FedEx today announced $200 million worth of salary cuts on top of previous savings measures totarget $1 billion worth of cost reductions this year in response to the worsening US and global
economy. It did not issue any Q3 forecast due to “a lack of visibility” over how volumes willdevelop in 2009.CEO Fred Smith will take a 20% basic salary cut and other senior FedEx executives will havetheir salaries reduced by 7.5-10% from January 1, 2009. There will be a 5% reduction for remainingUS salaried exempt personnel and the elimination of calendar 2009 merit-based salary increases forUS salaried exempt personnel. The salary cuts are “a shared sacrifice from the top down,” Smithcommented in a Q2 conference call with analysts.
These new measures should save about $200 million during the second half of the 2008/09fiscal year (ending May 31), and represent about $600 million worth of savings for 2009/10, hesaid. Total cost savings for the current fiscal year would be $1 billion. Capital investment willbe reduced from $3 billion to $2.4 billion.
“Our financial performance is increasingly being challenged by some of the worst economicconditions in the company’s 35-year operating history,” Smith commented. “We are managing our costsand taking full advantage of market opportunities, and our team members are delivering every day onour promise to ‘make every customer experience outstanding’. However, with the decline in shippingtrends during our second quarter and the expectation that economic conditions will remain verydifficult through calendar 2009, we are taking additional actions necessary to help offset weakdemand, protect our business and minimise the loss of jobs.”
The company has already introduced wide range of cost-cutting measures this year, includingelimination of variable compensation payouts, a hiring freeze, volume-related reductions in laborhours and line-haul expenses, discretionary spending cuts, and job cuts at FedEx Freight and FedExOffice.
In addition, FedEx has “pushed back” delivery of its new long-haul B777 freighters, CFO AlanGraf said. It now plans to take delivery of four B777s in 2010, 10 in 2011 and one in 2012,according to company fleet statistics.
In the second quarter ended November 30, FedEx’s group revenues rose 1% to $9.54 billion,operating profits rose fractionally to $784 million, and net profit was up 3% at $493 million. Butgrowth in revenues and operating profits was largely driven by the positive effect from thetwo-month time lag between fuel surcharges and the rapid decline in fuel costs. These offset thenegative impact of lower shipping volumes whose decline accelerated from Q1 to Q2.
FedEx Express increased revenues 1% to $6.1 billion, improved its operating profit 2% to $540million and slightly improved its operating margin to 8.9% from 8.8% the previous year. Theseimprovements were essentially due to the positive fuel surcharge effect, however.
US domestic express package volume declined 8%, while revenue per package increased 9% due tohigher fuel surcharges. International Priority average daily package volume declined 7% but revenuegrew 1%, driven by 8% growth in revenue per package. International Priority Freight revenue grew4%. International domestic volumes were flat and revenue fell 9.2%.
FedEx Express CEO Dave Bronczek told analysts that Asia Pacific volumes and US-Asia exportshad shown a “significant decline” but Europe “did well” during Q2. Domestic and internationalyields improved thanks to fuel surcharges while there had been a rates decline. Asked about UScapacity utilisation levels, he noted that capacity had been reduced to volume levels but could bequickly scaled up when demand improved.
FedEx Ground, the US domestic parcel business, increased Q2 revenue by 5% to $1.79 billion,raised operating profits by 23% to $212 million, and improved its operating margin to 11.9% from10.2% the previous year. Its average daily package volume was down 1% year over year as continuedgrowth in the FedEx Home Delivery service was more than offset by a decline in commercial volume.FedEx SmartPost revenue increased 11% and average daily volume grew 16% largely due to DHL’sdiscontinuation of its @Home service at the beginning of the quarter. Yield and profits benefitedfrom fuel surcharges.
Looking ahead, FedEx reaffirmed last week’s earnings estimate of $3.50 to $4.75 per dilutedshare for fiscal 2009, which assumes weak global macroeconomic conditions, anticipated volume gainsfrom DHL and stable fuel prices. The company’s earnings estimate for the second half of fiscal 2009is $0.69 to $1.94 per diluted share.
But FedEx will not provide third quarter guidance due to significant economic uncertainty andthe difficulty in forecasting the impact of recently acquired DHL customers. Q3 volumes, includingthe Christmas peak, would be “particularly weak” despite additional business gained from DHL, Grafcommented.
“While the departure of DHL from the US domestic package market presents a rare opportunity,significant uncertainty exists in the global economy,” Graf stated. “Our latest earnings outlookreflects that uncertainty and incorporates the expected savings from our cost reduction actions.”
Asked whether FedEx might now considering buying assets whose value had fallen, CEO FredSmith responded: “We have a very strong balance-sheet. When times are bad, then there are alwaysopportunities that come up. We have the balance-sheet to do anything that might arise.”
