FedEx sees tough going

Despite remaining profitable over its second fiscal quarter, FedEx Corp. is increasingly feeling the pressure on its bottom line from a major slump in shipping volume – forcing it to cut costs and raise rates where it can.

Despite remaining profitable over its second fiscal quarter, FedEx Corp. is increasingly feeling the pressure on its bottom line from a major slump in shipping volume – forcing it to cut costs and raise rates where it can.

“Our financial performance is increasingly being challenged by some of the worst economic conditions in the company’s 35-year operating history,” said Frederick Smith, FedEx’s chairman, president & CEO, in the company’s second quarter earnings release.

“We are managing our costs and taking full advantage of market opportunities, and our team members are delivering every day on our promise to ‘make every customer experience outstanding,’” Smith noted. “However, with the decline in shipping trends during our second quarter and the expectation that economic conditions will remain very difficult through calendar 2009, we are taking additional actions necessary to help offset weak demand, protect our business and minimize the loss of jobs.”

FedEx already has cut over $1 billion of expenses for all of fiscal 2009, including: eliminating variable compensation payouts; a hiring freeze; volume-related reductions in labor hours and line-haul expenses; discretionary spending cuts, and personnel reductions at FedEx Freight and FedEx Office.

Smith said FedEx is now implementing a number of additional cost cuts as well, such as: a 20% reduction in his own salary, along with a 7.5% to 10% salary cut for other senior FedEx executives and a 5% pay reduction for U.S.-based salaried employees; elimination of calendar 2009 merit-based salary increases for U.S. salaried personnel; and suspension of 401(k) company matching contributions for a minimum of one year, effective February 1, 2009.

These additional actions are expected to reduce expenses by $200 million during the remainder of fiscal 2009 and by approximately $600 million in fiscal 2010, Smith noted. The company is also boosting rates at its LTL subsidiaries, FedEx Freight and FedEx National LTL, by 5.7% effective January 5 next year.

While earnings increased to $1.58 per diluted share in FedEx’s second fiscal quarter – up from $1.54 per diluted period over the same periods in 2007 – the company’s operating income was essentially flat, noted Alan B. Graf, Jr., FedEx executive vp & CFO.

Revenue increased 1% in the second fiscal quarter to $9.54 billion compared to the same period in 2007, but operating income barely budged at $784 million, up from $783 million last year. The operating margin declined to 8.2% from 8.3% the previous year, though net income rose 3% to $493 million. Graf noted total combined average daily package volume in the FedEx Express and FedEx Ground segments was down 2% year over year, as the weak economy reduced demand for shipping services.

“Operating income was essentially flat, as the company significantly benefited from rapidly declining fuel prices and from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust,” he said. “These benefits and the cost reduction activities were offset by the negative impact of lower shipping volumes resulting from the weak global economy.”

The company is still on target to earn $3.50 to $4.75 per diluted share for fiscal 2009, Graf stressed – a projection that assumes weak global macroeconomic conditions, anticipated volume gains from DHL and stable fuel prices. But he said FedEx will not provide third-quarter guidance due to significant economic uncertainty and the difficulty in forecasting the impact of recently acquired DHL customers. Capital spending is now expected to be $2.4 billion for fiscal 2009, down from $3 billion at the start of the year, he added.

“While the departure of DHL from the U.S. domestic package market presents a rare opportunity, significant uncertainty exists in the global economy,” Graf noted. “Our latest earnings outlook reflects that uncertainty and incorporates the expected savings from our cost reduction actions.”

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