FedEx today announced a sharp drop in fourth-quarter and full-year profits due to the triple impactof soaring fuel prices, the weak US economy and financial charges, and presented a cautious outlook
for the new fiscal year.For the fourth quarter ending May 31 2008, FedEx reported a net loss of $241 million, a 140%decline on the previous year’s $610 million Q4 profit. The group’s operating income declined by116% from a $1,012 million profit to a $163 million deficit. The bulk of the decline was due to theone-off impairment charge of $891 million for FedEx Office (formerly FedEx Kinko’s), but inaddition fuel costs rose 54% and weak US domestic demand hit domestic US express volumes. Grouprevenues rose 8% to $9,866 million.
For the full year, FedEx revenues rose 8% to $37,953 million but costs increased 12%, largelydue to a 30% rise in the total fuel bill to $4.6 billion and the FedEx Office charge. As a result,operating profit dropped by 37% to $2,075 million, pre-tax profits declined 37% to $2,016 millionand full-year net profits were down 44% at $1,125 million. Capital spending for fiscal 2008 was$2.9 billion compared to the originally budgeted $3.5 billion.
“Record high fuel prices and the weak US economy dampened volume growth and substantiallyaffected our bottom line,” declared CEO Fred Smith. “Despite the challenging conditions, our teammembers continue their outstanding performance in support of our customers, as service levels andmorale remain high. We will continue to reduce expenses to match volume and revenue expectations.”
Looking ahead, FedEx said it is currently difficult to predict earnings for the 2008/09fiscal year due to the “very volatile and high” fuel prices and an uncertain economic outlook. Thecompany projects Q1 earnings of $0.80 to $1.00 per diluted share compared to the previous year’s$1.58 per diluted share, and is targeting fiscal 2009 earnings of $4.75 to $5.25 per diluted share,based on current fuel prices and no further US economic weakening.
“The operating environment for fiscal 2009 is expected to be very difficult due to the weakUS economy and extremely high fuel prices,” said CFO Alan Graf. “However, we will focus on reducingexpenses and remaining cash flow positive, and will continue to take positive steps to improve thecustomer experience across our portfolio of services.”
In a conference call with analysts, Smith noted that the difficult market circumstance alsogave FedEx “competitive opportunities” thanks to its strong balance-sheet and cash flow, and hehoped the company would return to an “upward trajectory” in 2010. Asked about the DHL-UPS deal,Smith said there is “a lot of uncertainty” among customers of competitors, and FedEx is “aggressively” talking with them about its offers.
Although the US domestic express market declined 3.6% in the first quarter, FedEx’s USnetwork benefited from the strong international growth with about 50% of FedEx’s internationalvolumes passing through the US, officials stressed. While the high fuel surcharges encourageshippers to switch modes from air to sea or ground, FedEx is open to re-negotiating contracts inexchange for long-term volume commitments, they noted. In addition, US freight imports switchedfrom air to sea were then often transported within the US by the FedEx ground network, they pointedout. The company is also parking some freighters on a rotating basis.
FedEx Express chief Dave Bronczek added that the company is looking for ways to speed upintroduction of the fuel-efficient B757s that will replace its ageing B727s. The first convertedB757 is due to enter service in September, he noted. The first B777F will be delivered in 2009/10.
In Q4, 2007/08, FedEx Express continued to grow strongly internationally but saw its resultsimpacted by weaker US domestic demand. In the fourth quarter, its revenues rose 9% to $6,366million despite a 1% average daily package volume drop thanks to a 12% rise in the average packageyield. In the US, domestic revenue per package increased 9% due to increased fuel surcharges andhigher rate per pound, while package volume declined by 3%.
International Priority (IP) revenue grew 16%, with revenue per package up 11%, primarily dueto higher fuel surcharges and favourable exchange rates. IP average daily package volume grew 6%,led by increases in export volumes from Asia, the United States and Europe. Non-US domestic yieldsimproved 12% on a 5% average daily volume increase.
But FedEx Express Q4 operating expenses were up 14%, including a 53% increase in fuel costs.As a result, operating profits declined 31% to $426 million, leaving its operating margin down 3.8percentage points at 6.7%.
Over the full year, FedEx Express revenues were up 8% to $24,421 million while average dailypackage volumes increased 4% and the composite package yield improved 4%. In the US, volumesdropped 2% but average yields were up by 4%. Internationally, IP volumes increased 6% and yieldsimproved 7%. International domestic volumes more than doubled following various acquisitions, butthe average yield declined 18%.
Full-year operating expenses rose 9%, including a 28% increase in fuel costs. As a result,operating profits dropped 5% to $1,901 million, and the operating margin dropped back 1.0percentage points to 7.8%.
The US parcel business FedEx Ground increased Q4 revenues by 8% to $1.72 billion but fuelcosts more than doubled, leading to a 26% drop in operating profit to $203 million. The operatingmargin fell to 11.8% from 17.3% the previous year. Over the full year, FedEx Ground increasedrevenues by 12%, saw operating profits drop 10% to $736 million and had a 10.9% operating margin,down 2.7 percentage points.
