Profits fall for FedEx

High fuel prices and a slumping U.S. economy are the main culprits behind FedEx Corp.’s 6% decline in net income

High fuel prices and a slumping U.S. economy are the main culprits behind FedEx Corp.’s 6% decline in net income to $393 million for its third fiscal quarter. That performance compares to profits of $420 million at the same point in its previous fiscal year and comes despite a 10% hike in revenues to $9.44 billion, up from $8.59 billion.

“FedEx faces a challenging economic environment that includes persistently high oil prices, sluggish U.S. growth and continued concerns in the credit markets,” said Frederick Smith, FedEx chairman, president & CEO. “We are managing our costs while positioning our portfolio of global transportation solutions to increase our profitability and returns once conditions improve.”

The company’s operating margin dropped to 6.8%, down from 7.5% during its previous fiscal year as higher fuel prices and a weak U.S. economy limited demand for U.S. domestic express and LTL freight services as well as and copy and print services. The costs of retail service enhancement initiatives, increased marketing and technology expenses and higher expenses at FedEx Ground more than offset the benefits from lower variable compensation and favorable exchange rates, the company added.

Alan Graf, Jr., FedEx executive vp & CFO, said the company expects earnings during its fourth fiscal quarter to range from $1.60 to $1.80 per share compared to $1.96 per share in the fourth quarter of its last fiscal year. “Our fourth quarter earnings outlook has been impacted by higher than anticipated fuel prices and a weak U.S. economy,” Graf said. “Looking ahead to our fiscal 2009, we are expecting a continuation of fourth quarter trends, which would result in limited earnings growth next year. We are scrutinizing all expenses and investments to realign them with the current environment.”

FedEx Freight, FedEx’s LTL division, is suffering from a slump in shipment volume despite posting higher revenues. LTL shipments declined 3% year over year, as demand for these services continued to be restrained by the weak U.S. economy, FedEx said, although average daily LTL shipments improved sequentially throughout the quarter. LTL yield improved 5% year over year as higher rates, including the impact of a January rate increase, more than offset the company’s fuel surcharge reduction implemented in July.

Overall, FedEx Freight posted higher revenues of $1.16 billion for FedEx’s third fiscal quarter – up 5% from last year’s $1.10 billion – while operating income slipped 8% to $46 million and the LTL carrier’s operating margin was 4%, down from 4.5% the previous year. Operating income and margin decreased in the quarter due to the net impact of higher fuel costs and the fuel surcharge reduction, higher utilization of purchased transportation and fewer long-haul LTL shipments, FedEx noted.
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