FedEx reports 18 percent decline in net income for fiscal second quarter 2011

A combination of factors led to net income for the fiscal second quarter at FedEx to drop 18 percent to $283 million, according to the company’s earnings announcement today.

Quarterly revenue of $9.63 billion was up 12 percent from $8.6 billion a year ago, and operating income at $469 million was down 18 percent from $571 million. FedEx reported earnings per share of $0.89, which fell short of last year’s $1.10 and of Wall Street estimates of $1.31 per share.

Company officials said that net income was down, due to costs pertaining to the company’s September announcement regarding the meshing of its FedEx Freight and FedEx National LTL operations, a reserve associated with a legal matter at FedEx Express, the reinstatement of certain employee compensation programs, and higher pension and higher aircraft maintenance expenses.

“Strong demand for FedEx transportation, outstanding customer service…and a healthier global economy combined to drive revenue higher,” said FedEx Chairman, President, and CEO Frederick W. Smith on a conference call. “We are relentlessly focused on improving our yield; our strategy is fast gaining traction. Yields and volumes increased significantly year-over-year in our transportation segments during the second quarter.”

Smith added that that on Monday, December 13 FedEx recorded its busiest day in company history in terms of total shipments carried. And more than half of this year’s peak volume increases are expected to result from online retail and catalog shipments delivered to residential customers through the FedEx SmartPost network, which Smith said delivered a 10 percent yield improvement for the quarter.

This is a main driver for the company’s bullish outlook for the remainder of the year, due to its record-setting peak volumes and greater than anticipated customer demand for its services, as well as positive, long-term macroeconomic trends, said Smith.

Individual unit quarterly performances: FedEx Express quarterly revenue was up 13 percent at $5.99 billion, with an operating margin of 4.4 percent, down from last year’s 6.5 percent and an operating income of $264 million for a 23 percent increase. Revenue at FedEx Ground was up 13 percent at $2.08 billion, with an operating margin of 14.3 percent, compared to 13.0 percent last year, and an operating income of $296 million for a 24 percent annual gain. FedEx Freight revenue at $1.22 billion was up 14 percent from $1.07 billion last year, with an operating margin at -7.5 percent compared to -1.1 percent a year ago.

At FedEx Freight, average daily shipments were up 8 percent, while average weight per shipment was down 1 percent.

Average daily package volumes at FedEx Ground were up 7 percent at 3,843 packages per day, due to increases in the B2B and FedEx Home Delivery service markets, according to company officials, with yields up 5 percent due to higher fuel surcharges and rate increases. FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service saw daily volume up 17 percent at 1,484 average daily packages per day and net yield up 10 percent, due in large part to lower postage costs as a result of increased deliveries to United States Postal Service final destination facilities and increased fuel surcharges.

Total U.S. domestic express packages were up 3 percent at 2,687 per day, while International Priority was up 11 percent at 585 packages per day.

Jerry Hemsptead, principal of Hempstead Consulting, said these package gains are encouraging, because UPS, FedEx’ biggest competitor, have also had positive package numbers year-over-year, which signals that the economy may be restoring itself or at least returning to normalcy.

At the same time, Hempstead observed that FedEx’ increased focus on yield management will not be a positive in any way for shippers.

“There is obvious pricing discipline going on which is not good for [shippers],” he said. “It’s getting harder to garner deep discounts or maintain the ones you may have negotiated in the past, because both of the big carriers are taking a hard line with shippers with regard to yield on a shippers book of business.”

Looking ahead to the fiscal third quarter, FedEx expects earnings to be in the $0.95-to-$1.15 per share range and $5.00-to-$5.30 range per share for fiscal 2011, ahead of its previous estimate of $4.80-to-$5.25 per share.

Part of this growth reflects the company’s focus on expanding its international network, with global trade serving as its prime source of future growth, according to CEO Smith. He cited how emerging market GDP as a percentage of the world’s GDP increased from 36 percent in 1980 to 46 percent in 2010, with emerging markets forecasted to increase to 50 percent of world GDP by 2013.

“Our operating performance in the quarter was impacted by strong compensation and benefits headwinds as we reinstated programs curtailed during the recession,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, in a statement. “During the quarter, we also realized more normalized growth in FedEx International Priority shipments and higher fuel prices than our earnings guidance had assumed. Yield improvement and cost management remain our focus. We expect margins to improve in the second half of fiscal 2011 and in fiscal 2012, as we continue to benefit from solid global demand for our differentiated services and as certain cost headwinds subside next fiscal year.”
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