FedEx reports 1 percent decline in fiscal first quarter net income

Fiscal first quarter net income for global transportation and parcel bellwether FedEx at $459 million fell 1 percent annually from $464 million, the company said in its earnings announcement today.

Quarterly revenue of $10.79 billion was up 3 percent from last year’s $10.52 billion, and operating income at $742 million was up 1 percent from $737 million. Its operating margin—at 6.9 percent—was down 7.0 percent. FedEx reported earnings per share of $1.45, which was down $1.46 from last year. This was above its previous revised estimate of $1.37-$1.43 per share.

“As we announced on September 4, weakness in the global economy constrained revenue growth at FedEx Express during our first quarter and affected our earnings,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, in a statement. “Meanwhile, our FedEx Ground and FedEx Freight segments performed well, with both improving their year-over-year operating margins. We are taking further actions to reduce costs and adjust our networks to match current and anticipated shipment volumes.”

And T. Michael Glenn, FedEx executive vice president, market development and corporate communications, said on an earnings conference call this morning, that that on the economic front FedEx continues to see “modest growth in the global economy,” adding that the company’s calendar year 2012 GDP growth forecast is 2.2 percent and 1.9 percent for calendar year 2013. He said FedEx expects 4.2 percent growth for industrial production in 2012 and 3 percent in 2013, which are both lower than previous forecasts.

Individual unit quarterly performances: FedEx Express quarterly revenue was up 1 percent at $6.63 billion, with an operating margin of 3.1 percent, down from last year’s 4.4 percent and an operating income of $207 million for a 28 percent annual decrease. FedEx said revenue growth was constrained by global economic conditions.

Revenue at FedEx Ground was up 8 percent at $2.46 billion, with an operating margin of 18.1 percent, compared to 17.9 percent last year, and an operating income of $445 million for a 9 percent annual gain.

FedEx Freight revenue at $1.40 billion was up 5 percent from $1.33 billion last year, with an operating margin at 6.4 percent compared to 3.2 percent a year ago. FedEx Freight had an operating income of $90 million which was up 114 percent from $42 million.

FedEx Freight yield was up 2 percent due to improvements in its FedEx Freight economy yields, and average daily shipments rose 4 percent due to an increase in customer demand for FedEx Freight Economy service in all lengths of haul, said FedEx. Weight per LTL shipment fell 1 percent to 1,150 pounds, and composite LTL yield—at $19.72—rose 2 percent.

Average daily package volumes at FedEx Ground were up 5 percent at 3.898 million packages per day, due to increases in business-to-business and FedEx Home Delivery services, according to FedEx officials. And revenue per package saw a 2 percent gain $8.94 due to increased rates.

FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service saw daily volume spike 18 percent at 1.664 million average daily packages per day due largely to increasing e-commerce activity and revenue per package at $1.75 down 1 percent, due mainly to higher postage rates.

Total U.S. domestic express packages at 2.429 million per day saw a 5 percent annual decline, while International Priority at 408,000 packages per day dipped 2 percent, and International Domestic was up 53 percent at 681,000 packages per day. Total revenue per U.S. domestic package at $17.33 was up 2 percent, due to higher rates while total revenue per package for International Priority and International Domestic at $62.68 and $7.00 were down 3 percent and down 2 percent, respectively.

Rate increases: FedEx also announced various rate increases today, with FedEx Express rates going up by a net average of 3.9 percent for U.S. domestic, U.S. export, and U.S. import services, effective January 7, 2013. Its full average rate of 5.9 percent is offset by a fuel surcharge reduction of 2 percentage points. The company said that 2013 rate changes for FedEx Ground and FedEx SmartPost will be announced later in 2012, and FedEx Freight rolled out a 5.9 percent general rate increase in July.

In his remarks on the call, Smith said there are “significant efforts underway” to reduce costs in the Express segment, which will be discussed in full detail at the company’s investor meeting in Memphis in early October.

And FedEx Chief Financial Officer Alan Graf said on the call that FedEx is taking actions to reduce costs and improve efficiencies and adjust its networks to match anticipated demand to build on actions taken earlier this year and during the fiscal first quarter, including a voluntary buyout plan and decisions to retire certain aircraft and modernize its Express fleet.

Looking ahead, FedEx expects earnings per share of $1.30-$1.45 in the fiscal second quarter and $6.20-$6.60 per share for fiscal 2013, which is down from previous full year guidance of $6.90-$7.40 per share. Graf said this guidance assumes weaker economic growth in the economy than expected when guidance was first issued.

Jerry Hempstead, principal of Orlando-based Hempstead Consulting, said that the decline in domestic air express volume and the 5 percent annual decline in domestic air express volumes is problematic for FedEx.

“Domestic air express is the revenue engine—or the oxygen—that energizes the FedEx world,” he said. “The downward trend in usage is startling and concerning. This is the sixth quarter in a row with declining domestic air package volumes. This is not indicative that the US is moving forward as FedEx handles so much volume it is indicative of the general health of the economy.”