Slow demand for gadgets key to FedEx Express volume shrinkage

The financial markets have not responded well to the latest results from FedEx Corp – and specifically executives’ comments that the global economy is slowing, and that FedEx share earnings for this year may be around 10 cents lower per share than previously anticipated. FedEx said it believed share earnings would be in the $6.25 to $6.75 range the remaining three quarters of Fiscal Year 2011, rather than the $6.35 to $6.85 range it predicted back in June.

Noises about slowing demand in Asia, coming off similar warnings by UPS last week, saw FedEx share prices dropping more than 8% later yesterday on the New York Stock Exchange.

The other global integrators also saw share price drops yesterday, and share prices have declined throughout this year, with FedEx value dropping 28% and UPS 14%.

To a great extent, the slowness in the economy at the moment and resulting problems in the global express shipping market is down to consumer sentiment, FedEx chairman Frederick Smith said yesterday.

Ultimately, consumer confidence is weak because of the US debt crisis and the European debt crisis, as well as talk of a possible “double dip” recession, which Smith stated yesterday that FedEx does not expect to happen.

In the FedEx Express results, one problem is that last year was a particularly strong year, coming out of the 2008-2009 slump, and this year’s first quarter has not been able to maintain that pace of growth.

A 14% year-on-year growth in volumes in last year’s first quarter turned into a 4% slip in volumes in this year’s first quarter.

FedEx has also seen its Express results hit by volumes shifting from its less more premium services to its more standard services, particularly apparent in international priority services.

Technology

A key customer segment for FedEx Express has been the technology sector, particularly based in China. Consumers are not buying quite so many electronic goods at present from these companies, while retailers have been cutting back on their stocks in anticipation of lower consumer demand.

FedEx said a strong June performance in FedEx Express suddenly screeched to a halt in July and August.

“In the international air cargo and international express market, a large percentage of the goods that are moving by air today are technology and electronic products,” said Smith yesterday. “We know from talking to our customers – the retailers and the manufacturers and so forth – that the primary driver of the reduced demand is lower sales of electronic products.”

It’s not just consumer spending habits – timing of product releases is also an issue with respect to the 4% drop in express volumes seen in this first quarter’s FedEx Express results.

Several electronic product launches that last year came in the summer are now shifting to the fall, which means volumes that should have come in the first quarter will not come in the second.

Moves like Apple’s decision to release the iPhone 5 in October, rather than the traditional iPhone release time of June, have affected the timing of volumes in the international express market – though FedEx executives named no specific customers in their analysis of the shifting retail patterns.

Smith said: “In the second quarter, there will be new product launches, but there hasn’t been a collapse in demand on electronic products – it’s just that the consumer just doesn’t have an appetite for considerably more purchases.”

Cutting costs

FedEx investors were reassured by executives in yesterday’s conference call that the company is now much better set up to deal with unexpected developments, however. It is more flexible to changes in volumes, and in this case has shifted aircraft from Asia to the United States, and reduced flight frequencies in Asia – “without affecting service”, according to Graf.

So while the company is not relying huge growth in volumes the rest of this year to hit its margin targets, its own efforts to cut costs and match the change in volumes has meant profits should be protected going forward.

Graf said the change in economic conditions during this latest quarter took the company somewhat by surprise, leaving it with capacity available but not used in its network. The system has now been changed, he said.

“Our Express network is now properly aligned with current volume levels, and we have additional action plans and trigger points in place if economic conditions deteriorate,” he told analysts.

As far as FedEx capital investment plans go, the company is tempted to put more resources into its Ground and Freight services, where better return on investment is now expected in terms of growth going forward.

While FedEx has seen the wind knocked out of its Express division, its Ground and Freight divisions are growing well – “phenomenally”, in fact, as far as Graf is concerned, who noted that margins were as high as 17.9% in the Ground division.

However, capital investment will still be going into FedEx Express aircraft going forward, although in other areas it may be toned down.

“We’re not going to back off from our (Boeing) 777 orders whatsoever – we may delay some station expansions and hub improvements and things like that,” said Graf.