Earnings Slip 12% to $438 Mln. at FedEx, Despite Gains at Ground, Freight Units

This story appears in the Dec. 24 & 31 print edition of Transport Topics.

FedEx Corp.’s Ground and Freight units increased fiscal second-quarter profit, cushioning the blow of lower profits at the Express business, the company reported last week.

Overall, quarterly net income slipped 12% to $438 million from $497 million last year, while revenue rose 5% to $11.1 billion from $10.59 billion for the period ended Nov. 30.

Freight’s profit nearly doubled to $76 million from $40 million, while Ground boosted earnings by $14 million. On the downside, the Express unit’s profit fell $112 million, or 33%, the company said Dec. 19.

“We’re very pleased with the operating results at FedEx Ground and FedEx Freight, which continue to show improvement,” Chairman and CEO Frederick Smith said on a conference call. “At FedEx Express, persistent weakness in the global economy and increasing demand for lower-yielding international services limited profits during the quarter.”

FedEx, Memphis, Tenn., said that Superstorm Sandy lowered quarterly earnings by 11 cents per share, or about $35 million, hurting every unit of the company. Holiday business volumes provided a boost, rising 13% companywide.

Freight revenue rose 4%, or $52 million, to reach $1.38 billion. The operating ratio was 94.5, better than the 97 in the year-earlier period.

The revenue increase was split equally between higher volume and improved rates. Demand strengthened, particularly in the Economy service option, where shipments increased 9%. The volume at Freight’s priority business fell 1%.

“We saw some good volume movement through November,” FedEx Freight President William Logue said. “We see continued improvement going forward. There’s significant upside for us on the Freight side.” “Our third quarter, which is December, January, February, is the most challenging quarter,” Logue added. “Our objective is to stay focused on continuing to build our base business, continue our efficiencies, and very focused on our contract renewals.”

Pricing also has remained solid at Freight, another company executive said.

“When you’re dealing with softness in the economy, and you have the number of competitors that we have in the LTL industry, there is certainly opportunity to see more aggressive pricing,” said Michael Glenn, executive vice president of market development and corporate communications. “I would consider the market rational.”

Ground revenue climbed 11% to $2.59 billion, and profit from that business rose 4% to $412 million from $398 million.

Average daily package volume rose 8% at FedEx Ground and rose 17% at the lower-priced SmartPost unit. Revenue per package rose 2% for both lines of business. The operating ratio was 84.1, worse than the 83 in the year-earlier period.

“The company is doing a good job of managing yields,” said a report by William Blair & Co. analyst Nate Brochmann, noting that profitability is improving in domestic markets despite steps by shippers to cut costs by using lower-cost options.

FedEx Express raised revenue 4% to $6.68 billion, but operating income fell to $230 million because shippers used more lower-priced services, fuel costs rose, pension costs increased and the superstorm reduced business levels. Its operating ratio worsened to 96.6 from 94.8.

Revenue growth was attributed to acquisitions and the company’s Trade Networks business that manages freight shipments around the world.

Express package volume in the United States fell 2%, but rates per piece rose 1%. International volume also rose, with the largest increase — 14% — occurring in deferred services.

Brochmann’s report also cited growth in international freight markets and market share gains, particularly in Europe and Asia.

“These results at least point to a stable environment with additional clarity hopefully near from a compromise to address the fiscal cliff,” Brochmann’s report said.

Glenn said FedEx expects 1.9% growth in the U.S. economy during 2013 and worldwide gross domestic product growth of 2.5%. He added that policy choices in the United States and Europe could alter that forecast.

FedEx also has targeted a $1.7 billion improvement in profitability by the end of fiscal 2015.

“I’m very confident we are well on our way to achieving this ambitious goal,” Smith said.

For the first half of the 2013 fiscal year, net income dropped 7% to $897 million, and revenue rose 4% to $21.9 billion, reflecting higher profits at the Freight and Ground units and weaker results at the Express unit.

Profit in the fiscal third quarter is expected to range from $393.8 million to $456.8 million, the company said. FedEx also continues to project earnings of as much as $2.08 billion for the full 2013 fiscal year, excluding the costs of job cutbacks that will be recorded in the fourth quarter.

Buyout costs are expected to range between $550 million and $650 million, the company announced.