FedEx cuts forecast as air freight weakness hits profit

Wed Mar 20, 2013 12:17pm EDT

Federal Express trucks head out for deliveries from a FedEx station in Los Angeles, California June 18, 2008. REUTERS/Fred Prouser

Federal Express trucks head out for deliveries from a FedEx station in Los Angeles, California June 18, 2008.

Credit: Reuters/Fred Prouser

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(Reuters) - FedEx Corp cut its full-year forecast after a worse-than-expected quarterly profit as customers shift from air express to slower but cheaper modes of international shipping.

The No. 2 U.S. package-delivery company said it would step-up restructuring efforts, cut capacity in Asia and realign its global aircraft network to cut costs and boost earnings.

Shares of the company, which has cut its full-year earnings forecast twice in the last six months, fell more than 5 percent in morning trading on the New York Stock Exchange on Wednesday.

The company's express unit, its biggest source of revenue, has been hit as more cost-conscious international customers opt to use container ships instead of costly overnight shipment by air. Operating income in the express unit fell 66 percent in the third-quarter ended February 28.

FedEx said the express unit had underperformed largely due to weakness in Asia and other international markets, where margin pressures caused by excess capacity in the air freight industry had more than offset increased volumes.

"We have a yield issue that exaggerated itself this quarter over last quarter," Dave Bronczek, CEO of FedEx Express, said on a conference call with analysts.

FedEx, the world's biggest air freight company, plans to cut express capacity to and from Asia from April 1 and is looking at reducing its fleet by retiring more of its older, less-efficient aircraft, among other options to realign its network.

The actions, along with cost cuts, will help the express unit perform better in the current quarter, Bronczek said.

"They have got to lower their costs because they are getting paid a lot less for the packages they are shipping," said BB&T Capital Markets analyst Kevin Sterling.

"It is hard for them to adjust quickly because we are talking about planes which cannot just be parked in the garage overnight," said Sterling, who doesn't expect margins to improve for a few quarters.

Atlantic Equities analyst Rorrie Mars said FedEx's cost-cutting plans would be enough to boost earnings but margins would remain under pressure for the next couple of quarters.

FedEx, considered an economic bellwether because of the massive volume of goods it moves, forecast fourth-quarter adjusted earnings of $1.90 to $2.10 per share. Analysts on average expect $2.07 per share.

The company now expects a profit of $6.00 to $6.20 per share for fiscal 2013 ending May 31. It had earlier forecast $6.20 to $6.60 per share. Analysts on average expect earnings of $6.31 per share, according to Thomson Reuters I/B/E/S.

"Our forecast calls for modest growth in the global economy," Chief Executive Fred Smith said on the call. "The calendar 2013 outlook certainly remains uncertain due mainly to policy issues in the U.S., Europe and China."

Rival United Parcel Service Inc, which reported quarterly results in January, forecast weaker-than-expected 2013 profit, citing an uneven global economy.

UPS has less exposure to international markets than FedEx, Mars said. It also has more ground operations than air.

COST CUTS

FedEx announced plans in October to improve profits by $1.7 billion over four years by cutting costs in the express unit.

FedEx said a number of its executives accepted voluntary buyouts in early February, and that it had notified thousands more of their eligibility for buyouts.

On Wednesday, the company said it had cut its estimate of charges in fiscal 2013 resulting from the buyouts by $100 million, to $450 million to $550 million, mainly because of a hiring freeze.

Third-quarter net income fell 31 percent to $361 million, or $1.13 per share. Excluding items, FedEx earned $1.23 per share.

Revenue rose 4 percent to $11.0 billion. Analysts expected earnings of $1.38 per share on revenue of $10.85 billion.

FedEx shares were trading at $100.53 at midday, down 5.6 percent. UPS shares were down 0.5 percent at $84.64.

Memphis, Tennessee-based FedEx's shares have gained about 18 percent since the beginning of the year. UPS's shares have risen 16 percent, compared with a 9 percent rise in the S&P 500 index.

(Reporting by A. Ananthalakshmi in Bangalore; Editing by Saumyadeb Chakrabarty and Ted Kerr)

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Comments (3)
bikin4fun wrote:
FedEx and UPS increase their shipping rates every year from 3 to 7% no matter what, may be they should revise their rates to allow people to ship more often. The USPS is becoming more and more relevant in the field with their flat rates and no fuel surcharges. FedEx is taking their customers for granted and they do not realize the impact of the economy on the consumer. They are a strong player, delivering great service but they should calibrate their rates to be in tune with the economy. An express letter from Boston To CA should not cost near $40.00 to ship! Volume is being shifted to TNT and USPS. FedEx needs to wake up, Fred can you hear me?

Mar 20, 2013 9:38am EDT  --  Report as abuse
Humanist11 wrote:
It seems it is all about the yield. FedEx may realize a higher yield by keeping rates high and parking inefficient aircraft. It would do no good to fly gas guzzling, maintenance intensive, half empty airplanes just to squeeze a few more packages into the system.

It is not FedEx’s responsibility to manage the economy of the United States, but rather make profits for its share holders. FedEx will do this with excellent service and maintaining its image as the best in the express business. Quality business will recognize that and use the services of FedEx for a long time to come.

Mar 20, 2013 12:14pm EDT  --  Report as abuse
tom63950 wrote:
Day late and a dollar short- the Express market has been diminishing since the invention of the fax machine. Here comes another ‘one time charge-off” in the multi-million dollar range…
The Freight segment has undergone massive management turnover during the last two quarters.
The only thing keeping FedEx above water is the labor-free Ground segment, outperforming all expectations..

Mar 21, 2013 8:31pm EDT  --  Report as abuse
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