Premium shipping services, rising pricing and fuel surcharges are key contributors to FedEx’s most recent financial results, and the company is increasing its stake in the higher-margin logistics markets. The US transportation group said it posted better-than-expected third-quarter results, aided by higher shipment volumes and continued improvements in its network restructuring. However, the company’s profitability may be limited in the short term by higher labor costs and tight capacity in the outsourced trucking market, as the company prepares for the holiday peak season.
Consolidated revenues were up 12% over the prior year to $22.9 billion, and adjusted operating income was $1.2 billion, up 16%. Adjusted earnings per share increased 28% to $3.74. FedEx beat Wall Street expectations when it reported results after the market closed Wednesday.
In particular, higher fuel surcharges were significant, accounting for about a quarter of the company’s revenue growth. The remainder of the performance was supported by improved pricing, volume growth and structural savings from network optimization.
The group has already shut 260 delivery stations under its restructuring program. FedEx expects the network and corporate changes to deliver $1 billion in recurring savings by the end of this year, ramping up to $2 billion in recurring savings by the end of 2027.
Network 2.0 hits its first major peak season.
FedEx is also accelerating the integration of its Ground and Express services as part of its Network 2.0 program, which aims to simplify its distribution infrastructure and improve operational efficiency.
Integration is already a reality in several large metropolitan areas, including Dallas, San Francisco, Phoenix and Washington, D.C. The Canadian network was integrated last year as well.
On the company’s earnings conference call, CEO Raj Subramaniam told analysts that Los Angeles, Charlotte, N.C. and Oklahoma City are the next locations scheduled to be integrated early next year.
This year’s holiday peak marks the first season FedEx will use Network 2.0 at scale. We expect approximately 65% of eligible shipment volumes to flow through facilities that can support both Ground and Express operations.
The company also lifted its full-year financial guidance. Revenue is forecast to grow 12% vs. the previous 11% forecast. The company sees adjusted diluted EPS of $18.30 at the mid-point of its guidance, compared with the prior view of $17.50.
The latest results also mark the first quarterly earnings report under FedEx’s new calendar-year reporting structure. The company has shifted from its previous fiscal year-end date of May 31 to December 31. As part of the transition, FedEx also released its regular quarterly results and its fourth-month financial results for June.
A strategic pivot to higher margin industries
Like competitor UPS, FedEx has been focusing since 2024 on industries that need full-service logistics solutions, rather than just transportation services.
Its priorities include aerospace, automotive, healthcare and high technology. The company is reducing exposure to less profitable local and regional last-mile delivery operations that serve price-sensitive e-commerce retailers.
Today, 60% of FedEx’s business is in business-to-business activities.
Its two fastest growing markets, artificial intelligence and data center operations, saw the strongest growth in the quarter. Healthcare also increased at double-digit rates.
A growing demand for AI infrastructure also provides further opportunities for the group, particularly through changing trade patterns across the Asia-Pacific region and increasing trans-Pacific freight movements. A recent report by Frost & Sullivan, sponsored by FedEx, explored the impact of artificial intelligence on these trends.
FedEx is also growing its specialized automotive logistics offering. The service, which was launched roughly one year ago, offers manufacturers dedicated operational teams, 24/7 support, flexible international pick-up and better visibility of shipments.
The initiative is starting to pay off commercially. FedEx’s Chief Commercial Officer Brie Caregivere said the company began serving 13 large automotive customers in the third quarter.
FedEx’s premium logistics bet buoyed by air freight growth
In addition to transforming its ground network, FedEx is also restructuring its airline operations to improve aircraft utilization and capture additional freight demand.
Under its Tricolor initiative, the company is separating overnight Express parcels from deferred palletized shipments. The approach aims at increasing aircraft loading density, optimizing work force allocation and reducing operating costs.
It also builds capacity to attract heavier, higher-value freight traditionally handled by specialized logistics providers.
The strategy is delivering encouraging results. The average daily weight of freight was up 15% year over year and FedEx said it gained market share in the air freight market.
DHL Express is pursuing a similar strategy, aiming to boost volumes of heavyweight cargo to make better use of the capacity of its parcel aircraft.
FedEx’s broad capabilities across industrial sectors are helping the company capture freight demand from customers that historically have been primarily parcel customers, said Raj Subramaniam.
He gave two examples: a 15-fold increase in aircraft engine shipments and winning new air freight business from an AI data center customer after more than 40 years of relationship heavily focused on parcel services.
“Increased customer relationships and customized logistics solutions are becoming competitive advantages, enabling FedEx to provide a wider range of transportation needs,” said the CEO.
US domestic operations: higher costs offset by revenue growth
FedEx’s domestic operating revenue was up 10 percent from the year-ago period. Average daily package volume rose 2%.
By contrast adjusted operating margins fell 20 basis points to 6.6%. Increased fuel and purchased transportation costs partially offset savings from the network restructuring.
The company’s Ground Economy home delivery product also saw a 4% drop in shipments. The move was a calculated retrenchment as FedEx’s price increases deterred some price-sensitive retailers from using the service.
But management is optimistic about the upcoming holiday peak. Domestic revenues expected to grow 10% q/q.
