FedEx Reports 6.5% Profit Gain as Results Improve at All Units

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

FedEx Corp. last week reported that fiscal first-quarter net income for the period ended Aug. 31 rose 6.5% to $489 million, or $1.54 per share, as results improved in each of the company’s business segments.

That compares with net income in the same year-ago quarter of $459 million, or $1.45 per share.

Operating income, which excludes interest and taxes, rose fastest at the Express unit, increasing 14% to $236 million from $207 million the year before, reflecting cost reductions and reversing recent quarters when profits lagged.

The Ground unit’s operating income improved 5% to $468 million from $445 million as revenue and volume rose 11%.

FedEx Freight’s operating income inched up 1% to $91 million from $90 million.

Revenue across the Memphis, Tenn.-based company improved 2% to $11.0 billion from $10.8 billion.

“Growth in overall demand for our broad global portfolio of solutions drove our improved first-quarter results,” CEO Fred Smith said in a statement.

Throughout the company, cost-conscious shippers continued to choose lower-priced shipping options over premium.

In the Express segment, international economy shipments climbed 15%, while priority shipments fell. At the less-than-truckload unit, economy shipments rose 3%, while higher-priced priority shipments declined. The lowest-cost Ground option, known as SmartPost, rose 26%, outpacing shipment growth elsewhere in that unit.

“You can understand why customers are trading down,” Chief Financial Officer Alan Graf said on a conference call. “They get significantly better pricing and lose just a couple of days.”

At the Express unit, revenue dipped slightly to $6.61 billion from $6.63 billion last year, but the operating ratio improved to 96.4 from 96.9. The unit’s slow revenue growth was attributed to the timing of fuel surcharge collections.

Deutsche Bank analyst Justin Yagerman said in a Sept. 18 report that the profit-margin improvement at the Express unit was 1.3 percentage points greater than expected due to cost reductions. Earlier this year, FedEx trimmed its aircraft fleet and completed an employee buyout program.

The company also said average daily package volume from all Express services was 1% higher in a quarter with one less workday.

In the Freight segment, revenue rose 2% to $1.42 billion. The $25 million increase in revenue produced a $1 million improvement in profitability. The operating ratio was 93.6 in the first quarter, unchanged from a year ago.

Economy LTL shipments reached 27.6 million, while Priority freight totaled 61 million loads. Revenue per 100 pounds of freight was $19.99, up from $19.73, reflecting improvements in both the economy and priority categories.

Included in the latest LTL results were $15 million in higher intercompany and other costs, a $3 million drop in fuel costs and $8 million more in purchased transportation.

The purchased transportation increase reflected more use of rail for some linehaul shipments. Rail accounted for 17% of linehaul miles in the first quarter, up from 14% in the year-earlier period.

“We will keep investing in the fleet, obviously making sure we have appropriate equipment,” Bill Logue, president of Freight, said on a conference call. “Purchased transportation will always be a supplement to our linehaul.”

On a sequential basis, Freight profit improved from the fiscal fourth quarter, ended May 31.

LTL operating income more than doubled from $38 million in the fiscal fourth quarter, and revenue rose by $36 million. Some of the sequential improvement was due to a $33 million decline in intercompany costs linked to restricting.

At the Ground business, revenue rose 11% to $2.46 billion, faster than the 5% rise in operating income. As a result, the operating ratio worsened to 82.9 from 81.9.

Ground revenue growth was powered by improved performance in commercial and home-delivery services.

In addition to announcing earnings, FedEx said its Express rates will rise 3.9% on Jan. 6 for domestic shipments as well as international shipments to and from the United States.

There were no further announcements of rate changes for Ground and Freight last week, though FedEx said it will announce Ground increases later this year.

LTL rates rose 4.5% on July 1.

The company also maintained its forecast that earnings will rise as much as 13% over the fiscal year. That forecast is based on adjusted earnings per share, which excludes one-time costs such as plane and personnel cutbacks.

“We remain confident in our full-year earnings outlook despite tepid global economic growth,” Graf said.