FedEx working ‘to recover the cost of inflation’ through cost-cutting plan, analyst says

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Bank of America Senior Transportation Analyst Ken Hoexter joins Yahoo Finance Live to discuss FedEx quarterly earnings, the company’s cost-cutting efforts, improving service, and the outlook for FedEx.

Video Transcript

JULIE HYMAN: FedEx is getting a boost from investors after the company raised its outlook and said its cost-cutting efforts led to positive expansion for its Ground and Freight shipments-- freight segments. The shipping giant also announced it would slash its US headcount by 25,000 in May. It had talked about that headcount reduction. Now we have more of a timeline.

Bank of America Senior Transportation Analyst Ken Hoexter joins us now. Ken, thanks for being here. FedEx has really been trying to right the ship here. Where does it feel like we are in that journey?

KEN HOEXTER: So great. Good morning, Brad and Julie. I'd say that we're really just at the start. I think if you go back a year ago when they hosted their Analyst Day and they talked about how they were going to do $7 billion of cost adjustments, a billion dollars this year, about $4 billion between '23 and '25, and the $2 billion thereafter, these were almost pie in the sky type of numbers, just because that's about $21 of additional earnings on what then was about a $15 base.

So you think about the magnitude of what they did. And then they-- first quarter out of the box, they missed. So now we're actually starting to see tangible evidence. You mentioned the 25,000 employees. Only a couple of months ago, we were looking for 12,000. So that could be almost a billion dollars right there of just getting to that employee level.

So now that you're putting some concrete facts behind the numbers, it becomes more real. So I think we're just at the beginning of taking off on this cost-cutting program. And that surety of confidence that you get as they do each of those steps keeps building to get to the ultimate target.

BRAD SMITH: So as FedEx gets better about managing its own expenses, should businesses that they engage with and customers that are relying on their services, should they expect their prices to come down?

KEN HOEXTER: So I don't think you see prices come down. I think what you see is service improve, right? They talked about the average time of delivery going from 2.3 days a year ago to now two days. So you're actually improving the service. And I think there's a price for that.

And what you want to do is you want to charge for that. And I think you're going to see core pricing go up. Now, the printed pricing, the yields that we actually see, are likely going to come down just because fuel surcharges roll over, and that's a direct pass-through. So the printed price that we see on a yield basis may come down on a year-over-year basis, but the actual pure pricing that FedEx and UPS continue to recognize should go up and cover your inflationary costs.

JULIE HYMAN: Well, I was going to ask about it versus UPS in the pricing dynamic, Ken, because at what point, especially as we maybe start to see the economy deteriorate, do we see more of price competition? I mean, how comparable are they in pricing right now? And at what point are we going to have to see pricing come down in that scenario?

KEN HOEXTER: Well, I think you're pricing to the market. You're pricing to the service you're providing. So if you're improving service, you're trying to get a better return on that product, you're likely to see, again, like I said, pure pricing continue to stay up. They've had general rate increases that continue to pass through. In an inflationary environment, you want to cover those rising costs.

Remember, FedEx right now has, as much of the cost-cutting program we're talking about, printed a 1% margin at Express. They did do just about 9% at Ground. That's well below UPS, which is up at about 13% right now. So FedEx has-- they were mismanaged a year ago and for the past two years. They're trying to come back with some cost-cutting, some new management team and work on that.

So this is not about cutting pricing to win volumes. In a down market, that just decreases everybody's margins. You're looking at a market as a, I'd say, a duopolistic structure, but you still then have the post office. You have Amazon out there as competitors. But again, right now we're not seeing them chase to the bottom by using price. We're seeing them work to recover the cost of inflation by increasing pricing.

BRAD SMITH: How exposed is FedEx compared to its competitors to some of the macroeconomic challenges that regions internationally, like-- like Europe, are facing?

KEN HOEXTER: Absolutely. These are the most concurrent economically exposed companies in the transport world. You know, rails and trucks tend to be leading. Air freight tends to be mostly concurrent. So you're seeing that with the volumes, right? Volumes were down close to double digits on the Express side.

But what you're looking for in the monthly data, it actually was getting less negative. That's a good sign. If you look at the slides from FedEx, each month through the quarter got a little bit less negative. That might mean we've passed some of the worst. But you're right, they are very concurrent economically.

And Europe also seeing that weakness. But also, they just finished blending TNT and FedEx Europe together last May. And so now it's all going to be about going in and upselling that and growing the business, a part of the business that had lost a lot of share. So for FedEx, that's all about recovery in Europe. We're going to hear a lot about that at their April 5 DRIVE Analyst Day talking about the recovery and the potential in Europe.

BRAD SMITH: All right. And we know that you will most likely be present, or at least just listening very close. Bank of America senior transportation analyst Ken Hoexter. Ken, thanks for the time.

KEN HOEXTER: Thanks for having me.

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