FedEx Q2 2026 Earnings Call Contradictions: Grounding Costs, Network 2.0 Savings, and International Headwinds Take Center Stage

Date of Call: December 18, 2025

Financials Results

• Revenue: Consolidated revenue grew 7% year-over-year
• EPS: $4.82 adjusted EPS in Q2, up 19% year-over-year
• Operating Margin: Adjusted operating margin expanded ~60 basis points year-over-year (FEC expanded 100 bps)

Guidance:

• Raised FY'26 adjusted EPS outlook to $17.80–$19.00.
• Consolidated revenue growth now expected 5%–6% for FY'26; FEC midpoint implies ~7% revenue growth.
• FedEx Freight revenue expected approximately flat to slightly down; yield offsets low single-digit shipment declines.
• Q3 adjusted EPS expected to be sequentially lower than Q2; Q4 expected to be strongest quarter.
• FY'26 effective tax rate ~25%; CapEx targeted at $4.5B; U.S. pension contributions ~$275M.

Business Commentary:

• Strong Financial Performance Amidst Challenges:
• FedEx reported adjusted earnings per share of $4.82 for Q2 2026, up 19% year-over-year.

• Despite external headwinds such as the grounding of the MD-11 fleet, nationwide air traffic constraints, and global trade policy changes, the company demonstrated resilience through network integration and optimization.

• Revenue Growth and Market Share:

• FedEx's revenue grew by 7% year-over-year in Q2, driven by strong domestic package services and yield management.
• The company's strategy of building a high-value business verticals and targeting profitable market share in B2B and B2C segments has led to nearly half of the revenue growth.

• Operational Efficiency and Transformation:
• FedEx achieved 17% adjusted operating income growth in Q2, with FEC's adjusted operating income increasing by 24%.

• The ongoing transformation efforts, particularly via the Network 2.0 and Tricolor initiatives, have led to improved profitability and margin expansion.

• Network Resilience and Contingency Planning:

• FedEx maintained high service levels during the peak season, mitigating the impact of the MD-11 grounding by implementing alternative measures like trucking and third-party lift.

• The company's swift network planning and flexibility were critical in ensuring customer commitments and stabilizing operations.

• Strategic Initiatives and Outlook:

• FedEx raised its adjusted EPS outlook to $17.80 to $19 due to strong execution and favorable trends in the first half of the fiscal year.
• The strategic separation of FedEx Freight and the ongoing digital transformation efforts, including AI adoption and data solutions, are positioned to unlock future value.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted strong Q2 performance: consolidated revenue +7% YOY, Q2 adjusted EPS $4.82 (+19% YOY), adjusted operating income +17%, FEC adjusted operating margin +100 bps, and they raised FY'26 adjusted EPS guidance to $17.80–$19.00 while citing execution on Network 2.0 and $1B of transformation savings.

Q&A:

• Question from Brandon Oglenski (Barclays Bank PLC): Can you discuss the dynamics driving domestic U.S. package share gains and pricing upside across B2C and B2B, and is there more room for yield gains?
  Response: FedEx is capturing profitable U.S. domestic share driven by a year‑long B2B focus, sales-compensation realignment, strong rate discipline and high surcharge capture; management expects to continue pushing B2B share and yield capture.

• Question from Jonathan Chappell (Evercore ISI): Of the nearly half of revenue growth from B2B in Q2, how much was new volume versus yield/surcharges, and should we expect similar contribution in the back half?
  Response: The B2B contribution was a mix—new account wins, share-of-wallet gains (including SMB) and yield/surcharge actions; management expects that mix to remain broadly consistent through the year.

• Question from Richa Talwar (Deutsche Bank AG): How much additional service-related cost is being carried (service tied to annual incentive comp), is that in the outlook, and how long until Network 2.0 efficiencies (e.g., Canada) fully materialize?
  Response: Service component in annual incentive comp increases near‑term expense and is embedded in the outlook; Network 2.0 efficiency recoveries typically materialize in ~3–6 months and are reflected in forecasts.

• Question from Christian Wetherbee (Wells Fargo Securities): For FedEx Freight's larger EBIT decline (from $100M to $300M), how much is temporary separation/spin prep versus market weakness?
  Response: About $100M of the incremental Freight headwind is separation/spin‑related (accelerated sales hiring, IT); the remainder is driven by weaker LTL market demand.

