FedEx’s Quarterly Profits Rise to $634 Mln.On Strong Performance of LTL Division

This story appears in the June 25 print edition of Transport Topics

FedEx Corp. said its fiscal fourth-quarter earnings, excluding a charge for aircraft retirements, rose to $634 million, helped by a 93% increase in operating income at the FedEx Freight segment.

FedEx’s results included 18% higher profit at its Ground business, but a 34% drop in the Express unit’s profit, as U.S. volume fell.

Overall revenue for the quarter ended May 31 was $11 billion, a 4% improvement from a year earlier. Earnings on a per-share basis were $1.99 in the quarter, compared with $1.75 a year earlier. FedEx earned $558 million in the year-earlier period.

Operating income, which ex-cludes interest and taxes, climbed to $81 million at FedEx Freight from $42 million on a year-over-year basis, and the results reversed a $1 million Freight loss in the prior quarter.

CEO Fred Smith credited the improvement at FedEx Freight to what he termed “a powerful new value proposition” at the less-than-truckload unit, with more than a year of experience offering a choice of priority or economy services.

Chief Financial Officer Alan Graf said FedEx Freight’s profit will “increase significantly” in the 2013 fiscal year due to pricing, volume and service improvements.

“Although domestic Express continues to slow, Ground is gaining market share,” said Sterne Agee analyst Jeffrey Kauffman in a report. “FedEx is gaining market share and growing both revenues and profits in Europe. FedEx’s LTL Freight business continues to improve margins and take market share.”

The industry’s largest LTL business raised revenue 7% to $1.4 billion, including 4% higher rates, mostly due to fuel surcharge. Volume rose 4%, and the operating ratio improved to 94.8.

While FedEx Freight’s results improved, company officials on a June 19 conference call voiced caution about overall market conditions.

“We expect moderate growth to continue in the U.S. and world economy,” Executive Vice President Mike Glenn said, projecting 2.2% growth in gross domestic product for 2012 and 2.4% in 2013. Those numbers, he said, assumed successful management of Europe’s debt crisis and favorable resolution of U.S. tax issues.

FedEx Ground raised operating income 18% to $494 million and boosted revenue 9% to $2.48 billion. Ground posted an 80 operating ratio, an improvement of 1.6 percentage points. Higher rates accounted for 5% of the revenue growth, with 3% coming from higher volume.

While Freight and Ground im-proved, Express’ operating income skidded, dropping 34% to $281 million. Revenue for that segment climbed 3% to $6.8 billion. Expenses rose $317 million, or 5%, to $6.51 billion. Fuel ac-counted for just $11 billion of the higher costs.

Domestic package volume, which accounts for 70% of Express business, fell 5%. That drop was offset by a 6% increase in domestic package rates.

Freight’s operating ratio, the best in nearly four years, was better than every publicly traded carrier’s most recent results except Old Dominion Freight Line. On a year-over-year basis, FedEx Freight’s operating ratio improved 2.6 percentage points from 96.8.

FedEx said that including the aircraft retirement costs, quarterly net income fell 1.5% to $550 million. For the full year, net income excluding the aircraft costs was $2.03 billion, or $6.41 per share, a 40% improvement over the $1.45 billion, or $4.57 per share, in the prior fiscal year.

The company said it expects to increase profits to as much as $2.35 billion, or $7.40 per share, in fiscal 2013. That forecast excludes expected benefits from cost cutting efforts that Smith said will be disclosed in October.Smith pledged that the changes FedEx plans to make will help both customers and the bottom line.

Graf said on the conference call that FedEx is working to get its costs in line due to tax and pension “headwinds” in the 2013 fiscal year.

Glenn noted another trend.

“Anytime you see [economic] softness, you will see some mode shift as customers evaluate their supply chain,” he said, explaining that action meant more use of lower-cost services.

William Logue, president of FedEx Freight, said LTL capital investment this fiscal year will be around $340 million, similar to 2012.

The company said LTL transit times are being accelerated on July 9 on more than 6,000 lanes for both priority and economy services.

When asked what else Freight could do to further improve its operating ratio, Logue said greater use of technology to automate functions such as dispatching and dock operations.

“We can balance [Freight] volume and yield growth,” Glenn said, and selectively adjust pricing or volume based on geography or demand levels.

Graf added that FedEx Freight also hopes to invest in “energy efficient” engines and win federal approval to run 33-foot trailers that can improve productivity and efficiency.