FedEx's Price Hedge Against Slumping Demand

Few were surprised when FedEx Corp. reported decreased shipping volume for its overnight services in its first-quarter ending August 2008. FedEx spelled it out in its press releases and its 10-Q filing: a weak U.S. economy and persistently higher fuel prices had reduced demand for the overnight shipper's premium services.

Instead, customers had shifted to lower-priced options such as FedEx Ground, which experienced a four percent increase in package volume in the quarter. With volumes dropping off, it might seem counter-intuitive to increase shipping rates. Yet that is just what FedEx is doing. Effective January 2009, the company is increasing its rates by an average 6.9 percent. While the rate increase may seem like a shot in the foot, it may turn out to be a smart move for FedEx's bottom line. Shipping volumes may decline as customers cut back on shipping activity to control expenses. However, FedEx will earn higher revenue on the boxes and envelopes that do get sent. The result could be better coverage of fixed costs and higher profit margins.

So how will FedEx convince its customers to pay the higher rates? They will be giving customers a break on fuel surcharges instituted earlier in the year by reducing the price at which the surcharges kick in. Fuel surcharges beginning in January 2009 will decline by approximately 2 percent. Even though customers may think they saving on the fuel charges, the net increase will be near 4.9% on shipping rates and surcharges combined. It is all part of the enhanced customer experience that FedEx CEO Fred Smith says will help the company capture market share.

Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.