Transportation and logistics professionals were once again taken aback this week by the FedEx announcement of fiscal second quarter earnings. The company announced a staggering 75 percent decline in quarterly profit along with a 14 percent decrease in second quarter revenues. These results could have been somewhat worse, but FedEx had also been the recipient of the decision by DHL to withdraw its operations in the U.S.
In contrast, rival UPS reported its fourth quarter revenues in February, indicating a 22 percent decline in profits and a 5% decline in revenues.
We don’t need an army of financial analysts to indicate the fact that FedEx has obvious excess capacity and expense problems, but FedEx is not alone in that camp. FedEx made large bets on the explosive increase in global outsourcing and emerging markets., with massive infrastructure investments in those regions.
There is however one bright spot in these results. Revenues for FedEx Ground were actually up 4.0 percent, along with a one point increase in operating margin. The previous FedEx decision to seek diversification has helped to some extent, buffer the effects of dramatically reduced volumes brought about by the ongoing severe economic recession.
To no surprise, FedEx management has initiated more aggressive cost reduction efforts for Fiscal 2010, to include network capacity reductions and additional labor cutbacks. Wage and salary reductions had previously been announced in December. I was interested to note the statistics indicating that total average daily freight weight was off by 19 percent, international daily package volume was down 29 percent, but U.S. domestic daily volume was only off by 3 percent. That indicates to me even more evidence that global material movements are dramatically declining.
If you have been keeping up with recent news on the transportation front, there is growing excess tanker, ocean container, and rail capacity throughout the U.S. and global regions. Idled ocean tankers now serve as static bulk storage of inventory. I read a statistic this week that over 11 percent of global ocean container capacity has been idled, just when a new wave of container mega ships are scheduled to come online this year. A past Wall Street Journal article reported that up to 30% of the nation’s railcars have literally been parked on sidings throughout the U.S., creating huge eyesores and vandalism.
The broader question on the transportation and logistics front is how much further cost-cutting measures can realistically occur for all of these global carriers and providers, before more permanent cuts in transport capacity need to be made.
What’s your view? Can these global carriers hold on to their current transportation fleets, given the potential timing or scope of recovery?