The company’s 30 largest customers are forecasting about 2% growth in average daily parcel volumes between Black Friday and Christmas.
But transportation costs could be a big drag on earnings growth in the fourth quarter.
FedEx now contracts out about 10% of its linehaul transportation operations. “Trucking rates remain elevated, particularly in the truckload market, and we expect to incur an additional $130 million in monthly costs,” executives said.
FedEx plans to gradually internalize more linehaul operations in 2022 to address the situation. The company also said it may make targeted changes to commercial pricing.
FedEx might move some shipments to rail, where intermodal services usually cost less than traditional truckload transportation, said TD Cowen analyst Jason Seidl.
Another problem is the cost of labor. The new pilot agreement is expected to result in about $100 million in above-normal wage inflation each quarter through 2027 at the company.
Aircraft maintenance costs are rising, too. FedEx expects another $80 million of costs versus the fourth quarter of 2025, reflecting the need for extensive heavy inspections on more aircraft.
Management expects that the recently implemented peak season surcharges will more directly contribute to earnings. Also planned is a general rate rise of 5.9% next year.
Increased freight demand is good for international operations
FedEx said its international business saw especially strong growth in the quarter.
International Express revenues rose 17 percent, reflecting higher fuel surcharges, improved package and freight pricing, and increased overseas export and freight volume. Margins were up 4% versus a year ago.
International freight revenue posted an even stronger performance, up 28% partly due to demand from the data center industry.
Recovering trade flows between the U.S. and China also benefited the international economy and freight segments. Trade tensions between the two countries led to a sharp decline in traffic along the commercial corridor.
Also supporting were demand from large cloud service providers and technology companies.
But not all types of shipment performed equally well. US low-yield exports fell 11% in the third quarter.
“FedEx might raise prices next year to cut less profitable freight volumes and improve its overall revenue mix,” said Jason Seidl.
Europe: Network consolidation reshapes operations in France, Italy
FedEx continues to reconfigure its European operations, long plagued by fragmented national structures that have made managing cross-border shipments difficult.
The idea is to create a more integrated network so that clients will be able to better manage international deliveries across European markets.
The company has already closed 17 stations in France and modernized two hubs and 16 stations with the installation of advanced automated sorting systems.
New tracking and monitoring technologies have been installed in another 32 stations, according to Raj Subramaniam.
Italy is going through a similar transformation, with FedEx focusing on higher value international B2B transportation and export services.
The company is downsizing its Italian hub network from eight to three facilities, and is progressively cutting back the number of operating stations.
In June an important milestone was reached, when two stations in the Milan area were merged in a newly upgraded facility. The site is expected to provide improved efficiency of pickup and delivery in one of Italy’s most densely populated areas.
FedEx is also planning to make major cuts to its domestic operating capacity across Europe. Italy will see a 20% cut, the United Kingdom 30% and France 40%.
The restructuring will not be limited to infrastructure. FedEx also plans to alter the mix of its European shipment volumes by directing its commercial teams toward stronger intercontinental and intra-European traffic, while decreasing lower-yielding domestic shipments.
The company remains on track to achieve its goal of $650 million in adjusted operating income in Europe by the end of 2029, Subramaniam said.
MD-11 freighters slowly coming back to life
Most of FedEx’s three-engine MD-11 freighters have returned to active service after repairs to a design flaw identified by Boeing, the company has also confirmed.
The defect could have caused fatigue cracks in the aircraft’s engine pylon. US authorities grounded operators’ fleets for several months following a fatal crash of a UPS-operated MD-11 last November.
Most of the affected FedEx planes have been corrected under Boeing’s instructions and put back into service.
Strategic disposals and new opportunities in European parcel delivery
Key changes to FedEx’s business portfolio are part of its restructuring strategy.
Earlier this month, the company closed its $1.4 billion sale of its contract logistics subsidiary, FedEx Supply Chain, to CMA CGM of France, one of the world’s largest shipping and logistics groups.
The transaction enables FedEx to focus resources on its core freight transportation business, the company said.
Separately, a consortium of investors is close to completing the $9.2 billion InPost deal. The deal is expected to give FedEx a 37 percent stake in the European express delivery firm.
This would increase its market share in the European B2C parcels market but also offer it the opportunity to develop other growth possibilities without affecting its core B2B activities.
FedEx also named AutoZone executive Jamere Jackson as its next Chief Financial Officer earlier this week.
Share buybacks reinforce investor returns
FedEx’s adjusted financial results exclude $270 million in expenses associated with network restructuring and the separation of FedEx Freight last summer.
The company also returned capital to shareholders through a $2 billion share repurchase program during the quarter.
Equity analysts continue to express confidence in FedEx’s prospects, pointing to improving shipment volumes and the potential for stronger margins once the integration of its US ground network is completed next year.
The ongoing restructuring of European operations is also expected to contribute to future profitability.
FedEx shares were trading at $307.08 late Thursday, recording a gain of less than one dollar.
Despite mounting pressure from pilot compensation, aircraft maintenance and outsourced trucking expenses, the company is maintaining its strategic focus on premium logistics, international freight and specialized services for high-value industrial sectors.
