DEEPER DIVES: What The Q1 FY25 FedEx Results Really Say

Good Morning,

First, as always, thank you for joining.

If you missed our livestream related to transportation/delivery GRIs (General Rate Increases) on Friday, you can watch the recording here. This was one of my favourite shows that Matt, Jess and I have done. It was a 60 minute conversation jammed with questions, insights and explanations.

Here’s what this issue brings:

• FedEx held their Q1 Fiscal Year 2025 earnings call on September 19th. While the results weren’t great (and it sent their stock tumbling), there’s been a lot of misunderstanding out there as to what’s happening and what it really means. I’ve going deep to give you a well rounded explanation and connect it to current market conditions and other service providers.

National Carriers Still Dominate

If you caught my video yesterday, you know that this situation irritated me.

One of my biggest pet peeves is seeing people misuse information - especially when they are doing it for their own gain.

A number of posts from alternative carriers have been using these FedEx results to infer that nationals like FedEx and UPS are no longer viable options for eCommerce activity as all they are interested in is raising rates and “hurting” the customer.

Now, I’m not a FedEx or UPS fanboy.

I regularly work with clients to build out and support carrier diversification strategies.

But the reality is that FedEx and UPS do have their own strengths and benefits, and to pretend like they don’t will leave you with a weaker ecosystem of options when it comes to executing for customers.

So let’s debunk the bullshit that people are posting about and give you a full view of what is going on with FedEx (and UPS) so that you can build out the best solutions for your business.

The Numbers

We’re going to start with the numbers. Because they are what got everyone talking.

Revenue: $21.6 billion (flat YoY)​.

Operating Income: $1.08 billion (down 27% YoY)​.

Operating Margin: 5.0% (from 6.8% YoY)​​.

Net Income: $0.79 billion (down from $1.08 billion YoY)

This is the first big misconception going around.

People are making reference to the fact that the earnings “miss” was a result of lower demand (i.e. shippers choosing to simply not use their service).

The gross revenue impact is largely related to customers shifting their choices. With the current economic conditions, more shippers are moving away from high-margin services like Priority Overnight Express, and choosing lower-margin services like FedEx Deferred and Economy options.

What I find amusing however, is seeing other players in the market using this as evidence that customers are moving away from FedEx when it really represents customers moving away from high cost options to lower cost options (essentially, what all of these regional players have built their business on - as a lower cost options is how they are getting attention from shippers).

The other two big buckets that impacted revenue are working days and International Exports.

One less working day. It cost them $200M in revenue (that’s insane!). While it may seem silly to list these impacts, these are exactly the weird types of things that happen to YoY comparisons and it’s always important to separate one-offs from trends.

International Export (this is FedEx business that is outside of the US and that will cross international borders).

FedEx faced significant pressure on international yields, particularly in the international priority segment (again), as global demand softened.

The shift to lower-yielding services like international economy also contributed to a decline in revenue per package​. Basically, many customers shifted to the cheaper international economy service, which takes longer but is less expensive.

Since more customers chose this service, FedEx's average revenue per package decreased because international economy services have a lower yield compared to international priority

The Activity

Let’s tackle the next big misconception, that customers are actively moving away from FedEx.

Both of the above graphs show the last 5 quarters of activity.

For discussion purposes, we are going to focus on Q1 for FY 24 and FY25 since these are the relevant YoY comparisons that hit the news.

Ground commercial (top graph - black) and Deferred (top graph - orange) are basically flat year-over-year when it comes to US Domestic activity.

Priority (top graph - purple) shows a significant decline averaging about 80,000 packages per day less volume moving through the service.

But here’s the thing, FedEx Priority is not a default (or even common) choice for eCommerce shipments.

This service is typically used by businesses that need to GUARANTEE fast delivery (often by a specific time or the next business day). It’s used for documents, time-sensitive shipments and B2B package shipments.

When we see regional carriers (especially the gigwork platforms) soliciting for business from retail and eCommerce shippers, the service that they compete against is the FedEx Home Delivery/Economy option.

When we look at that data (top graph - grey), we don’t see a decline at all. What we actually see is an INCREASE in FedEx activity.

They have added about 27,000 more packages per day on average through the service (this annualizes to just over 7 million more packages being moved).

Pricing

There’s a few important takeaways from the pricing graph you see above.

Since this chart also shows the last 5 quarters, they would show rate increases over that period.

Just as we talked about in on our GRI livestream last week, FedEx had implemented a similar broad based 5.9% GRI as of Jaunuary 1, 2024.

This means that you would see the impact of it in these numbers from their Q3 fiscal year and beyond.

