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Ground unit continues to hobble FedEx results

FedEx Ground continues to be a burr in parent FedEx Corp.’s saddle.

Operating profits at the company’s ground-parcel unit declined by $61 million in FedEx’s (NYSE: FDX) fiscal 2022 third quarter to $641 million. This came despite the unit producing nearly $1 billion more in revenue during the quarter, ending at $8.8 billion. FedEx said late Thursday after releasing the quarterly results that the unit’s operating margins, which are currently around 8%, will not hit double-digit levels by the end of the fiscal year as company executives had hoped.

The quarter, which included the holiday shipping season, saw the FedEx unit mostly put a six- month struggle with operating inefficiencies, largely due to labor shortages, in the rearview mirror. Still, the unit’s efforts to improve staffing levels came at a financial cost, which was reflected in the bottom-line results.

The issues at FedEx Ground contributed to the parent posting adjusted diluted earnings per share of $4.59, which was below a range of median estimates of between $4.64 and $4.69 a share. FedEx Express, the company’s air and international unit and the largest of its four units, reported $520 million in operating income, up from $463 million in the year-earlier quarter. FedEx Freight, the company’s LTL unit, produced a strong quarter, with operating income nearly tripling year-on-year. The unit’s revenue rose to $2.25 billion from $1.83 billion, while operating margins rose 850 basis points to 15%, FedEx said.

In all, FedEx (NYSE: FDX) posted revenue of $23.6 billion, a 10% year-over-year increase. Adjusted operating income rose to $1.46 billion from $1.06 billion, while operating margins rose to 6.2% from 4.9%. Net income climbed to $1.22 billion from $939 million. The solid results, especially from FedEx Freight, were overshadowed by the issues at FedEx Ground. In after-hours trading, shares were down 3.5%

FedEx expects to post a strong fiscal fourth quarter, though that is expected due to seasonality. The company raised its full-year EPS guidance to $18.60 to $19.60 per share from $18.25 to $19.25 a share.

FedEx is facing the twin challenges of spiking cost inflation and slowing demand, especially on the consumer front. The company, which operates a highly regarded economic forecasting unit, reduced its outlook for 2022 U.S. GDP growth to 3.4% from 3.7% and predicted 2.3% growth in 2023. It also cut its forecast for 2022 global GDP growth to 3.5% from 4.1%. 

U.S. business-to-consumer activity, most of which is related to e-commerce, is expected to grow at an 8.3% annual compound rate through 2026. That is lower than earlier forecasts and reflects a slowdown in consumer demand, the company said.

FedEx executives said on the subsequent analysts call that they are aggressively repricing legacy contracts with shippers to stay ahead of rising inflation. In response to recently rising fuel prices, the company said Thursday that it will increase its diesel fuel surcharges by 1.75%, effective April 4. 

FedEx adjusts its fuel surcharges with a one-week lag after the latest price postings from the Energy Information Administration. Surcharge rates are based on a range of diesel prices set by the EIA.

For example, FedEx Ground’s most recent diesel surcharge, which is based on last Monday’s average on-highway fuel price of $5.25 a gallon, is set at 16.25%. Effective April 4, that figure will climb to 18% should fuel prices on March 28 stay constant to the prices that were set March 14.

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes FedEx (No. 1).