FedEx Corp. and Amazon.com Inc. no longer cross paths after the two severed their U.S. transportation relationship in 2019. However, the companies still have something in common: severe labor pains at the worst possible time.
In late September, FedEx (NYSE: FDX) reported fiscal 2022 first-quarter results that were impaired by higher labor costs and operational disruptions due to worker scarcity. On Thursday, Amazon (NASDAQ: AMZN) sang a similar tune in releasing its third-quarter results. Operating income at the Seattle-based e-tailer fell year-over-year to $4.9 billion from $6.2 billion, and net income was nearly halved to $3.2 billion. Earnings per share came in at $6.12 per diluted share, half of the 2020 quarter’s EPS and well below analysts’ consensus of $8.92 to $9.10 per diluted share.
Amazon shares were down more than 4% in after-hours trading after rising 1.5% in the regular session.
Amazon said it incurred $2 billion in additional third-quarter expenses due to higher labor costs, operational inefficiencies and the cost of investments. The company is supporting a fulfillment network that’s twice as large as it was in the early stage of the COVID-19 pandemic.
The fourth quarter will be a bottom-line doozy, if Amazon’s forecasts are accurate. The company expects to spend $4 billion more than it hoped as labor expenses and network disruptions increase in intensity with the surge in holiday traffic. Many deliveries will need to be rerouted in a costly and inconvenient manner due to staffing shortages at the intended destinations, Amazon said. Costs in general will spike as Amazon spends heavily to meet delivery commitments with a tsunami of traffic bearing down on it.
Those comments were remarkably similar to those made last month by FedEx when it said that operating results at its FedEx Ground unit, which will handle most of the company’s peak-season deliveries, were hurt by “higher labor costs and network inefficiencies due to inadequate staffing.”
Amazon’s labor issues will do a number on its fourth-quarter operating income. The company expects its operating bottom line to be no more than $3 billion, and it could end up being zero should the additional $4 billion cost anvil wipe out all of its operating profits. To put it in perspective, Amazon reported $6.9 billion in operating income in the 2020 fourth quarter, a period when headcount concerns were nowhere near as severe as they are today.
In each quarter since the pandemic hit, fulfillment capacity shortfalls were Amazon’s primary constraint, said CFO Brian Olsavsky on an analyst call following release of the results. It has now been replaced by labor costs and availability, Olsavsky said. Amazon will be managing through an elevated labor-driven cost structure for some time, Olsavsky said. Some of those costs, such as higher worker wages, are permanent, he added.
The labor issues are also impeding Amazon’s progress in restoring the reliability of its one-day shipping program to levels that existed before the pandemic, Olsavsky said.
The price of FedEx shares had dropped nearly 20% since the company disclosed its labor pains, though they have recovered in the past two weeks. Amazon shareholders can only wait and see what is in store for their holdings.