Dive Brief:
- FedEx expects a $500 million headwind in fiscal year 2025 from the looming expiration of its U.S. Postal Service air cargo contract, FedEx EVP and CFO John Dietrich said in a Q4 earnings call Tuesday.
- The delivery giant is preparing to aggressively reduce Postal Service-related costs following the contract's Sept. 29 expiration to minimize the impact to its bottom line. FedEx has already permanently retired 22 Boeing 757 freighters in its U.S. network to match capacity with demand needs, according to an earnings release.
- "We've got a pretty good hold on what those costs are," Dietrich said of the $500 million headwind. "We're going to be aggressively going after them beginning in Q2 and it's going to flow into Q3. And those aggressive mitigation efforts should start to really take hold in Q3 and beyond."
Dive Insight:
FedEx expects Postal Service volume to remain near the contract's minimum levels until the deal expires and the agency jumps ship to rival UPS, FedEx EVP and Chief Customer Officer Brie Carere said on the call.
"After the expiration of the contract, we will implement adjustments for our operations and network that will drive efficiencies and create more flexibility," Carere said.
Efficiency has been the name of the game for FedEx in recent quarters, as it cuts costs in its air cargo network and other areas through its wide-ranging DRIVE program. DRIVE helped the company boost its operating income and margin in fiscal 2024, which ended May 31, despite a soft demand environment. Average daily package volume at FedEx Express fell 2% year over year, while average daily volume at FedEx Ground saw a 1% increase.
In fiscal 2025, FedEx is expecting the demand environment to moderately improve and planning for U.S. parcel volume growth, Carere said. The company is expecting delivery growth to be driven by e-commerce shipping moreso than business-to-business volume.
"We do like the fundamentals from an e-commerce perspective that will help us here in the United States and around the world," Carere said.
However, FedEx's upbeat fiscal 2025 expectations could be challenged by excess market capacity that challenges the company's pricing power, Anthony DeRuijter, an analyst at global research firm Third Bridge, said in emailed remarks about the company’s earnings report. The capacity glut could diminish in the next six months, but it could stretch to six quarters depending on how the economy fares, he added.
"Until this happens, the ability to drive pricing higher is limited, and in fact some of our experts suggest 14-17% yield dilution on contracts currently being renegotiated by major carriers with shippers," DeRuijter said. "However, when the demand-supply normalization occurs, our experts see 5-7% pricing growth per annum potentially being the new norm.”
