FedEx’s Net Income Declines After Charges for Retiring Aircraft, Buyouts

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

FedEx Corp. reported that its fourth-quarter and yearly earnings declined due to one-time charges the company took for aircraft and personnel changes.

The carrier said these charges will improve operational efficiency and lead to higher rates of net income during the fiscal year that just began.

The No. 2 North American freight transportation company had net income of $303 million, or 95 cents a share, on revenue of $11.4 billion for the quarter ended May 31. During the same period last year, the company earned $550 million, or $1.73 a share, on revenue of $11 billion.

For the fiscal year, FedEx earned $1.56 billion, or $4.91 a share, on revenue of $44.29 billion. The year before, the company earned $2.03 billion, or $6.41 a share, on revenue of $42.68 billion.

Quarterly operating income decreased, year-over-year, at all three of the company’s major segments, although none of the segments posted a loss.

Excluding the two special charges for personnel and aircraft, the Memphis, Tenn.-based company said quarterly earnings would have increased by 7.1%.

“We are taking actions to better align our global networks with demand. We’re confident our business strategy is correct and we believe we’re positioning FedEx for profitable long-term growth,” Chairman and CEO Frederick Smith said during a June 19 earnings call.

The company’s voluntary employee separation program, agreed to by 3,600 people, generated costs of $313 million after taxes, or 98 cents a share, for the quarter, and $353 million, or $1.11 a share, for the fiscal year.

FedEx also took an after-tax, noncash charge of $63 million, or 20 cents a share, in the quarter related to the retirement of 10 aircraft and related engines.

The charges consumed all of the quarterly operating profits at the FedEx Express division, which broke even on revenue of $6.98 billion. In the year-ago period, it earned $281 million on revenue of $6.80 billion.

Stock analysts questioned management on whether FedEx has too many cargo jets and whether the company’s lucrative International Priority service is being cannibalized by the less expensive International Economy line.

Smith and other executives said it is the difficult challenge of management to route freight through the appropriate service network and make sure each network has the needed resources to satisfy customer demand.

“I think there’s this implicit belief in the questioning that the growth of the economy sector for FedEx is a bad thing,” Smith said. “Our issue was simply that we had too much of the Priority capacity up and we needed to be more aggressive in the Economy sector, and that’s what [the Express president] has done.”

As for the number of cargo jets, FedEx’s fleet size decreased to 647 as of May 31, from 660 at the end of the previous fiscal year. Smith said the company is only buying replacement jets, not adding capacity, but the expensive new jets are far more fuel-efficient than the models being retired.

The company was scheduled to fly its last Boeing 727 on June 21.

Analyst Donald Broughton of Avondale Partners found Smith’s arguments convincing.

“FedEx management an-nounced the [personnel] restructuring last year because the marketplace is changing, and they acknowledge that. The new planes are expensive to buy, but they are more efficient and you need fewer of them, so they cost less to operate,” said Broughton, who is known in trucking for his work on fleet bankruptcies.

While the Express unit generates a majority of revenue, FedEx Ground produces a majority of profit. The truck-based parcel unit provided $464 million in quarterly operating profit of the company’s $502 million total.

The business-to-business and home-delivery lines saw a 10% volume increase for the quarter, while the SmartPost budget line surged by 25%.

“Ground has stolen market share from UPS Ground for 54 quarters [13½ years] in a row. I’d call that a trend,” said Broughton.

UPS Inc. is the No. 1 North American freight transportation company.

The less-than-truckload FedEx Freight unit remained profitable, but at a low level, earning $38 million on quarterly revenue of $1.39 billion. Operating ratio — expenses as a percentage of revenue — deteriorated to 97.3 from 94.2 in the year-ago period.

Chief Financial Officer Alan Graf said, “Demand in the LTL market remains weak.”

Capital expenditures declined to $3.37 billion in the fiscal year just ended from $4.01 billion the previous year. For the fiscal year started June 1, the company anticipates capital spending will rise back to $4 billion.

Based, in part, on the personnel and aircraft expenses, earnings per share for the year just begun are forecast to rise by 7% to 13% over the level for the year just ended.