FedEx Reports Lower Earnings; Reduces Future Profit Forecasts

This story appears in the Sept. 24 print edition of Transport Topics.

FedEx Corp. last week reported a lower fiscal first-quarter profit and reduced earnings forecasts, but said its less-than-truckload unit provided a bright spot by more than doubling its results.

For the three months ended Aug. 31, corporate net income slipped 1% to $459 million, or $1.45 cents per share, as operating income fell 28% at Express, the largest unit. Companywide, revenue rose 3% to $10.79 billion.

The company also said fiscal second-quarter profit could be as much as 22% below the average of Wall Street analysts surveyed by Bloomberg News.

“The slowdown in the global economy and global trade constrained results at FedEx Express,” said CEO Fred Smith on a conference call. “Growth rates have been lower than everyone wanted. Meanwhile, our FedEx Freight and FedEx Ground units performed well.”

The lower income before taxes and interest at Express was neutralized by Freight, its LTL unit, whose operating income increased to $90 million from $42 million, and by Ground’s profit growth of 9% to $445 million.

Smith and other company executives said that the weak economy prompted shippers to more carefully select shipping options for both international and domestic shipments.

As a result, economy shipments at the Express unit rose 13%, while higher-priced express shipments fell 2%.

At the LTL business, the trend toward lower-cost shipments resulted in a 12% volume increase during the quarter, while the unit’s more expensive priority freight volume rose just 0.3%.

Analysts said after FedEx’s report that the gradual process of trading down to more economical choices could be accelerating.

“Modal trade down in international lanes appears to be more permanent than we previously thought,” said Jefferies & Co. analyst Peter Nesvold.

“Part of the profit pressure hurting FedEx’s results is the trade-down effect (air to ocean; next-day to deferred, etc.),” said analyst Chris Ceraso of Credit Suisse. “While these shifts may be prompted by cyclical pressures, we suspect the effects will be long-lasting, as shippers reconfigure supply chains and grow accustomed to the margin benefits of cheaper transportation costs.”

The LTL unit took advantage of the surge in economy business to raise revenue from that freight by 10%. In total, Freight’s revenue rose $71 million to $1.4 billion. Expenses increased 2% to $1.31 billion.

As a result, the operating ratio improved to 93.6, which was better than the recent quarterly performance of all other publicly traded companies in the LTL sector except Old Dominion Freight Line.

It was also Freight’s best operating ratio since the 92.4 recorded in the fourth quarter of fiscal 2008 ended May 31.

On a quarter-to-quarter basis, Freight improved operating income by $8 million and booked $4 million more in revenue.

“The customer is embracing our new offering,” said Bill Logue, president of FedEx Freight, referring to the choice of priority or economy less-than-truckload freight.

However, the economy is weakening, and fuel prices are rising because of ineffective government, Smith said.

“[Government] policy choices in North America, Europe and China are having an effect on world trade,” he said, noting that trade is declining for the first time in 25 years, excluding recessions.

He linked fuel costs to government policies that control interest rates and encourage traders’ speculation in commodities such as crude oil, which drives up the price of jet fuel.

The effects of the economic softness were most visible at Express, where operating income, which excludes taxes and interest, dropped 28% to $207 million. Express revenue of $6.63 billion rose 1%. Operating expense rose 3%, including $261 million more for salaries, benefits and purchased transportation.

The picture was brighter at the ground package delivery business, whose revenue climbed 8% to $2.46 billion.

Most of that unit’s revenue increase resulted from 5% higher volume for ground packages, attributed to market share gains, and 18% growth in the SmartPost segment resulting from more deliveries of goods ordered online.

The operating ratio at Ground improved to 81.9 from 82.1 a year earlier.

FedEx also announced that Express rates will rise 3.9% on Jan. 7. In July, a 6.9% rate increase was announced at FedEx Freight. Adjustments in Ground rates will be announced later this year.

The company also said its fiscal second-quarter profit forecast of $1.30 per share to $1.45 per share excludes the expected results from cost reduction steps that will be announced at an investor meeting on Oct. 9-10.

FedEx also lowered its full year earnings forecast, on a per share basis, to a range of $6.20 to $6.60 per share from the earlier $6.90 per share to $7.40 per share.

FedEx, Memphis, Tenn., ranks No. 2 on the Transport Topics Top 100 list of the largest for-hire carriers in the United States and Canada.