Shares of logistics and freight forwarding company FedEx, one of the largest in the industry globally, plunged last Friday after it announced the result of a review of its numbers for the first quarter of this year.
FedEx withdrew its annual financial forecasts, which it had presented in June, and sounded alarm bells over weakening consumer demand. «First quarter results were negatively impacted by global volume weakness, which accelerated in the final weeks of the quarter», the company stated.
According to the report, results were especially influenced by macroeconomic weakness in Asia and service issues in Europe. The situation resulted in a revenue shortfall in this segment of approximately 500 million dollars compared to initial forecasts.
In this context, the company made the decision to ground aircraft, cut the working hours of part of its workforce and close more than ninety offices.
The American company sees a similar environment to other logistics and freight forwarding companies. In general, they point to a trend of consumers saving money in order to buy essentials, such as gasoline and food, as widespread inflation discourages online purchases of non essentials goods.
Its outlook contrasts, for example, with that of its rival United Parcel Service (UPS), whose management reaffirmed its full-year financial targets earlier this month, despite further shutdowns in China due to outbreaks of COVID-19 and the current energy situation in Europe.
After withdrawing its profit forecast, FedEx lost 11 billion dollars in market value, ending two years of stock market gains. Its shares plunged 21.4%, the worst one-day percentage drop in its history. «Conditions could deteriorate further in the current period», its management assured.
The company lowered its planned investment volume for the period from 6.8 billion to 6.3 billion dollars. However, it maintains its 1.5 billion share buyback plan. It expects to bill between 23.5 billion and 24 billion dollars in the second fiscal quarter.
Overall, shares of various players in the freight forwarding market remain vulnerable following the announcement. Analysts argue that global demand is undoubtedly moderating after months of boom. However, many of the difficulties faced by FedEx could be more related to the company’s own business characteristics. This would make it particularly vulnerable to a slowdown in demand.
The Express unit, which handles express and overnight deliveries, has posted operating margins below 7% over the past five years and an average of 5.7% since 2008. Delivering goods on short notice is capital-intensive: among other factors, it involves high costs for the purchase or lease of aircraft, their operation and maintenance.
For this reason, much of the company’s business has depended on the continued growth in demand for global air cargo transportation, an activity that has boomed in recent months. Especially since the beginning of the pandemic, the demand for supplies and goods has grown exponentially. At that juncture, aviation appeared as a valuable alternative, especially thanks to its speed.
However, it is now probably reaching its ceiling. Demand may even start to decline as more companies try to shorten their supply chains to avoid current problems and optimize their operations.
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