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FedEx’s Pricing Power Isn’t Working and Won’t Last

After carving a fifth off the market value of FedEx Corp. last week when it withdrew its annual forecast and announced preliminary results that fell well short of expectations, investors were in a more forgiving mood on Thursday for the full quarterly report. They mildly welcomed FedEx’s effort to chop as much as $2.7 billion of costs over the next 12 months to offset sagging package volume, especially at the Express unit. The shares rose 0.8% on a day when the S&P 500 Index fell 0.8%.

No doubt, the cuts are needed. Package volume at the Express unit fell about 11% in the fiscal first quarter from a year earlier because of disruptions in China from severe Covid lockdowns and in Europe because of Russia’s war in Ukraine. Operating profit at Express fell to a paltry $174 million from $567 million a year earlier.

What should be alarming to investors, though, is that revenue per package at Express was $24.33, up almost 16% from a year ago. That’s just shy of record high pricing in the previous quarter. The same thing is happening at the Ground unit. Revenue per package jumped 12% from a year earlier to $11.48, an all-time high.

The big question is why FedEx can’t increase profit when it has never had so much pricing power. The company said on Thursday that it plans to increase prices in January by an average of 6.9% for Ground and Express and as much as 7.9% for its freight business, and that doesn’t count surcharges that both FedEx and United Parcel Service Inc. have heaped on liberally since the pandemic. These price increases aren’t FedEx catching up on inflation. Revenue per package at Ground is up 26% from the same quarter in 2019 and 31% higher at Express.

If the deterioration of demand is as alarming as Chief Executive Officer Raj Subramaniam discussed last week, it should be difficult for FedEx to maintain the upper hand on pricing over its customers. The rapidly rising costs for e-commerce deliveries have already driven large retailers, including Target Corp. and Walmart Inc., to look for solutions of their own to get packages to their customers.The pendulum of pricing power clearly swung in favor of FedEx and UPS during the pandemic and, at some point, will turn back to the advantage of shippers. When that happens, shippers will gleefully play one courier off the other to drive hard bargains. Many shippers feel they were taken advantage of during the pandemic when they had no choice but to increase e-commerce sales to stay alive. FedEx and UPS raised prices, tacked on surcharges and limited volume from large shippers.

FedEx still has the upper hand on pricing, Brie Carere, chief customer officer, said on a conference call Thursday with analysts. FedEx is negotiating strong increases for contract renewals, she said. “We continue to execute our revenue quality strategy and pursue business that provides attractive yields,” she said. “We continue to delivery new pricing capabilities.”

When asked by Morgan Stanley analyst Ravi Shanker if the record 6.9% general rate increase for January would put more downward pressure on volumes, Carere said inflation was a main motivator for such a large price hike. 

“We had continued cost increases throughout the year, and so we thought the 6.9 was appropriate,’’ Carere said. “We will monitor post-implementation stickiness. And, of course, we’re constantly looking to balance the yield and the volume and make sure we get the right volume levels.”

Both FedEx and UPS suspended their service guarantees when the pandemic hit. Under those guarantees, shippers would receive a refund if the couriers missed a delivery window. It wouldn’t be surprising if UPS, which has experienced much less service disruption than FedEx, is a first mover on returning these service guarantees. That would put more pressure on FedEx, which has been struggling with turnover of the contractors that make the last-mile deliveries for the Ground unit.

During December’s peak season last year, FedEx’s on-time delivery performance slipped to 89% while UPS’s percentage was in the high 90s, according to ShipMatrix, which compiles data on the parcel industry. ShipMatrix said earlier this week that it expects “huge excess capacity” during peak season this year. Couriers, including the  US Postal Service and Amazon.com Inc., will have capacity to handle about 110 million packages a day during the holiday season while daily demand will increase only minimally to 92 million parcels, the consultancy said. Demand will be weaker this year because more consumers will shop at stores as concerns over Covid-19 wane and people will spend more on services and entertainment. Inflation is also eating away at their holiday budgets. Last year, delivery demand outstripped capacity by about 1.3 million packages a day, ShipMatrix said.

None of this is good news for FedEx. It clearly won’t be able to lean on pricing to shore up its profit when the pendulum swings back toward shippers. It’s a much tougher task to cut costs and improve operations in a notoriously inefficient network.

More From Bloomberg Opinion:

• FedEx’s Problems Are About FedEx, Not the World: Thomas Black

• FedEx Investors Need This Data. They Don’t Have It: Thomas Black

• Industrial CEO Tenures Get Shorter and Busier: Brooke Sutherland

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

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