FedEx Corp. delivered strong third quarter results driven by higher volumes and pricing for premium B2B and B2C shipping services, but bullishness for peak holiday season demand was tempered by expectations for lower domestic margins amid a rise in transitory labor and outsourced trucking costs that likely will spill into next year.
Consolidated revenue grew 12% to $22.9 billion, with adjusted operating income of $1.2 billion, up 16% year over year, the freight transportation giant reported after the market closed on Wednesday, beating Wall Street expectations. Adjusted earnings per share was $3.74, up 28% from the prior year.
A quarter of FedEx’s (NYSE: FDX) revenue growth is attributable to higher fuel surcharges. Results also benefitted from continued structural cost reductions from network optimization initiatives. FedEx so far has closed 260 delivery stations and expects to realize $1 billion in recurring savings because of network and corporate restructuring by the end of the year, and $2 billion in savings by the end of 2027.
Network integration has been completed in large metropolitan areas like Dallas, San Francisco, Phoenix and Washington, D.C., along with Canada last year. Early next year, FedEx will tackle Los Angeles; Charlotte, North Carolina; and Oklahoma City, CEO Raj Subramaniam told analysts during a conference call about the financial results.
This is the first peak season for FedEx operating at scale under its Network 2.0 initiative to consolidate ground and express networks, with about 65% of eligible volume expected to flow through dual-purpose facilities.
FedEx revised upward its full-year outlook. Revenue is now estimated to grow 12% year over year vs the prior estimate of 11% growth and adjusted diluted earnings per share are projected at $18.30 at the midpoint range, up from $17.50.
It was FedEx’s first quarterly earnings report aligned with its new calendar-year reporting framework, following the company’s transition from a May 31 fiscal year-end to a December 31 year-end. As such, FedEx also reported four-month results to cover June, alongside normal quarterly results.
FedEx, much like UPS, has pivoted since 2024 toward high-margin sectors that require end-to-end-logistics services, such as aerospace, automotive, healthcare, and high-tech, and foregoing no-frills, local and regional last-mile delivery for cost-conscious e-commerce retailers. The AI and data center industry was the fastest growing vertical at FedEx during the quarter. A recent Frost & Sullivan report, sponsored by FedEx, discussed how AI is influencing trade patterns in the Asia-Pacific region and trans-Pacific freight movements, which FedEx is capitalizing on.
One year ago, as part of the focus on revenue quality, the company began offering more tailored services for the automotive production market, with a dedicated team, 24/7 support, flexible global pickup capabilities, and enhanced visibility. The effort paid off in the third quarter when it began serving 13 major automotive customers, Chief Commercial Officer Brie Carere said.
FedEx’s realignment of airline operations is also playing a key role in creating a better value proposition for customers, according to management. Under the Tricolor initiative, running parallel to optimization of the North American surface transportation network, the integrated logistics company essentially segregates overnight express parcels from deferred pallet shipments to better utilize aircraft and workforces, with the goal of creating better density, reducing cost and attracting high-value heavyweight cargo from logistics service providers.
Average daily freight pounds grew 15% year-over-year and FedEx is winning share in the air freight market, indicating that the approach towards heavyweight, premium service is paying off, management said. Rival DHL Express is similarly pursuing a strategy of pursuing more heavy freight to fill out available space on package aircraft.
“Our expanding capabilities across key verticals are enabling us to address more of our customers’ logistic needs, unlocking air freight demand from traditionally parcel-centric customers. For example, we drove a 15-fold increase in aircraft engine moves and won new air freight business with an AI data center customer after more than a 40-year largely parcel-centric relationship,” Subramaniam said during the briefing. “Differentiation is increasingly centered on deep customer relationships and tailored service experiences, positioning us to capture more freight volume as we address customers’ needs beyond parcel.”
Domestic
Revenue for the domestic business increased 10% year over year, supported by a 2% gain in average daily package volume. Adjusted operating margins ticked down 20 basis points to 6.6% due to the negative impact of higher costs for fuel and purchased transportation, offsetting savings from network restructuring.
