FedEx to expand international air offerings next quarter

A COVID-19 vaccine vial next to a FedEx aircraft. FedEx has won a Canadian government logistics contract to distribute COVID-19 vaccines.

FedEx Corp. (NYSE:FDX) said Thursday night that it will roll out two intercontinental delivery products within the next couple of months as it looks to beef up its lagging global e-commerce operations and capitalize on the continued tightness of international air cargo capacity resulting from government restrictions on air travel due to the COVID-19 pandemic.

The Memphis, Tennessee-based company will add nine European countries to its Europe-to-U.S. priority air delivery network, a move that executives said will give it a sizable coverage advantage over rival UPS Inc. (NYSE:UPS) and DHL Express, the international air express unit of Deutsche Post DHL (OTCMKTS:DPSGY). FedEx would not identify the countries to be added.

FedEx will also start a service called International Connect Plus, which will be designed for e-commerce customers and link Europe, the U.S. and Asia. One of the key elements of the service will be improved customs clearance capabilities, FedEx said. FedEx is underpenetrated in global e-commerce deliveries and lags UPS and DHL in this area, Brie Carere, FedEx’s executive vice president and chief marketing and communications officer, told analysts Thursday in discussing the company’s fiscal 2021 third-quarter results.

In the U.S., FedEx will add six markets to its last-mile delivery operation, bringing to 63 markets that it serves. The company’s last-mile service involves heavy goods deliveries by LTL unit FedEx Freight, increasing network collaboration among FedEx Express, its air and international unit, and FedEx Ground, its ground-delivery unit, and expanded deliveries of ground parcel traffic by FedEx Freight.

According to Chairman and CEO Frederick W. Smith, a key byproduct of the collaboration is that FedEx Express, which focuses on time-sensitive deliveries, can turn over slower, lower-yielding residential traffic to the other units and focus on high-margin B2B shipments and traffic supporting verticals industries like health care. “It lets Express be Express,” Smith said of the collaborative efforts on the analyst call.

The two new international services have a distinctly European flair, and they dovetail with the near-completion of the protracted integration of TNT Express LLC, which FedEx acquired for $4.8 billion in 2016, and which it will have spent about $1.7 billion to execute what has been a difficult combination.

The integration of TNT’s vaunted intra-European over-the-road operation should be completed sometime this year, with the full integration set to consummate in calendar year 2022, FedEx said.

FedEx’s international expansion will take place in an ongoing seller’s market for international air cargo capacity. Passenger flights remain well below pre-COVID-19 capacity and are expected to stay that way through the year, according to company executives. FedEx said that belly space will return to 55% to 75% of pre-pandemic levels by the end of 2021, with a full recovery not expected until 2023 as governments gradually lift travel curbs. 

FedEx expects a very strong pricing environment through the balance of the year, Raj Subramaniam, the company’s president and COO, told analysts. Subramaniam said he does not expect the current trend to last but that FedEx has the capabilities to profitably flex its air system even when belly capacity returns to global markets.

The company said it is also being buoyed by a return to near pre-COVID levels of business-to-business (B2B) activity in all its major regions except Europe. B2B traffic was flattened by government stay-at-home restrictions and other upheavals caused by the pandemic. In turn, confined consumers worldwide turned to online commerce, which sparked an unprecedented surge in business-to-consumer (B2C) delivery activity. During its fiscal third quarter, which encompassed the peak holiday season, B2C accounted for 70% of FedEx’s traffic.

In the U.S., industrial and automotive remain the two B2B laggards for FedEx, Carere said.

Strong Q3 results

FedEx reported very strong fiscal third-quarter 2021 results, with massive year-on-year increases in earnings per share as well as operating and net income, and revenues of $21.5 billion, a 21.3% gain.

On an adjusted basis, EPS hit $3.47, well above the range of $3.21 to $3.24 a share estimated by analysts on various financial platforms. The company posted EPS of $1.41 in its fiscal 2020 fourth quarter. Adjusted operating income hit $1.06 billion, more than doubling the fiscal 2020 figures. Adjusted net income of $939 million was way above the $371 million figure reported in the fiscal 2020 fourth quarter. Adjusted operating margin of 4.9% was far above the 2.8% margin in the fiscal 2020 fourth quarter.

Revenues were $4 billion above fiscal 2020 third-quarter levels, a reflection of the COVID-19 pandemic’s impact on parcel delivery demand as online ordering activity zoomed far ahead of in-store retail shopping. FedEx’s fiscal third quarter fell during the peak holiday shipping season, which when combined with changes in consumer behavior due to the pandemic resulted in an unprecedented surge in traffic. 

Besides the strong domestic residential results, FedEx also reported gains in its time-definite, premium-priced international delivery services, and benefited from favorable pricing trends across its three transportation segments: air and international, less-than-truckload, and domestic ground parcel services.

Though e-commerce and parcel delivery are expected to level off somewhat from the breakneck pace of 2020, activity is expected to stay elevated for some time to come. In a statement, Smith said he expects demand for the company’s services to “remain very high for the foreseeable future.”

Severe weather during February curbed the company’s operating income by about $350 million, FedEx said.

At 7:30 p.m. ET Thursday, FedEx shares were up nearly 4% from their regular market close.