Dive Brief:
- FedEx's new ability to dynamically adjust surcharges helped bring in $150 million in profit from peak season home delivery fees, Chief Customer Officer Brie Carere said on a Q3 earnings call Thursday.
- Holiday residential surcharges changed based on individual shippers' weekly peaking factors. This metric tracks how many more packages a customer is shipping compared to earlier in the year, with fees increasing as the peaking factor climbs.
- FedEx's Dataworks unit helped build the company's dynamic pricing infrastructure, and it has also assisted in creating capabilities to identify instances of customer overbilling. "Now, we will use those same capabilities to better manage customer performance and contract compliance," Carere said.
Dive Insight:
Plummeting package volume gives FedEx an added incentive to extract as much revenue as possible from each delivery. Dynamic pricing, which FedEx initially launched in August, advances that effort.
"We're releasing a capability to have a far more granular peak surcharge to be able to manage customers really in an automated way if they are not hitting the requirements that they are giving us because, as you can imagine, as we go into peak, it's important we get the surcharge," Carere said during a June presentation to investors.
FedEx's performance for its most recent quarter, which ended Feb. 28, demonstrates the company's ability to make deliveries more profitable in the face of declining demand. Average daily package volume fell YoY for both FedEx Express (-14% for U.S. domestic packages) and Ground (-11%). Revenue per package increased 11% for both Express U.S. domestic and Ground.
Despite the company's persistent pricing power, FedEx executives say gains in revenue per package, or yield, will slow in the coming quarters.
"Yield growth will be pressured as year-over-year fuel surcharge comparisons normalize and customer demand shifts, most prominently in Asia," CFO Mike Lenz said on Thursday's call.
FedEx has enacted a variety of cost-cutting measures to adjust to cooling demand. This includes parking Express planes and reducing Sunday delivery coverage at Ground.
At the same time, the company is pushing to improve efficiency in its operations over the long term and save billions through its DRIVE and Network 2.0 initiatives. Anthony DeRuijter, an analyst at Third Bridge, said in emailed remarks that despite the benefits this overhaul could bring, successful execution will be a tall order.
“UPS has a better cost structure than FedEx because its network is integrated and it has achieved interoperability," DeRuijter said. "FedEx is fundamentally siloed, and despite looking to reverse that with Network 2.0 and DRIVE, our experts say it continues to struggle to integrate its network."
