Logistics and delivery stalwarts United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) have a lot of things in common, but earnings dates aren't one of them. UPS delivered fourth-quarter results on Feb. 3, while FedEx released its third-quarter earnings a month and a half later. Given that both companies are facing similar challenges and opportunities in 2015, it's useful -- for both sets of investors -- to assess the latest industry commentary from FedEx's management. What does it mean for FedEx and UPS in 2015?
5 questions for FedEx Corporation's management
There are five key questions you might have wanted to ask management about FedEx's third-quarter earnings. The first four, it turns out have a direct relevance to UPS.
- What was customers' reaction (particularly small customers) to FedEx's implementation of dimensional weight pricing? UPS is also implementing dimensional weight pricing in 2015.
- What happened during peak season? Why did FedEx get it right and UPS get it wrong?
- What about competition from Uber and other apps?
- How are falling fuel prices affecting the bottom line?
- How is FedEx's profitability improvement plan -- intended to increase profitability by $1.6 billion by the end of 2016 -- tracking against expectations?
Dimensional weight pricing
In plain English, dimensional weight pricing is a plan to charge all packages by volume as well as weight. The idea is to encourage customers to cut back on unnecessary packaging volume -- something that would help profitability at FedEx and UPS. One concern is that small customers will see a dramatic cost increase as a consequence and then seek out alternatives to UPS and FedEx.
It's in the early days with both companies' initiatives. On the conference call, FedEx Executive VP Michael Glenn pointed out that the practice was in effect for only two of the three months in the most recently completed quarter. However, Glenn also disclosed that excluding SmartPost (a service that uses the USPS for final delivery) and the impact of fuel, ground yield increased 3.7%.
"The market has responded about the way we thought," Glenn said.
Peak demand season
UPS management had previously disclosed how challenging the last holiday season was in terms of peak demand, and FedEx management confirmed much of the same.
"We had an unusual peak this year," FedEx Ground CEO Henry Maier said. "We were busy at the beginning, we were busy at the end; things were little light in the middle."
"We saw significant demand shift across the entire period, with less specific demand on any given day," Glenn said, positing that FedEx's operational structure, in which air and ground networks are separate, gave the company a "unique advantage."
In essence, FedEx confirmed what UPS management had said about the structure of peak demand. It's just that FedEx dealt with the conditions better.
In answering a question on Uber from Morgan Stanley analyst William Greene, FedEx CEO Fred Smith argued, "There's just an urban mythology out there that the app somehow changes the basic cost input of the logistics business or changes the circadian patterns or the underlying business situation, and that's just incorrect."
Essentially, his argument was that Uber's potential market -- customers who want parcels moved on the same day, at great speed, over a relatively short distance -- is really only a small niche of the logistics market. Moreover, Smith pointed out that the FedEx SameDay City service already offers local courier service in many major U.S. cities.
Lower fuel prices had a significant effect on profitability. In fact, FedEx's total operating income increased by $321 million, or 50%, to $962 million in the third quarter. However, fuel expenses contributed $353 million to the figure. If fuel expenses had been flat, then FedEx's operating income would have declined. Cheaper oil is definitely having an impact.
Profitability improvement plan
CFO Alan Graf was categorical that management is "sticking" to its plan and added that "we're very confident at least where we are right now."
He added: "We have a lot of momentum. And so, as of today, we are on track." That's good news for FedEx stockholders.
The takeaway for FedEx and UPS stockholders
Transitioning to dimensional weight pricing across its ground-segment deliveries doesn't appear to have had a negative effect as yet, but you should look out for what UPS says in its next report. FedEx's commentary on peak season confirms the unusual pattern UPS management outlined and suggests that UPS needs to carry on creating flexibility in its network. Meanwhile, competition from the likes of Uber looks to be little more than a momentary distraction.
Lower oil prices are clearly having a positive effect on profitability for FedEx, and the company's profitability improvement plan remains on track. That's good news, and analysts have some impressive EPS targets for the stock. All told, things sounded positive for UPS investors, and FedEx investors can be reasonably pleased that the company is headed in the right strategic direction.