through the RPS’ network to an RPS location where they are picked up by a separate team of 10 independent contractors who deliver the parcels.

“The tests are going very well, proving some things that we assumed about cost structure and the availability of very high-quality, reliable independent contractors to deliver packages,” said Graf.

Graf would not say which cities the new service would be launched in, or when the service would be expanded to the entire country, but said that as the date gets closer, FedEx will tell everyone the exact ZIP codes the service will be available in.

To differentiate itself from UPS and the USPS, RPS plans to make deliveries in late afternoon or early evening.

“We will be able to have appointment deliveries when people are actually at home and can except the package,” Graf said. The company also said it expects Saturdays to be a big day for deliveries.

Jerry McKiernan, a USPS spokesman, was not too concerned about the RPS announcement.

“Welcome to the neighborhood, FedEx,” said McKiernan. “It’s nice to see you, but we’ve been here a long time.”

In addition, McKiernan said that at about the same time RPS began its pilot in Pittsburgh, the USPS began delivering ground parcels to residences for Airborne Express, Seattle, to help give the air-express carrier a more secure foothold in the business-to-residential delivery space.

“Our business is increasing with the addition of Airborne, not decreasing, said McKiernan. “And, we would welcome [entering into partnerships like this] with any others.”

UPS’ Black said that FedEx has always been a worthy competitor “and I’m sure we are going to see even more competition in the ground business-to-residential market in the future.”

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