FedEx Q2 Earnings Call Highlights

FedEx (NYSE:FDX) executives highlighted revenue growth, margin expansion, and a higher full-year earnings outlook during the company’s second-quarter earnings call, while also addressing operational disruptions from the unexpected grounding of its MD-11 fleet and continued weakness in the less-than-truckload (LTL) freight market.

Quarterly performance and key headwinds

CEO Raj Subramaniam said the company delivered “high single-digit revenue growth, margin expansion, and high teens adjusted EPS growth” in the quarter despite multiple headwinds, including the MD-11 grounding, nationwide air traffic constraints, weakness in the industrial economy, and the impact of global trade policy changes.

On a consolidated basis, CFO John Dietrich reported adjusted earnings per share of $4.82, up 19% year-over-year. Consolidated revenue increased 7%, supporting 60 basis points of adjusted margin expansion and 17% growth in adjusted operating income.

Dietrich said adjusted operating income increased by $231 million despite several pressures, including:

• Headwinds tied to global trade policy changes
• Higher variable incentive compensation accruals
• Weaker-than-expected LTL results
• A $30 million impact from the expiration of a postal service contract
• A $25 million impact from the MD-11 grounding in the quarter

Express and domestic package strength drove operating leverage

Management emphasized strength in U.S. domestic package services as a key driver of the quarter’s results. Subramaniam said revenue rose 7% year-over-year, driven by yield and volume strength across U.S. domestic package services, while the company achieved targeted transformation-related savings.

At Federal Express Corporation (FEC), revenue rose 8% and adjusted operating income increased 24%, with adjusted operating margin up 100 basis points. Subramaniam noted this was FEC’s fifth consecutive quarter of year-over-year adjusted operating margin expansion. He also said nearly half of revenue growth was driven by B2B services, which he called an “important enabler” of profitability.

Chief Customer Officer Brie Carere said U.S. domestic package revenue rose 12% at FEC, and average daily domestic volume increased 6%. She cited a recent B2B healthcare win supporting growth in priority and deferred express services, and said onboarding of new Amazon business focused on large and heavyweight shipments was “going well.”

On pricing, Carere said U.S. domestic package yield increased over 5% at FEC. She also pointed to “strong capture” of peak-related demand surcharges and said the company expects strong capture of its 5.9% general rate increase that goes into effect next month.

Trade shifts and MD-11 grounding reshaped the network

Subramaniam described how shifting trade patterns and the MD-11 grounding required rapid network changes. He said FedEx reduced its “Purple Tail” trans-Pacific Asia-bound capacity by about 25% year-over-year and decreased third-party “White Tail” capacity by nearly 35%. He added that the company is shifting capacity to the Asia-to-Europe lane, which he said typically carries an attractive B2B mix of over 75% with high load factors.

On the MD-11 grounding, Subramaniam said safety was the top priority and that the company is working with Boeing and the FAA. Of the 34 MD-11s FedEx owns, 25 were in operation at the time of the grounding. He said the company revised its November schedule in three days and took multiple mitigation actions, including trucking more volume in the U.S., shifting volume to other aircraft, adding third-party lift, and adjusting maintenance timing while remaining compliant with regulatory guidelines.

Dietrich said the current outlook reflects the MD-11 aircraft returning to service in the fourth quarter. He warned that costs rise during peak shipping season, saying the company incurred about $25 million of impact in November, with “significantly higher costs” in December. He later quantified MD-11 grounding impacts embedded in the second-half headwinds as “up to a total of about $175 million,” with most expected in the third quarter.

Freight remains pressured ahead of planned spin-off

FedEx Freight results were weaker, reflecting LTL industry conditions and incremental separation expenses. Subramaniam said freight results remained pressured primarily due to lower volumes, partially offset by higher weight and revenue per shipment, which he attributed to a focus on revenue quality.

Carere said FedEx Freight revenue declined 2% and average daily shipments were down 4%, consistent with broader LTL trends. However, she said service quality metrics improved, with claims and damage performance among the best in company history and on-time service at the highest level since Q3 of fiscal 2021.

Dietrich said FedEx Freight adjusted operating income declined by $70 million and adjusted operating margin contracted 3 percentage points. He attributed the quarter’s underperformance to lower average daily shipments and cited a $25 million headwind from accelerated sales force hiring and other separation expenses.

In the Q&A session, Dietrich said that of the expected $300 million decline in Freight adjusted operating income embedded in the full-year outlook, $100 million is tied to separation costs, including accelerated sales force hiring, IT, and other expenses. He also said the remaining portion is driven by lower shipment volumes in line with LTL industry conditions, while noting the business saw a positive inflection in yield.

Outlook raised; capital returns and separation milestones

FedEx raised its fiscal 2026 adjusted EPS outlook to $17.80 to $19.00, up from the prior $17.20 to $19.00. Dietrich said the midpoint implies FEC revenue up about 7% with adjusted operating margin up slightly, while Freight revenue is expected to be down slightly with margins down year-over-year. The effective tax rate assumption remains about 25%.

Dietrich said the second-half outlook includes roughly a $600 million year-over-year headwind to adjusted operating income from three items:

• $160 million from continued softness in LTL
• Up to $175 million from MD-11 grounding impacts (mostly in Q3)
• About $265 million from increased variable incentive compensation accruals

He also said the company expects Q3 adjusted EPS to be sequentially lower than Q2, with Q4 expected to be the strongest adjusted EPS quarter of the fiscal year.

On capital allocation, Dietrich said FedEx repurchased nearly $300 million of stock during the quarter and has $1.3 billion remaining under its 2024 repurchase authorization. Year-to-date capital spending totaled $1.4 billion, and the company continues to target $4.5 billion in annual CapEx for fiscal 2026. He also reduced expected pension contributions to $275 million for fiscal 2026, down from a prior forecast of up to $400 million.

Regarding the planned separation of FedEx Freight, management reiterated it remains on track for June 1, 2026. Dietrich said FedEx submitted a confidential Form 10 to the SEC and requested a private letter ruling from the IRS on tax treatment, with the Form 10 expected to become public in January. He added FedEx intends to retain up to 19.9% of Freight’s shares at separation and monetize them within an IRS-permitted timeframe to preserve tax-free treatment. FedEx Freight plans to host an Investor Day on April 8 in New York City, while FedEx Corporation plans an Investor Day in February.

About FedEx (NYSE:FDX)

FedEx Corporation (NYSE: FDX) is a global logistics and courier company headquartered in Memphis, Tennessee. Founded by Frederick W. Smith in 1971 and beginning operations in the early 1970s, the company pioneered overnight express shipping and has since expanded into a diversified portfolio of transportation, e-commerce and supply-chain services. FedEx operates an integrated air-and-ground network that moves parcels, freight and documents for businesses and consumers worldwide.

FedEx’s core operating segments include express parcel delivery via its FedEx Express division, domestic and residential parcel delivery through FedEx Ground, less-than-truckload (LTL) freight services, and logistics and supply-chain management solutions.