FedEx reports 31 percent decline in fiscal third quarter net income

Despite solid performances from its Ground and Freight units, fiscal third quarter earnings for transportation and parcel bellwether FedEx were down overall on an annual basis, with quarterly net income—at $361 million—down 31 percent.

Quarterly revenue of $11.0 billion was up 4 percent from last year’s $10.6 billion, and operating income at $589 million was down 28 percent from $813 million. Its operating margin—at 5.4 percent—was down from 7.7 percent. FedEx reported earnings per share of $1.13, which was down from $1.55 from last year. This was below Wall Street estimates of $1.25-to-$1.45 per share.

FedEx said that earnings per share were $1.23, excluding business realignment costs of $147 million related to its previously announced buyout program for eligible U.S. officers and managing directors, and including this year’s realignment costs earnings were $1.13 per share.

“While FedEx Ground and FedEx Freight posted solid financial results, the third quarter was very challenging for FedEx Express due to continuing weakness in international airfreight markets, pressure on yields due to overcapacity, and customers selecting less expensive and slower transit international services,” said aid Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, on an earnings call today. “FedEx Express will decrease capacity to and from Asia and will aggressively manage traffic flows to place lower-yielding traffic in lower-cost networks.”

Smith said the company is assessing these actions to see how it may allow FedEx Express to accelerate the retirement of more of its older and less sufficient aircraft as part of its fleet modernization program. He added that FedEx remains focused on its strategic cost reduction programs, which are ramping up and on target. And he cited the company’s experience in flexing its network to meet network conditions, explaining he is confident the company’s strategic profit improvement program, coupled with additional actions at FedEx Express, will increase margins, improve cash flows, and strengthen its competitiveness over time. 

Individual unit quarterly performances: FedEx Express quarterly revenue was up 2 percent at $6.70 billion, with an operating margin of 1.8 percent, down from last year’s 5.3 percent and an operating income of $118 million for a 66 percent annual decrease. FedEx said revenue growth was due to business acquisitions and growth at FedEx Trade Networks, and core express revenue was constrained due to customers shifting to lower-yielding international services.

FedEx Ground revenue at $2.75 billion was up 11 percent, and operating income at $467 million was up 0.5 percent. Quarterly operating margin at 17.0 percent was down from 18.8 percent. 

Revenue at FedEx Freight, its less-than-truckload unit, at $1.24 billion was up 0.8 percent from $1.23 billion last year, with an operating margin of 0.3 percent compared to -0.1 percent a year ago. FedEx Freight had an operating income of $4 million which was ahead of last year’s operating loss of $1 million.

FedEx Freight yield was up 2 percent due to improvements in its FedEx Freight economy yields, and average daily shipments rose 1 percent due to higher customer demand for the FedEx Freight Economy service offering for all lengths of haul. And daily LTL shipments rose 1 percent. Weight per LTL shipment was flat at 1,154 pounds, and composite LTL yield—at $20.03—was up 2.3 percent. The company pointed out that the quarter had two fewer operating days but Freight was still able to have higher operating income and margins due to gains in yield and volume along with operational efficiencies.

Average daily package volumes at FedEx Ground were up 10 percent at 4.019 million packages per day, due to increases in FedEx Home Delivery services and business-to-business services, according to FedEx officials. And revenue per package rose 1 percent due to increased rates and higher residential surcharges that were partially offset by lower package weights and fuel surcharge.

FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service saw daily volume increase 26 percent due mainly to e-commerce growth, with net revenue per package down 1 percent because of higher postage rates that were partially offset by rate increases.

Total U.S. domestic express packages at 2.689 million per day were up 0.6 percent, while International Priority at 420,000 packages per day was up 1.7 percent, and International Domestic was up 35 percent at 781,000 packages per day. Total revenue per U.S. domestic package at $17.00 was up 1 percent, and total revenue per package for International Priority and International Domestic at $60.25 and $7.06 were down 3.6 percent and up 7 percent, respectively.

FedEx Chief Financial Officer Alan Graf said on the call that the lower than expected results for the quarter were driven by third quarter international revenues at FedEx Express, due to customer preference for lower-yielding international services, lower weight per pound, and lower weight per shipment and lower fuel surcharges.

“Given the persistence of this trend, additional cost-cutting actions are underway for the linehaul network, which represents a significant part of our costs to provide international services,” said Graf. “We are reducing our Transpacific capacity on April 1, with these reductions leading to savings on fuel, crew and maintenance costs. We will align our global networks to better match yields with the appropriate costs to serve that network, taking advantage of the increased capabilities of FedEx Trade Networks (the company’s freight forwarding unit). Some of the actions we are taking may involve temporarily or permanently grounding older, less efficient aircraft.”

And along with taking steps to reduce operating costs at Express, Graf explained that FedEx is also continuing to implement its profit improvement plan, which was first unveiled at its investor meeting last October.

Part of this plan includes a voluntary buyout program for U.S.-based employees, with certain managing directors accepting the voluntary buyout as FedEx adjusts its management team to its new organization structure. More buyouts will become an option for eligible U.S. employees next February, with an April 1, 2014 deadline to accept. 

This is a somewhat startling earnings performance, considering packages were up for Express and in particular Ground,” said Jerry Hempstead, president of parcel consultancy Hempstead Consulting. “And almost ten percent growth in ground packages may be their best performance in recent memory and Smartpost just continues to crush all previous records growing that segment of the business. 

He added that unfortunately the supply and demand curve in particular from Asia for air lift is driven by new product announcements which are episodic, such as new desktop computers in the past, followed by laptops and cellphones in subsequent years. This speaks to part of the problem with demand in a global economy that Hempstead said is generally weak.

“My observation of February for air cargo—not unique to FedEx—was that demand for space was low,” said Hempstead. “I know FedEx was making network adjustments to better balance supply and demand for the heavyweight and had a very well defined plan.
Right now we have to wait for Apple to introduce the next thing we don’t know we really need to have.”