• Question from Brian Ossenbeck (JPMorgan Chase & Co): Are the separation costs excluded from EPS guidance, and what's the MD‑11 return timeline and Q3 impact magnitude?
  Response: Separation/spin prep costs are included in reported earnings; MD‑11s are expected back in service in Q4, with substantial incremental MD‑11-related costs concentrated in Q3 (notably December), driving a meaningful Q3 headwind.

• Question from Scott Group (Wolfe Research): Can you break down the $600M back‑half headwind into the three buckets and indicate Q3 exposure and year‑over‑year Q3 direction?
  Response: Back half $600M comprises ~ $160M of LTL softness, up to ~$175M MD‑11-related costs (majority in Q3), and ~ $265M higher variable incentive compensation; Q3 adjusted EPS will be sequentially lower than Q2.

• Question from Thomas Wadewitz (UBS Investment Bank): Is the refilling of incentive comp a multi‑year drag or a near‑term catch‑up, and how should we think about ongoing FEC margin improvement?
  Response: Management views incentive comp refill as a catch‑up this year (not expected to persist into FY'27); underlying FEC margin momentum remains strong despite near‑term headwinds.

• Question from Jordan Alliger (Goldman Sachs): What would drive upside to the high end ($19) of the EPS range?
  Response: Upside to $19 would come from a combination of stronger-than-expected revenue (volume/yield), improved LTL trends and better cost outcomes; broadly 'all of the above.'

• Question from Bascome Majors (Susquehanna Financial Group): Could a stronger UPS–Postal Service relationship or labor renewals reverse FedEx domestic parcel growth into FY'27?
  Response: Management does not view such developments as a material threat to FedEx's high‑value growth strategy (B2B, home delivery, ground commercial) and expects to continue taking profitable share.

• Question from Ken Hoexter (BofA Securities): Is the $300M Freight impact net of $100M separation costs (i.e., $200M market weakness), and are the $152M spin costs one‑time?
  Response: Yes — roughly $200M of the Freight hit is from lower ADV/market pressure; the ~$152M spin‑preparation costs are one‑time and treated as such.

• Question from Reed Seay (Stephens Inc.): By consolidation do you mean truckload capacity consolidation and is there any intentional rationalization of lower‑quality Freight volume ahead of the spin?
  Response: Management expects truckload capacity consolidation is beginning (which should benefit LTL over time) and noted a positive inflection in Freight yield, reflecting pricing discipline rather than deliberate large-scale volume shedding.

• Question from J. Bruce Chan (Stifel): If there were an adverse Supreme Court tariff ruling reversal, would that be a tailwind to trade next year and to your $1B headwind estimate?
  Response: Any tariff-related volume upside would be beneficial but is not assumed in current guidance; management will monitor developments but is not counting on them.

• Question from Stephanie Benjamin Moore (Jefferies): Can you provide more color on peak performance and channel/segment trends?
  Response: Peak is tracking to plan: mid‑single‑digit ADV growth and high‑single‑digit total peak volume (extra operating day); SMBs are slightly ahead, larger retailers slightly below, and network/time‑in‑transit performance remains strong despite MD‑11 constraints.

• Question from Ariel Rosa (Citigroup): What is the margin/cost profile difference for Network 2.0 automated facilities versus legacy facilities and the ramp timeline?
  Response: Management will provide more detail at Investor Day; tangible financial benefits from Network 2.0 are expected mainly in FY'27 though operational efficiencies are already improving performance.

• Question from Conor Cunningham (Melius Research): Can you discuss the opportunity in healthcare, SMB and the data‑center verticals?
  Response: Healthcare is a large multi‑year opportunity (~$70B market) where FedEx's digital, quality and cold‑chain capabilities are differentiators; SMB momentum is strong; data‑center logistics is smaller but growing and offers additional upside.

• Question from David Vernon (Sanford C. Bernstein): How should we reconcile Network 2.0 ramp targets (24% today) with modest near‑term margin impact?
  Response: Network 2.0 is at ~24% pre‑peak, targeted ~65% by next peak with ~30% footprint reduction by end FY'27 and ~ $2B of cost savings skewed to FY'27; some benefits are already embedded in transformation savings but material financial impact arrives later.

• Question from Jeffrey Kauffman (Vertical Research Partners): How will the remaining ~$450M of non‑GAAP add‑backs flow across the next two quarters—Network 2.0 vs freight separation?
  Response: The majority of remaining add‑backs are tied to the FedEx Freight separation; smaller portions are related to calendar change and ongoing business optimization.

