FedEx Took $450M Fiscal Q1 Hit From ‘Constrained' Labor Supply

The impact of “constrained labor markets” remains the biggest challenge for FedEx, as with most other large companies, said President-Chief Operating Officer Raj Subramaniam on an earnings call Tuesday for fiscal Q1 ended Aug. 31. He estimates FedEx incurred $450 million in added costs during the quarter from the labor shortages. The disclosures sent the stock tumbling 9.1% lower Wednesday to close at $229.08.

Competition for "frontline" FedEx Ground workers drove wages and “pay premiums” higher, but “the more significant impact is the widespread inefficiencies in our operation,” said Subramaniam. “Across the FedEx Ground network, there are more than 600,000 packages a day being rerouted” because some of its hubs have only 65% of the staffing required to handle their normal volume, he said. Though the problems are expected to “persist” through the peak holiday e-commerce period, “we are working strategically with several retailers to deliver a win-win-win solution -- win for the retailer, win for the end consumer and win for FedEx.”

Of the $450 million in added costs, about $200 million went to higher wages and “higher rates paid for third-party transportation services” to handle rerouted packages, said Chief Financial Officer Mike Lenz. The $250 million in added costs that Lenz attributed to "network inefficiencies" included adding “incremental” freight and delivery routes where necessary to enable the company to “bypass” some of its understaffed hubs “entirely,” said Subramaniam.

FedEx doesn’t view the labor shortage as an “us versus them situation at all,” said Subramaniam in Q&A. “Firms in every sector” are reporting “difficulty in attracting labor,” including more than three-quarters of the Fortune 500, he said. “The situation is very complex, not just the availability of workers impacted by safety concerns” with COVID-19's delta variant, he said. “Labor availability” is expected to recover in “the new calendar year,” he said.

FedEx is forecasting the U.S. parcel market will grow to 101 million packages a day by calendar 2022, for 12% year-over-year growth, said Chief Marketing and Communications Officer Brie Carere. That’s slightly lower than previous projections because e-commerce as a share of retail recently declined with the shift to in-store shopping and buying online, pickup in store, she said.

The “secular trend” of e-commerce growing as a percentage of retail “will continue to drive healthy parcel market growth,” said Carere. FedEx is forecasting the U.S. parcel market will rise at a 10% compound annual growth rate through 2026, she said.