FedEx’s Net Income Drops 53% in Quarter

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

FedEx Corp.’s Freight unit re-versed two quarters of losses and posted a $2 million profit in the first quarter of fiscal 2010, but the corporation’s net income fell 53% to $181 million from a year earlier.

The Freight business made money despite a 27% decline in revenue that included a 14% volume decline and a 13% fall in revenue per hundred pounds of freight, the company said on Sept. 17. In the comparable quarter a year before, the trucking unit earned $89 million, but it ended the second half of the fiscal year with two consecutive losses that totaled $165 million.

Frederick Smith, FedEx chief executive officer, said in a conference call that he expected moderate economic growth and that month-to-month volume increases at the company’s Freight and Ground units “are encouraging signs of a more stable economy.”

“The economy was slightly better during the first quarter, and confidence appears to be improving,” Smith said. He noted that industrial production has improved for the past two months, after 18 months of decline, adding, “the housing sector seems to have bottomed, and auto sales have picked up.”

Smith said FedEx anticipates 4% growth in industrial production, a significant driver of the company’s business, in the 2010 calendar year and a 2.9% rise in gross domestic product. He said FedEx expects GDP will grow at a 3% annual rate in the third quarter of 2009, followed by 4.9% in the fourth.

First-quarter revenue at FedEx Freight was $982 million, compared with $1.35 billion in the year-ago quarter. On a sequential basis, revenue rose by $34 million from $948 million in the fourth fiscal quarter, and expenses were shaved by $74 million to $980 million.

FedEx Freight’s 14% volume drop was less than the decline in freight at its largest freight competitor. For YRC Worldwide Inc., national volume fell 39% and regional freight fell 26% in the second quarter.

“Shipments increasing from month to month are not the normal seasonal pattern,” Avondale Partners analyst Donald Broughton told Transport Topics. “Usually, July is weaker than June, and August is weaker than July. For them [FedEx] to have exactly the opposite experience is only possible because they are stealing significant market share from their largest competitor.”

Freight’s operating ratio was 99.8 in the quarter, compared with 93.4 a year earlier and 111.2 in the fourth quarter of fiscal 2009.

Asked about the potential for FedEx to capitalize if there is a major event in the less-than-truckload industry, Douglas Duncan, who is president of FedEx Freight, said on a conference call: “Our driver force, our workforce is intact. We’re very prepared from a competitive standpoint, from a consolidation standpoint, which we believe will occur at some point.”

FedEx Corp.’s fiscal first-quarter net income was $181 million, or 58 cents a share, compared with $384 million, or $1.23 a share.

In the fiscal fourth quarter of 2009, FedEx lost $876 million because of impairment charges. Excluding those charges, FedEx’s earnings on a sequential basis fell from $200 million, or 64 cents a share.

Smith credited the results to better-than-expected international priority shipments, which trailed the prior year by just 4%.

Most of the decline in year-to-year corporate earnings was attributed to lower fuel surcharge collections, Chief Financial Officer Alan Graf said. Unfavorable exchange rates hurt results on the international business, he said.

FedEx relies on its Express business for about 60% of corporate revenue, which totaled $8.01 billion in the quarter, a decline of 23%. Express revenue in the 2010 quarter was $4.92 billion, 20% less than in the prior year. Operating income in that unit fell 70% to $104 million from $345 million.

At the Ground unit, operating income rose by 7% at the ground unit to $209 million from $196 million, though revenue slipped by almost 2% to $1.73 million from $1.76 billion, a performance that resulted primarily from cost-reduction efforts. As a result, the operating ratio at that unit improved to 87.9 from 88.9.

During the recession, FedEx has lowered costs by $3 billion by cutting wages and benefits and improving efficiency, Graf said, noting that about half of those savings were permanent.

For the fiscal second quarter, FedEx maintained its forecast that profit will range between 65 cents and 95 cents a share, or about half of the $1.58 per share earned in that quarter of fiscal 2009.