FedEx Profit for 3rd Quarter Tumbles 31% as Customers Pick Slower, Cheaper Service

By Seth Clevenger, Staff Reporter

This story appears in the March 25 print edition of Transport Topics.

FedEx Corp.’s fiscal third-quarter profit declined from a year earlier as international airfreight remained weak and customers increasingly selected slower, less expensive services, the company said last week.

The company also reduced its forecast for fiscal 2013 to range between $4.91 and $5.31 — down from a high end of $5.51 in recent guidance.

Likewise, it cut its capital spending forecast for the fiscal year to $3.6 billion from $3.9 billion in its previous forecast.

Net income for the quarter ended Feb. 28 fell 31% to $361 million, or $1.13 a share, from $521 million, or $1.65 a share, in the same period a year earlier. Revenue, however, rose 4% to $10.95 billion.

For the nine months, the Memphis, Tenn.-based company’s net income slipped 15% to $1.26 billion from $1.48 billion. Revenue was $32.85 billion, up 4% from $31.67 billion.

FedEx’s lower earnings reflect a 66% drop in its Express segment’s operating income, which fell to $118 million from $349 million a year ago, the company said on March 20.

“The third quarter was very challenging for FedEx Express due to continued weakness in international airfreight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit international services,” Chairman and CEO Frederick Smith said on a conference call.

In response, Smith said, Express will decrease its capacity to and from Asia beginning April 1 and will “aggressively manage traffic flows to place lower yielding traffic in lower-cost networks.”

Consequently, FedEx is examining how these actions may allow Express to retire more of its older, less efficient aircraft, Smith said.

Although the company’s Ground and Freight units continue to post “steady results,” international revenue at Express plunged by $100 million compared with its prior forecast, said CFO Alan Graf Jr.

“Our results for Express reflect a significant decline in profitability due to the ongoing shifts in demand to lower-yielding international services, a trend that has continued to accelerate this year versus our previous expectations,” Graf said.

Freight posted operating income of $4 million, compared with a loss of about $1 million a year earlier, as revenue edged up to $1.237 billion from $1.234 billion.

Average daily less-than-truckload shipments rose 1% to 80,500. Shipments in Freight’s priority business slipped 2% to 55,300 per day while its economy shipments rose 8% to 25,200 per day.

The segment’s operating ratio was 99.7, an improvement from 100.1 in the same period last year.

FedEx Freight is “still working its way out of the margin hole it dug for itself when it clogged its network with bad freight in 2009-2010,” analyst David Ross said in a note to clients of Stifel, Nicolaus & Co. after the earnings announcement. “At some point, we would like to see the company take a leap forward in margins rather than baby steps.”

Ground’s operating income edged up to $467 million from $465 million, while revenue climbed 11% year-over-year to $2.75 billion.

Average daily package volume at FedEx Ground increased 10% to 4.48 million and climbed 26% to 2.48 million at its SmartPost unit. Revenue per package rose 13 cents for Ground but declined 2 cents for SmartPost.

E-commerce and business-to-consumer shipment trends remain “a huge tailwind” for Ground as market share gains continue, said Ross, of Stifel, Nicolaus.

The segment’s operating ratio was 83, worse than the 81.2 ratio in the year-earlier period.

FedEx Express increased its revenue 2% to $6.7 billion, but operating ratio worsened to 98.2 from 94.7 in the year-earlier period.

The segment’s package volume in the United States edged up 1% while revenue per package increased by 17 cents. The volume of international export packages also increased, rising 4% from a year ago, but average revenue per package dropped by $2.02.

The third quarter included $47 million in realignment costs as the company began implementing a voluntary buyout program with some U.S. employees. FedEx said that, in early February, a number of officers and managing directors, primarily at FedEx Services and FedEx Express, accepted voluntary buyouts, and on Feb. 15, thousands of additional employees were notified of their eligibility for the buyout program.

The company said it expects buyout costs of $450 million and $550 million in fiscal 2013, with some additional costs expected in fiscal 2014.

The company said it is aiming to improve annual profitability at Express by $1.6 billion by the end of fiscal 2016.

Including the realignment costs, FedEx projected earnings ranging between 94 cents and $1.34 per share in the fourth quarter, down from a profit of $1.73 per share a year earlier.

FedEx is projecting “modest growth in the global economy,” said Michael Glenn, executive vice president of market development and corporate communications.

The company’s forecast calls for U.S. gross domestic product to grow 2% in 2013 and 2.5% in 2014, and for global GDP to grow 2.3% in 2013 and 3% in 2014.

FedEx Corp., based in Memphis, Tenn., ranks No. 2 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.