FedEx Ground game got the job done in Q3

FedEx Corp.’s strong cost-reduction actions at its FedEx Ground U.S. delivery unit allowed the company to comfortably beat third-quarter estimates, raise full-year earnings per-share guidance and take the pressure off its lagging FedEx Express unit to quickly bring its costs under control.

FedEx (NYSE: FDX) reported adjusted earnings of $3.41 per share, which excluded 36 cents per share of restructuring costs. This is 70 cents above industry consensus, an achievement that surprised and pleased analysts on Thursday night’s conference call.

The company also raised its full-year earnings per share outlook to $14.60 to $15.20 per diluted share from $13 to $14 per share as originally forecast. The new range implies a new fourth-quarter range of $4.57 to $5.17 per share, well above the consensus estimates of $4.89 on the top end, according to estimates from Susquehanna Investment Group.

The outperformance at Ground proved to be a crucial tailwind. Despite a 2% overall revenue decline and lower package volumes, operating income soared 32% year over year (y/y). The unit benefited from an 11% increase in revenue per-package due to a better product mix, higher delivery surcharges on large, outsized parcel shipments and expense-reduction actions that led to an 8% y/y decline in salaries, benefits and transportation costs.

In a note Friday, Thomas Wadewitz of UBS said Ground margin performance was the “most notable” as a 4% reduction in operating costs supported 250 basis points of margin improvement compared to its forecast of 40 basis points of improvement.

In a note the night before, Wadewitz said the largest cost drop was $302 million in purchased services versus UBS’ estimate, which Wadewitz said likely reflects reductions in Sunday deliveries and a variety of other cost-reduction factors.

The analyst upped his 12-month price target to $260 a share from $225 a share.

The big drawback is the company’s FedEx Express air and international unit, its largest, most complex and the one responsible for much of the revenue and volume declines in the past three quarters. Express’ revenue fell 8% y/y, while operating income plunged 77%. 

To mitigate the impact of nearly half the revenue decline, FedEx said it would reduce aircraft utilization by 10%, park 15 MD-11 freighters in the second half of the fiscal year and downsize to smaller aircraft on certain routes. FedEx operates 58 of the older, tri-engine jets. 

FedEx looks to make $1 billion in fiscal year ’23 cost savings permanent, most of which will come from the Express unit. The Express unit will also leverage the lower-cost FedEx Ground network for domestic parcel services in an effort to reduce capital expenditures.

Part of the savings will also come from head-count reductions in the U.S., either from position eliminations or through attrition. Across the U.S. system, there are expected to be 25,000 fewer positions by the end of the fiscal year, which ends May 31, than there were at the end of the company’s last fiscal year.

To adjust to Express customers’ preferences for a less time-definite international service, FedEx plans to relaunch its International Economy bellyhold service out of Asia in May. The service coincides with more available below-deck capacity on international trade lanes as commercial passenger flight levels expand. Belly lift is typically priced at a discount to main-deck air freighter capacity.

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Editor: Mark Solomon