The 4% volume decline for the home delivery Ground Economy product was intentional as FedEx price hikes discouraged budget-conscious retailers from
Management expressed confidence for a good peak season, with revenue projected to be up 10% quarter over quarter, noting that the top 30 customers are planning for about 2% growth in average daily parcel volume from Black Friday through Christmas.
Rising costs could slow profit growth in the fourth quarter. FedEx outsources about 10% of its linehaul and executives said they anticipated about $130 million in higher expenses month over month due to elevated rates in the truckload sector, where capacity is very tight. The company will incrementally insource more linehaul operations next year and take specific commercial pricing actions to address the cost challenges. TD Cowen analyst Jason Seidl suggested FedEx is also likely to shift some volume to railroads, where intermodal costs are lower than truckload.
FedEx also faces pressure from its new pilot contract, with about $100 million of above- normal wage inflation quarterly expected through 2027 and an $80 million increase in aircraft maintenance expense versus the fourth quarter of 2025 because more aircraft are due for comprehensive, heavy inspections.
Management said it expects more bottom line capture of revenue from recently announced peak season surcharges and a 5.9% general rate increase next year.
International
Express international revenue increased 17%, primarily due to higher fuel surcharges, higher pricing for packages and freight, and growth in overseas export and freight volumes. Margins were up 4% year over year.
International freight revenue grew 28%, helped by the data center vertical.
International economy and freight segments experienced strong volumes arising from recovery in the U.S.-China trade lane, which declined last because of the trade war between the countries, and demand from large-scale cloud service and technology companies. Low-yield U.S. exports were down 11% in the third quarter. FedEx next year is likely to squeeze out less desirable freight with higher pricing to improve margins, Seidl said in a client note.
FedEx is also consolidating its fragmented country operations in Europe to make it easier for customers to manage shipments across an integrated network across borders. In France, the company has closed 17 stations, modernized two hubs and 16 stations by installing advanced, automated sorting systems, and equipped 32 stations with new tracking and monitoring technology, said Subramaniam.
In Italy, FedEx is similarly simplifying operations to prioritize higher-value international B2B and export services. As part of this process, FedEx is transitioning from an eight-hub footprint to a highly streamlined three-hub footprint and actively reducing station count, the CEO said. In June, the company reached an important milestone when it consolidated two Milan area stations into a newly upgraded facility that allows more efficient pickup and delivery within one of the most densely populated areas of the country.
FedEx plans to reduce domestic capacity by 20% in Italy by 20%, 30% in the United Kingdom and 40% in France. “The second part of our strategy is to improve the mix. Given the network utilization, we are now focusing our commercial teams on driving more intercontinental and intra-European volume and reducing lower-yielding intra-country volume,” Subramaniaam said.
The integrator is on track to reach its target of $650 million in adjusted operating income in Europe by the end of 2029, he added.
FedEx said it has returned the majority of its MD-11 tri-engine freighters to service after fixing a design flaw, per Boeing instructions, that had the potential to allow fatigue cracks in the engine pylon. U.S. authorities forced operators to ground their fleets for several months following the fatal crash last November of an MD-11 operated by UPS.
Adjusted results exclude $270 million in costs related to expenses for network restructuring or the spin off of FedEx Freight last summer. FedEx rewarded investors by using some of its profits to buy back $2 billion in shares during the quarter.
FedEx earlier this month completed the sale of its contract logistics unit, FedEx Supply Chain, to France-based shipping and logistics giant CMA CGM for $1.4 billion as it focuses on its core freight transportation business.
Meanwhile, consortium of investors is nearing the completion of the $9.2 billion InPost deal, which will give FedEx a 37% share in the European express delivery company and greater opportunities in the B2C parcel sector without having to divert resources from core B2B operations.
Earlier this week, FedEx announced the appointment of AutoZone executive Jamere Jackson as its next chief financial officer.
Equity analysts continue to recommend FedEx, citing volume growth trends and higher profit margins once the U.S. ground network is fully merged next year and streamlining efforts in Europe take root. FedEx stock price was up less than a point to $307.08 a share in late day trading on Thursday.
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Write to Eric Kulisch at ekulisch@freightwaves.com.
