Dive Brief:

• FedEx saw a 12% year-over-year drop in its Ground Segment operating income and a 13% year-over-year drop in its Freight Segment operating income, the company stated during its earnings call Wednesday.
• This holiday season, FedEx opened four new distribution hubs and 19 automated centers, which drove down profits despite a 9% increase in FedEx Ground revenues and 3% increase in FedEx Freight.
• The company noted increasing capacity was equally if not more important that meeting demand, to the point that FedEx cut various relationships with shippers who could not meet rate and capacity requirements.

Dive Insight:

FedEx has been investing heavily in increasing its capacity. In the past year, the company completed 185 new facility projects to increase its sorting and distribution space by more than 10 million square feet, according to Alan Graf, FedEx's executive vice president and chief financial officer.

While the increased need for distribution centers is driven primarily by the growth of e-commerce, the company made it clear that its last-mile ambitions are not top priority, as the majority of its revenues are driven by non-online commerce B2B and B2C deliveries.

"Let me emphasize, FedEx is much more than a last-mile carrier," FedEx Chairman and CEO Fred Smith said during the call. "Over 92% of our U.S. revenue comes from customers using both Express and Ground and 76% of that U.S. revenue is generated by customers that use Express, Ground and Freight," he added, noting the increased investments in FedEx Ground this year were to sustain future growth this year.

The company also noted the importance of automation to the entire process, boasting 105 fully automated facilities, route optimization technology and a new delivery manager program. Technology is also key to improving its freight capacity, as it looks to robots and other tools to increase throughput and cross-dock loading in the hopes of delivering significant growth by the end of 2020.

In that segment, FedEx is betting on the less-than-truckload (LTL) segment for growth. LTL shipments drove Freight's 3% revenue growth, driven in part by the company's new priority LTL service.

As the earnings call occurs in the middle of the holiday season, FedEx's results can be seen as a litmus test for the season's success. Faced with an increase in demand, the company suffered from below-average on-time delivery ratings, although the 96.9% rate was still above last year's figures.

In a nod to supply chain management, the company noted the importance of retail forecasts to the company's success, noting 50 retail clients drove the majority of peak demand. Low forecasts could, therefore, severely compromise the entire network.

Fortunately, the problem was the opposite.

"While a few customers this year have experienced demand below their forecast, the majority of our large retail and e-tail customers are meeting expectations," said Mike Glenn, president and CEO of FedEx Services.