FedEx Profits Down 3% in Third Quarter on Winter Weather, High Fuel Costs

This story appears in the March 21 print edition of Transport Topics.

Global economic improvement allowed FedEx Corp. to pull in 11% more quarterly revenue, but the carrier saw its net income drop by 3%, as it had to battle severe winter weather, soaring fuel costs and $43 million of integration costs at its less-than-truckload unit.

In a March 17 earnings conference call, FedEx said it earned $231 million on revenue of $9.66 billion for the three months ended Feb. 28. In the same quarter a year ago, the Memphis, Tenn., corporation earned $239 million on revenue of $8.7 billion.

“Strong demand for our services drove revenue higher as volumes increased across our businesses,” Frederick Smith, FedEx chairman and chief executive officer, said. “Yields increased as we continued to focus sharply on managing FedEx for profitable growth.”

FedEx Ground, the truck-based, domestic parcel unit, led the quarter in operating income, producing 26% more than a year ago. FedEx Express remained profitable, but its earnings were 33% below last year, and LTL FedEx Freight saw its quarterly loss expand by 3%.

FedEx said the economy is sound enough to continue with its major yield-improvement campaign, but fuel costs and the situation in Japan remain as uncertainties that could cause problems. FedEx is the second-largest corporation in North American freight transportation behind UPS Inc.

Bloomberg News said FedEx shares jumped as much as 6% after the company said its per-share earnings for the quarter ending May 31 will be $1.66 to $1.83. Analysts had projected $1.66 on average, Bloomberg said.

The Ground division appeared immune to problems at the rest of the corporation, posting increases in revenue, net income, operating margin, volumes shipped and yields. Quarterly operating ratio — expenses as a percentage of revenue — improved to 85.1 from 86.5.

David Rebholz, president of the Ground division, said its SmartPost line did particularly well, fueled by online retail sales “in the dot.com world.”

SmartPost is an economy service that uses the U.S. Postal Service for final home delivery. Its daily package volume during the quarter increased by 17% to 1.74 million while revenue per package, or yield, increased by 7% to $1.70.

The Freight division has lost money in eight of the past nine quarters, dating back to the quarter ending February 2009. In the most recent period, it lost $110 million on quarterly revenue of $1.12 billion, but FedEx executives said they expect the losing streak to end in the current quarter.

Freight’s quarterly operating ratio improved to 109.8 from 110.3.

Reorganization expenses at Freight cost the corporation 8 cents a share but are now complete, FedEx said. Freight unified its regional and longhaul LTL networks as of Jan. 31.

The Freight division served as an ex-ample of FedEx’s corporatewide yield-management project. The project expanded quarterly revenue by 8%, year-over-year, even though the number of LTL shipments declined by 6%.

Analyst Matthew Brooklier of Piper Jaffray & Co. described the process as “trying to flush out some lower-yielding freight.”

As a result, Freight’s LTL revenue per hundredweight increased by 11% to $18.66.

T. Michael Glenn, an executive vice president, said the corporate-wide project “is in the first quarter of the football game and has three components.

Glenn said, “As we sign up new business, we’re signing that business up at higher average yields, so the pipeline of new business coming in is coming in at higher rates. Secondarily, we’re doing a terrific job at negotiating increases to our agreements as they come due. We’re also doing a great job clawing back surcharge discounts, all of which have a significant impact on yield.”

Corporatewide, FedEx spent $1.05 billion on fuel during the quarter, up 11% from $810 million a year ago. Glenn and other executives said the problem was not yet at the level of the infamous 2007-08 price spike, but there is no guarantee that prices won’t reach those levels.

Smith said Japan’s problems are “highly localized” within the country for now, but that it is important to continue monitoring the status of the nuclear plants.