Morningstar | FedEx Ground to Deliver Every Day--Good for Capacity and Utilization, Likely Near-Term Cost Headwind
We maintain our fair value estimate for FedEx after the firm announced plans to increase Ground delivery days and include Sunday beginning in January 2020. The firm currently delivers seven days per week during peak season and delivered six days per week year-round in 2019. Expanding Ground service from six to seven days seems a sound way to increase capacity without material facilities investment.FedEx indicated it will divert around 2 million daily SmartPost packages to internal delivery instead of handing off to the U.S. Postal Service, which is how most low-priced SmartPost packages are currently delivered. Ground handled 9.6 million average daily packages in the most recent quarter, including all SmartPost packages. We believe internalizing the full handling of greater SmartPost volume will improve package density and that will be increasingly important to guard Ground's typically midteens operating margins, given the margin challenges from growing business-to-consumer, or B2C, deliveries (chiefly delivering a mere one package per vehicle stop). The firm already diverts about 20% of SmartPost volume into the FedEx Ground delivery system and indicates that the "vast majority" of SmartPost packages will remain in the FedEx system by the end of 2020.
Still, we wouldn’t be surprised if Ground margins declined during the early quarters of this service because sortation staffing costs may increase in advance of improved facility utilization. Many Ground facilities are highly automated, but the fact remains that sortation employees will be working more days per week year-round.
FedEx also indicated it plans to invest to better handle oversize and heavy items in its Ground facilities. Such shipments constitute over 10% of current Ground volume. We've seen tires, mattresses, and 10-foot-long window blinds in Ground facilities--all currently requiring manual handling (often by two employees) rather than the efficient automated conveyor belt scan and sort.
FedEx provides transportation, e-commerce and business services through companies under the FedEx brand. These companies are included in the following segments: Federal Express Corporation, including TNT Express B.V., is an express transportation company; FedEx Ground Package System, Inc., which is a provider of small-package ground delivery services; FedEx Freight Corporation, which is a provider of less-than-truckload freight services; and FedEx Corporate Services, Inc., which provides sales, marketing, information technology, communications, customer service, technical support, billing and collections services, and certain back-office functions.
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