The board of FedEx has agreed to separate FedEx and FedEx Freight into two public companies with the reasoning that “separation unlocks significant value”.
FedEx Corporation confirmed the decision in its fiscal second quarter 2025 earnings presentation, released on December 19. The aim is to grow FedEx Freight’s position in the Less than truckload (LTL) market.
The company said: “FedEx and FedEx Freight will benefit from enhanced focus and competitiveness.” However, it added that it planned to “continue to enable commercial, operational and technological cooperation”.
Rajesh Subramaniam, FedEx president, chief executive and director, said in the Q2 earnings call that “we expect to execute the separation within approximately 18 months”.
Revenue for FedEx Express in the second quarter was flat on the second quarter of financial year 2024, at $18.8bn for both periods.
“Improved base yields and increased demand for international export parcel supported results, offset by lower U.S. domestic parcel and freight volume,” said FedEx.
The company added: “U.S. manufacturing PMI has indicated a contraction 24 of the last 25 months, reflecting soft B2B demand environment.”
However, operating income was up 13% for the segment, driven by DRIVE structural cost savings, base yield improvement, and increased international export demand. Inflationary pressures, the expiry of the United States Postal Service contract, and Cyber Week timing shift served as partial offsets.
“Federal Express delivered 13% adj. operating income improvement, despite significant headwinds and flat revenue growth,” said the company.
FedEx’s decision to separate FedEx Freight from the rest of its operations clearly comes at a challenging time for the business.
FedEx Freight suffered an 11% revenue drop to $2.2bn. FedEx noted that the “decrease (was) driven by lower average daily shipments, fuel surcharges, and weight per shipment. YoY revenue comparison (was) challenged by last year’s Yellow volume acquisition.”
Operating income for the segment was down 36%. Again, the decrease was driven by lower average daily shipments, fuel surcharges, and weight per shipment, partially offset by cost management and continued base yield growth. FedEx added there is $30m expected from facility sales in the second quarter of financial year.
Overall (as reported) second quarter revenue was $22bn, down from $22.2bn in the same quarter last year. Operating income was $1.05bn, down from $1.28bn, and the operating margin was 4.8%, down from 5.8%.
“Consolidated revenue declined 1% in the quarter,” said Brie Carere, executive vice president, chief customer officer. She added: “Higher yields across our services were partially offset by volumes, which declined year over year.”
Carere further noted: “International export package volumes increased 9% in the quarter, driven by international economy, which is largely consistent with recent quarterly trends.
John Dietrich, executive vice president, chief financial officer, said: “Despite soft market conditions, our Q2 performance demonstrates the team’s strong commercial execution and actions to lower our costs to serve. We sequentially grew adjusted operating profit by approximately $170 million and increased our adjusted earnings per share year over year with the growth driven primarily by our Federal Express segment. And we achieved these results despite revenue declining 1%.”
FedEx has revised its fiscal 2025 revenue and earnings forecasts, and now expects approximately flat revenue year over year, compared to the prior forecast of a low single-digit percentage increase.
In addition to separating its FedEx Freight business, FedEx has redesigned its Tricolor global air network. “Our international air network design strategy is improving density and asset utilization across the enterprise,” said the company.
Dietrich stated that “the the ramping of our Tricolor strategy drove higher average daily pounds and yields year over year for Federal Express International Freight”.
One of FedEx’s goals for next year is to increase its global airfreight market share, noted Carere. “This is a market with significant potential,” she said. “We currently have a low single digit market share in the $80 billion air freight market. International priority freight already serves as a profit DRIVEr for us. Our tricolor strategy is a necessary condition to competing and winning in this market.
“Commercially, we’ve also made numerous changes to improve our performance. We have created a dedicated sales organization, a new customer service model, and are investing in the digital experience. The air freight market is fragmented and the shipping processes are antiquated. It’s a market ripe for disruption.”
The company also aims to enable $4bn in structural cost savings by the end of financial year 2025 through its DRIVE programme, plus is targeting $2bn in cost savings by the end of financial year 2027 through optimisation and efficiency with its Network 2.0 multi-year initiative to improve how packages are picked up, transported and delivered.
“At the end of September, we reduced our U.S. domestic daytime flight hours by nearly 60% and swiftly began to reduce other associated costs,” noted Subramaniam.
“In Q2, we decreased total U.S. Domestic flight hours 24%, largely due to the 60% reduction in daytime flight hours…due to the expiration of the postal service contract,” further commented Dietrich.
FedEx saw revenues and profits decline in its fiscal first quarter as the company faced challenging market conditions, customers opted for less expensive delivery services and operating costs were on the rise.
Source: https://www.aircargonews.net/airlines/fedex-freight-to-be-split-from-fedex-and-q2-express-revenue-flat/
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