For every service type, FedEx did not “achieve” their desired rate increase when you compare FY24 vs FY25. Their priority service saw a GRI of 7.88% last year while their Ground Home Delivery actually saw one of 6.36%.

Looking at the Q1 FY25 results, this should mean that their ARPP would be around $12.44. Instead they reported a small YoY increase from $11.70 to $11.73.

So what happened?

The two most likely situations are that the biggest shippers in their network didn’t take a real rate increase (or they had negotiated stronger discounts before it was applied).

Or second, that the volume and mix of the types of parcels moving through the network is significantly changing. With more eCommerce volume getting smaller and lighter, it would generate less revenue for companies like FedEx on either a DIM weight or an actual weight basis.

Market Dynamics

What’s happening to FedEx is happening to everybody.

eCommerce volume continues to climb, but the average order value continues to fall.

This is because we have more sellers than ever, we have more shipping options than ever and we have a customer base that has been conditioned with the idea that they should be able to order anything and everything to their door.

I made a comment the other day on someone’s post that highlighted this challenge.

Long gone are the days where cubic capacity was the limiting factor for parcel delivery. These days, a “full” day will easily leave a lot of cubic capacity left in delivery vans.

The real measure of capacity these days when it comes to last mile parcel delivery is time.

And your ability to be profitable when it comes to the activity is with density (but the key unlock is getting this density with the right quality of revenue).

Big nationals like FedEx and UPS have massive infrastructures. They have been building for decades to be able to offer a wide range of services.

That infrastructure unfortunately comes with massive operating costs.

But it’s also what provides reliability and consistency in the service.

The current economic situation in the US (and most other countries around the world), coupled with increased competition is forcing FedEx to compete in a way that is lowering the overall revenue while continuing to support increasing activity levels.

The impact of regional or gigwork models that have been getting attention from shippers because of the fact that sell their service at a lower price is showing.

Poking A Sleeping Dragon

While a lot of the new regionals and gigwork models have been successful growing their businesses, you have to wonder how many of them are on borrowed time.

The changes in package profiles and the current economic conditions are putting massive cost pressure into the market.

While selling on low price is the easiest way to increase your volume and density, there can only ever be one true, low cost provider in any market - and a race to the bottom isn’t going to help.

Rumours are already going around with respect to more last mile carrier closures and consolidation that will start happening in 2025.

There simply isn’t enough good quality of revenue volume to go around.

What’s worse, is that having players like FedEx and UPS competing more aggressively at lower price points will only accelerate these changes.

FedEx for example is releasing a new feature next month that will continue to create quality of revenue impacts.

Its new “Picture Proof of Delivery Attempt” is no doubt a way that they will continue to look for ways to generate more revenue (as they will likely look to do away with multiple delivery attempts unless paid for).

But, you will for sure see their smaller competitors quickly jump to selling on discount again by offering multiple delivery attempts “for free” with their service to try to woo more shippers.

On the other side however, this could very well establish a new customer expectation “prove to me you were actually at my door”, which frankly would have a negative impact on a lot of the smaller players who are regularly missing SLAs and have drivers input that they attempted the delivery but weren’t able to be successful.

Because making the delivery or not, the second you put the vehicle and the person at the door, you have incurred the cost of the delivery.

Conclusion

Whether people want to admit it or not, national players are still a preferred option when it comes to the core parcel strategy for most shippers.

They provide the largest breadth of services, have the biggest coverage areas, and are one point of contact for a shipper when it comes to warehouse to door activity.

Add to this that both FedEx and UPS are making significant investments into automation, robots, technology platforms, etc, and you have a couple of very large organizations that simply can’t afford to fail.

They will start to “fight back” more aggressively and put their own pressure on regional and gigwork alternatives. They will use their networks and infrastructure to continue to offer more options to shippers, which in turn, will continue to be combated by their competitors at a price point level.

But here’s the thing. While you might not like surcharges, there’s always a reason for it. It’s easy to try to sum it up to greed, but the reality is, those surcharges are addressing a pain point that exists.

And if FedEx and UPS are dealing with the pain of delivering to rural areas or ultra-dense urban environments - the regional or gigwork platform is dealing with it as well.

If you’re a shipper, banking the quality of your service on networks that are doing delivery with any vehicle (with not safety checks or maintenance programs), using staff that jumps from platform to platform for a better offer and pays less than minimum wage to survive, you have to ask yourself what is the long term viability of the solution?

To be the most successful with your last mile strategy, you need to have a portfolio of options and be intentional about what services you use in what areas and for what customers or products.

The small regionals will never be the next FedEx. They will never be able to afford it.

That’s it for this week. Thanks for being here.