FedEx Corp. Profit Tumbles

By Rip Watson, Senior Reporter

This story appears in the March 23 print edition of Transport Topics.

FedEx Corp.’s freight unit last week posted its first-ever operating loss, falling victim to the recession that cut both rates and freight volumes. It announced cost-cutting moves that included job reductions and the closing of its California general office.

Less-than-truckload carrier FedEx Freight lost $59 million in the fiscal third quarter, compared with a profit of $46 million a year earlier, FedEx Corp. said. Profit at the parent corporation dropped 75%.

Freight shipments handled per day fell 13%, and revenue per 100 pounds of freight slipped 7%. The result was a 21% decline in revenue to $914 million for the quarter from $1.15 billion in the year-earlier quarter, FedEx said in its March 19 earnings report. Freight’s operating ratio for its fiscal third quarter climbed to 106.5 from 96 last year. In the fiscal second quarter, the ratio was 97.3.

“The operating loss reflects the extraordinary decline in demand for freight services, the continued competitive pricing environment, costs related to the consolidation of our freight regional offices and severance charges from personnel reductions,” FedEx said. “These negative factors were partially offset by lower variable incentive compensation and continued stringent cost-containment initiatives.”

The company didn’t specify how much of the loss related to cost-saving steps or how many positions were cut.

The move to cut jobs, working hours and network capacity at the freight unit continued a pattern that began late last year, when business volume softened for all fleets, leading FedEx Freight to cut 540 jobs (12-15, p. 3).

Overall, FedEx Corp. revenue fell 14% to $8.14 billion from $9.44 billion and operating income was $182 million, down 72% from $641 million. Net income slipped by 75% to $97 million, or 31 cents a share, from $393 million, or $1.26 a share.

“Our financial performance was sharply lower during the quarter due to the global recession,” said Frederick Smith, FedEx Corp.’s chief executive officer.

Smith said he saw some near-term potential for stronger demand, and other company officials said they thought the U.S. economy may have “bottomed out.”

“The inventories are now being bled off and will have to be restocked later in the year if the economy stays even at these levels,” Smith said.

The company’s FedEx Express unit also experienced a sharp drop in profitability, with operating income falling 89% to $45 million from $425 million. Only the Ground unit was able to improve performance, boosting operating income by 15% to $196 million from $170 million.

Domestic package revenue at Express fell 15% to $5.1 billion, reflecting a 12% drop in revenue per package and a 3% volume decline. International package volume fell 13% and revenue per package fell 8%.

Ground revenue rose 4% to $1.79 billion from $1.72 billion, including 2% increases in both volume and yield. Results were helped by the departure of DHL from the U.S. domestic package business, as well as lower fuel prices, FedEx said.

The latest cost-reduction efforts, aimed at saving $1 billion in the 2010 fiscal year, will result in a fourth-quarter charge of $100 million.

FedEx also said it was cutting pay and pension for workers outside the United States, following on its action in December to cut pay for salaried workers by at least 5% and by 20% for Smith.

“With industrial production and global trade trends worsening since last quarter, we are applying these additional measures to continue to secure as many of our jobs as possible,” Smith said.

Douglas Duncan, FedEx Freight chief executive officer, said on the conference call that the reduction in workers’ hours was equival-ent to the decline in freight volume.

Duncan said the downturn in the housing and construction industry, as well as reduced consumer purchases, hurt results for the trucking operation. He also said the unit was gaining market share, without giving specifics.