Supply Chain Matters provides a follow-up to our previous commentary related to FedEx’earlier warning on operating results. Both FedEx and UPS volume performance are often important indicators of the current and near-term state of global supply chains.

Yesterday this global carrier formally reported operating results from its August fiscal quarter. Consistent with its earlier warning to Wall Street, FedEx reported earnings results of $1.45 per share, compared with $1.46 a year earlier, thus confirming flat growth. The carrier’s overall revenues were up 3 percent while operating income increased by 1 percent.  Overall operating margin was essentially flat.

Weakness in FedEx’s Express division was acknowledged as the prime culprit in reduced earnings.  Noteworthy was that U.S. domestic average package volumes for the Express segment declined 5 percent while international export average package volume fell by 4 percent.  Operating income for the Express segment was down 28 percent while operating margin fell a significant 1.3 percent to a value of 3.1 percent.

These numbers confirm that structural change has occurred within priority air transport with a significant number of international shippers opting for lower-cost ground based shipping methods. Operating volumes and financial results among both FedEx’s Ground and Freight segments reflected positive growth, reaffirming that global carriers such as FedEx and UPS continue to benefit from robust B2C shipment volume driven by online commerce, and by B2B supply chains opting for less costly ground movements.

Two other noteworthy developments came from yesterday’s earnings announcement.  First, FedEx significantly reduced its full fiscal 2013 earnings estimate.  The company now expects full year 2013 earnings to fall in the range of $6.20-$6.30 per share, compared to a prior forecast of $6.90-$7.40.  That is a significant decrease which in our view implies the growing effects of reduced global shipping activity.  FedEx management again indicated that some further structural re-structuring will occur in the Express segment, which will be announced in October.

More disturbing though, was an announced overall increase of 5.9 percent in shipping rates effective in early January.  FedEx was quick to point out those shipping rates for U.S. domestic, export and import movements would rise a net average of 3.9 percent after an adjusted two percentage reduction in current 2012 fuel surcharges.  Procurement teams overseeing transportation services had better get cracking on 2013 rate negotiations since this potentially represents an untimely increase in transportation costs.

As Supply Chain Matters has noted in previous commentary related to the ocean container segment, it is disturbing to note a continuing trend of global transportation carriers increasing rates to compensate for decreased supply chain shipping volumes, in essence shifting the burden of reduced activity back to shipping customers.  While high volume shippers will for the most part be somewhat protected by individual contract negotiations, smaller businesses and online consumers will more than likely bear the real brunt of these transportation rate increases. In 2013, online B2C fulfillment sites will have to factor two perceived increases in offered price for goods, one being the trend for increased collection of individual state sales taxes related to goods, and now increased shipping rates for consumers to actually receive their purchases.  The two could amount to a final price increase in excess of 10 percent. That does not factor any new disruption forces in energy markets which could drive fuel surcharges higher.

In our view, both FedEx and UPS need to be very cognizant of the fragile global economy.  Aggressive price increases in times of economic uncertainty may well tip the scale again in the ultimate determination of component and manufacturing sourcing, and in how consumers elect to buy goods.

Bob Ferrari