News / FedEx bets on rate hikes being accepted, despite tough market headwinds

Soft market conditions blunted FedEx’s first-quarter results, but management is confident that its rate increases will get traction.

The integrator has announced a general rate increase (GRI) of 5.9% for the coming year, which will kick in on 6 January.

In addition, as usual, it is raising surcharges, which pushes cost increases for shippers well above 5.9% – but there is usually room for negotiated discounts.

However, market conditions do not look favourable for significant rate hikes. FedEx’s results for the first quarter of its fiscal year, tabled yesterday, disappointed, as they missed targets.

Revenue was $21.6bn, slightly below the $21.7bn of a year earlier, while net profit shrank from $1.08bn to $0.79bn. Revenues for FedEx Express declined 1%, while those in FedEx freight slipped 2%. Operating income in the Express division fell 25%.

Management blamed the disappointing results on “market headwinds” that produced a shift from priority to deferred services, elevated costs and one fewer operating day.

As a result of the migration of business to lower-margin deferred services, yield growth was 1% lower than expected, reported CFO John Dietrich. This prompted management to revise its revenue forecast for the year: instead of low-to-mid single-digit percentage growth, it now expects low single-digit expansion for fiscal 2025.

But management expressed some optimism. FedEx president and CEO Raj Subramaniam emphasised the elements that the company could control – notably through its cost and efficiency initiatives – as factors leading to improving results as the fiscal year progresses. He was particularly bullish on the European market, where the company has “a long runway to profitability”.

“We will implement dimensional pricing in Europe,” he said, adding that this should yield considerable gains, given a high volume of dimensional traffic moving there.

Out of Asia, FedEx anticipates “continued strength”, according to chief customer officer Brie Carere. She said the company had productive relationships with the two large Chinese e-commerce players, but emphasised that these accounted for a only small part of FedEx’s business out of Asia.

“They will not be a significant growth driver for us,” she added.

Management sounded bullish on its cost curtailment and restructuring drive, as well as the GRI and demand and fuel surcharge hikes that have been announced. The 5.9% GRI is an average number, concealing considerably higher increases in a number of segments. Customers stand to pay significantly more for residential deliveries, deliveries to certain areas and for packages that require additional handling. Fees for oversize shipments, and those where additional handling comes into play, rise more than 20%, according to some observers.

While next-day, priority and standard overnight rates for shipments moved by air rise close to 5.9%, charges for second-day will go up significantly more, as will rates for ground shipments moving over long distances.

In the prevailing market conditions, such aggressive rate hikes are bound to trigger pushback from customers, but the FedEx top brass are confident they will be accepted.

“We’re very confident in the capture rate from the GRI we anticipate in January,” said Ms Carere, adding that demand surcharges were necessary to “ensure profitability and deliver the kind of service customers expect”, and that the fuel surcharge was “the right mix and the right approach to make sure we are growing our yield […] and we are very confident from a capture perspective”.

Rival UPS, which has yet to announce its GRI for 2025, is not likely to challenge the FedEx increases. Over the years the pair have moved mostly in lockstep, and UPS has also felt the impact of the migration of traffic to deferred services on its yield.

Parcel consultants have pointed out that shippers now have more alternatives than a few years ago. Some regional parcel carriers have expanded, but stronger competition is coming from final-mile providers, that have considerably lower costs than the integrators, and from private fleets – notably Amazon, Walmart and Target, which are increasingly courting online merchants.

According to some observers, the integrators don’t have the cost structure to remain in the B2C delivery market. With the B2B sector in the doldrums and not expected to show a marked recovery this year, this makes frothy rate hikes a questionable strategy.