You may have spent last week freaking out about the rail strike and completely missed the new thing to freak out about: FedEx’s spooky business update.
In a report last week, FedEx withdrew its financial guidance for the remainder of its fiscal year, which began June 1, 2022. (I wish fiscal years did not start in the middle of the actual year.)
FedEx Express — which is the delivery giant’s air cargo unit and highly exposed to weaknesses in Asia and Europe — saw a revenue shortfall of $500 million. FedEx Ground, which delivers packages to doorsteps across the U.S. and Canada, fell $300 million below expectations. Meanwhile, the company’s less-than-truckload division FedEx Freight actually had a great quarter — thanks to the industrial economy’s relative resilience this year.
FedEx’s first-quarter earnings will be announced at the end of Thursday. Wall Street will be keenly listening to learn how FedEx plans to revamp itself.
You can read into the parcel behemoth’s poor results however you wish. Bearish folks are using it as the latest example that the economy is headed to shambles. Deflated volumes at FedEx points to decreased global trade. Others are blaming FedEx’s poor management, rather than any macro-meltdown. Some have compared FedEx’s floundering with the healthy finances at UPS, which seemed to be better prepared for the post-COVID demand slump.
But there’s another takeaway.
FedEx’s earnings are indeed a sign that demand is softening. Even more alarming, though, is how ill-prepared our biggest companies are for this moment — which seemingly anyone could have expected after two years of wild consumer behavior.
“The market we’re witnessing now is something that everybody knew was going to happen,” Vespucci Maritime CEO Lars Jensen told FreightWaves. “The extreme highs were always going to be temporary.”
Air freight is softening, contributing to FedEx’s woes
Typically the public doesn’t care much about logistics. COVID-19 changed that.
Through 2020 and 2021, folks cheered on truckers and watched container ships pile up at ports. Americans suddenly realized that everything they buy is almost certainly moved by a truck, ocean vessel or train at some point. Supply chain crunches hit close to home when cars, couches and clothing orders were delayed by weeks or months.
Transporters cleaned up through those two years, with ocean carriers raking in a record $148 billion profit in 2021 and tens of thousands of truck drivers opening up their own companies to cash in.
The fun is now over.
We’ve seen spot rates on key forms of transportation tumble — including domestic truck and international ocean shipments. The entire North American railway system almost closed down last week. We’re in what’s been dubbed the “bad vibes” economy.
Amid all the fanfare, we seemed to forget about the mighty cargo plane.
Air freight carries less than 1% of all global trade by volume. Trucking and ocean shipping are the head honchos of our logistics world, with each touching nearly everything we consume or use at some point. Rail moves those necessary commodities we don’t consider, like wheat or lumber.
Cargo planes, meanwhile, are a “luxury” option, said FreightWaves market expert Zach Strickland. They’re what you select if you’re trying to move high-margin, lightweight cargo, like electronics or medical goods. Expedited e-commerce is also big for air freight. The mode represents 35% of the value of global trade, even though the actual weight is relatively wee. (Vaccines and fresh flowers are a lot lighter than, say, coal.)
Though it plays in a different sector than other modes of freight transport, air cargo too has seen rates crumble in recent months. According to the Freightos Air Index, which measures spot rates in 191 airport lanes worldwide, air cargo rates are at their lowest point since Jan. 2021. They’ve fallen by 25% since the beginning of the year.
For FedEx, the tumble in air cargo demand has been painful. FedEx Express is its air cargo unit, and the crown jewel of the company. The delivery giant reported last week that Express will generate some $174 million in operating income in fiscal year 2023 — compared to $567 million the year before.
But declining air freight demand doesn’t necessarily mean economic doom, some experts say
The decline is undeniable, but whether it means we’re in a recession or simply returning to normal remains the question.
On its face, FedEx’s declines are alarming.
“When we see major logistics firms like FedEx report disconcerting results, it can send up alarm bells for all kinds of economic onlookers,” Adie Tomer, a senior fellow at the Brookings Institution, told Marketplace last week.
Other experts remain more cheerful.
Judah Levine,head of research at freight booking platform Freightos, pointed to the fact that international trade volumes are still elevated from 2019.
Digging specifically into air freight and FedEx’s ground delivery unit, Levine said one reason for the decline may be that fewer people are ordering stuff online. E-commerce shipments are sometimes placed on planes to arrive at your doorstep more quickly. If you’re driving to the store to go shopping, you obviously no longer need a FedEx driver to drop off your stuff.
Still, the issue isn’t necessarily that demand is down but rather that we’ve built up too much capacity across most modes of transport. We don’t need unusually high truck capacity or air fryers in stock, for example, if consumer interest is merely so-so.
“Demand is somewhat weak, but not catastrophically so,” Jensen of Vespucci Maritime told FreightWaves. “This is predominantly not a demand issue but a supply issue.”
Plenty believe that the issue isn’t the global economy but mismanagement on FedEx’s side, as analysts told FreightWaves’ Mark Solomon last week. Its integration of a European delivery service it acquired in 2016 is still somehow chaotic. Analysts urged that FedEx take a page from rival parcel giant UPS and start slashing costs.
Wall Street is not giving FedEx a pass, even as its CEO insisted its bad earnings were a sign of international weakness. Deutsche Bank analyst Amit Mehrotra wrote in a note Thursday morning that this earnings call “will probably be the most consequential in recent history for FedEx as we believe that market participants want to see a sense of urgency and evidence of more meaningful change.”
FedEx was bizarrely unprepared — and so were Target, Amazon, Ford and other big names
It’s a little jarring how poorly prepared our corporate overlords were for the inevitable drop-off in consumer spending.
FedEx, for example, seems to have expanded its air freight capacity through 2020 and 2021. That’s all jolly news, except that it’s hard to profitably run a fleet of cargo planes if they’re not chock-full of packages.
“FedEx’s air freight unit is not getting the utilization that it did,” FreightWaves’ Strickland said.
As I wrote earlier this month, companies did not seem to realize that consumers would eventually stop spending so much money on random stuff online.
Target, Walmart and other retailers are struggling with too many electronics and kitchen appliances but not enough consumer interest. Amazon is scaling back its fearsome logistics empire. Ford has to punt some $600 million in expected profit because of, yes, supply-chain issues.
Retailers are so stocked up that we might skip out on a peak season altogether this year. Ocean freight should be soaring right now in preparation for the winter holidays, while air freight typically peaks in October or November.
Amid all this, FedEx is still looking to invest some $6.3 billion in capital expenditures. That’s a move that strikes analysts like ShipMatrix’s Satish Jindel as bizarre, he told FreightWaves’ Solomon last week, considering the softening in freight demand.
“The writing on the wall is that the global economic environment has changed,” said Strickland, noting that FedEx had more of a buffer in the U.S. while international volumes in Asia and Europe were wallopped. “I think the real answer here is that FedEx was slow to react.”
If you want to learn more about air freight, please consult the “Ode to Air Cargo” poem by the International Air Transport Association.