Contradiction Point 1

MD-11 Grounding Costs

It directly impacts the financial outlook and operational costs for the company, potentially affecting earnings and investor expectations.

Are MD-11 grounding costs separate from spin-off costs? Are there additional thoughts on the MD-11 impact? - [Brian Ossenbeck](JPMorgan Chase & Co, Research Division)

2026Q2: We are grounding the aircraft under our MD-11 fleet, and we expect the grounding to impact our operating results by approximately $200 million in total in fiscal 2026, with $100 million in fiscal Q2, $70 million in fiscal Q3 and $30 million in fiscal Q4. - [John Dietrich](CFO)

What are the drivers of peak season strength and the outlook for FedEx Freight? - [Brian Ossenbeck](JPMorgan Chase & Co, Research Division)

2026Q1: We expect the grounding to cost a total of $200 million in fiscal 2026. - [Rajesh Subramaniam](CEO)

Contradiction Point 2

Network 2.0 Savings and Impact

It involves the expected timeline and impact of cost savings from Network 2.0, which is crucial for operational efficiency and profitability.

How does Network 2.0 impact margins and when will savings become significant? - [David Vernon](Sanford C. Bernstein & Co., LLC., Research Division)

2026Q2: Network 2.0 is expected to reduce costs and improve efficiency. Most savings will be realized in fiscal '27. - [Rajesh Subramaniam](CEO)

How will the $1 billion in Network 2.0 savings be distributed throughout the year and how are DRIVE savings incorporated into Q1? - [Daniel Imbro](Stephens Inc.)

2025Q4: We're expecting $200 million from both DRIVE and Network 2.0 in Q1. The $1 billion savings target for the year will include Network 2.0 savings, which are expected to have a material impact by end of fiscal year 2027. - [Rajesh Subramaniam](CEO)

Contradiction Point 3

International Export Headwinds

It involves the explanation and impact of international export headwinds, which can affect revenue and profitability in the given quarter.

Can you detail the costs related to the LTL spin-off and if any are temporary? - [Christian Wetherbee](Wells Fargo Securities, LLC, Research Division)

2026Q2: The $170 million headwind is primarily due to de minimis related to China to U.S. trade. We're also seeing ongoing trade negotiations in other regions that will further impact the trade environment. - [Brie A. Carere](CMO), [John W. Dietrich](CFO)

What is the expected timeline for tailwinds and headwinds this year, especially Q1's impact? - [Richa Harnain](Deutsche Bank AG)

2025Q4: The $170 million headwind is primarily due to de minimis related to China to U.S. trade. We're also seeing ongoing trade negotiations in other regions that will further impact the trade environment. - [Brie A. Carere](CMO), [John W. Dietrich](CFO)

Contradiction Point 4

B2B and B2C Market Dynamics

It involves the dynamics and performance of B2B and B2C markets, which are critical for strategic positioning and revenue growth.

Can you discuss recent trends in B2C and B2B dynamics, and whether additional yield gains are expected? - [Brandon Oglenski](Barclays Bank PLC, Research Division)

2026Q2: We're very pleased with the profitable market share in FEC. The incremental margin expansion at FEC is due to continued focus on B2B and disciplined rate capture. - [Brie Carere](CMO)

Can you provide an update on B2B and consumer demand trends in June? - [Jason Seidl](TD Cowen)

2025Q4: B2B is pressured, but May saw improved consumer demand, likely from onboarding new business rather than a consumer pull-forward. - [Brie A. Carere](CMO)

Contradiction Point 5

Network 2.0 and Operational Efficiency

It involves the progress and expected benefits of the Network 2.0 rollout, which is crucial for operational efficiency and cost savings.

What are the margin differences between Network 2 and legacy facilities? - [Ariel Rosa](Citigroup Inc., Research Division)

2026Q2: Network 2.0 is expected to provide significant operational efficiencies. The financial impact will be more pronounced in fiscal '27. - [John Dietrich](CFO)

How is the Network 2.0 rollout progressing, and what are the productivity benefits? - [David Vernon](Bernstein)

2025Q3: We've seen strong progress this quarter. We are already seeing benefits in yield improvements, reduced operational costs in our facilities, all the things we talked about. And we've executed now, we have 12% of our volume through the optimized facilities. - [Rajesh Subramaniam](CEO)