Weaker Outlook Prompts FedEx To Align Logistics Network For Shifting Demand
As sluggish global economic growth continued to weigh on shipping volumes and diverted customer demand towards cheaper lower-priced delivery options last quarter, FedEx (NYSE:FDX) has initiated restructuring and cost-cutting to align its logistics network with the anticipated demand trends and improve profit margins. It plans to improve efficiency in operating expenses by slimming its supply chain network and retiring old aircraft. The global logistics company has recently expanded its European footprint by acquiring Polish courier company Opek and French B2B express transportation company TATEX, after its U.S. rival UPS (NYSE:UPS) acquired major European delivery companies such as Kiala and Dutch-based TNT Express last quarter.
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Demand Shift Towards Cheaper & Slower Shipping Options
While FedEx has continued to raise shipping rates to offset higher costs and improve yields, there has been a clear trend of customers shifting from premium services to slower or deferred products while seeking lower shipping expenses. The air freight carriers are accordingly facing higher market share competition with seaborne shipping that offers lower rates. We expect these trends to continue at least through 2013.
Moderated GDP Growth Forecasts, International Growth Hits Soft Spot
The global shipping volume demand is closely correlated with the overall consumer demand and GDP growth of an economy. The logistics services company thus expects continued moderation in demand, anticipating a 2.2% GDP growth in the U.S. in fiscal 2012 and 2.4% in fiscal 2013. However, the forecast still relies on resolution of European debt crisis and no significant tax increases in the U.S.
FedEx’s results have also been been soft given its international growth trajectory, particularly in Asia. While the international priority shipments revenues increased 3% over higher shipping rates, the volumes actually fell 3% as shipping volumes from Asia to North America and Europe declined. The demand has been adversely affected by several technology company customers postponing product launches. Its biggest competitor UPS has also reported a similar decline in Asian shipments in its last earnings.
Adjusting The Network For Conservative Demand
As slow economic growth weighs on demand for package shipments and margins, FedEx is expected to cut costs by adjusting its network capacity for the more conservative demand trends then previously projected. The airfreight carrier is expected to provide more details on its cost-cutting initiatives at its investor conference in October.
Early this month, FedEx announced plans to retire 18 Airbus A310-200 aircraft and 26 related engines, as well as six Boeing MD10-10 aircraft and 17 related engines permanently from service to slim down its express network. It plans to replace them with with more fuel efficient fleet but has delayed their delivery to keep expenses low till demand improves. However, it also faces bumps along the way with higher pension expenses and depreciation costs, before it can hit their double-digit margin target.
We are in the process of revising our $106 Trefis price estimate for FedEx.
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