FedEx today announced a clear upturn in US domestic and international express volumes in the secondquarter ended November 30 due to the improving global economy. It has added more flights from Asia
to try to clear a backlog of shipments and will be increasing services next year.FedEx Express revenues dropped 13% to $5.31 billion in the second quarter. Its operatingprofit fell 36% to $345 million, and the operating margin dropped to 6.5%, down from 8.9% theprevious year. The revenue decline was largely due to a mix of lower fuel surcharges, lightershipments and lower yields. Volumes, however, showed a positive upturn during the months ofSeptember, October and November. FedEx International Priority (IP) average daily package volumeincreased 6%, while revenue per package declined 14%. In the USA, domestic average daily packagevolume increased 4%, while revenue per package dropped 19%.
“Positive momentum in the global economy and continued execution of our business strategydrove volume growth across all FedEx transportation segments, highlighted by increasedinternational shipments,” said Frederick W. Smith, FedEx Corp. chairman, president and chiefexecutive officer. Asia and Latin America had led growth in International Priority shipments, hecommented during an analysts’ call.
FedEx Express CEO Dave Bronczek said that while the express operator reduced overall flighthours by 6% in Q2, it had added a ninth weekly Hong Kong-Memphis flight and had flown “dozens” ofadditional services out of Asia and Latin America to cope with the surge in export volumes from thetwo regions. “We started flying extra sections and we are having a hard job keeping up,” Bronczekdeclared. “We have had backlogs in Asia, Latin America and Europe for the last few weeks.” The Asiaexports were to both the USA and Europe, while most Latin America exports were to the USA.
Michael Glenn, executive vice president market development, said the volume trend hadcontinued into December but it was too early to say how volumes would develop in January andFebruary. The current volume improvement was a combination of inventory re-stocking, highercustomer demand for products such as consumer electronics, as well as market share increases, hepointed out.
FedEx Express will increase capacity between Asia and North America next year by employingits first B777 freighters on the Hong Kong-Memphis route. The company is due to have four B777s inoperation by the end of the financial year. FedEx is also continuing to replace B727s with largerB757s in the USA on a one per month basis. It will take delivery of its 17th 757 at the end of thismonth, Bronczek said.
CEO Fred Smith told analysts that FedEx will continue to expand its international portfoliowith new products and services. He highlighted the launch of the International Direct Distributionservice, enabling customers to consolidate freight and parcels into single shipments, thegeographical expansion of ocean and air forwarder FedEx Trade Networks, faster delivery betweenChina and Europe and the new domestic express service in India.
Asked by an analyst about the investment in TNT by two funds, Smith reiterated that FedEx didnot comment on such issues. But he stressed: “It is a myth that our European operations are notstrong. They are extremely strong and very profitable for us.” FedEx saw organic growth prospectsin Europe, which was very different to the USA due to the “highly fragmented marketplace” and thecompetitive environment with four intra-EU air networks and various ground delivery operators, hecommented.
At group level, FedEx Corp. reported consolidated Q2 revenue of $8.60 billion, down 10% from$9.54 billion a year ago. Operating profits dropped 27% to $571 million and the operating margindeclined to 6.6%, down from 8.2% the previous year. Net profits were 30% lower at $345 million.Revenue and earnings declined as a result of lower yields, primarily due to a substantial declinein fuel surcharges year over year. Shipment growth, particularly in international express andat FedEx Ground along with strict cost controls benefited the results, the company stated.
For the second quarter, the FedEx Ground segment reported revenue of $1.84 billion, up 3%.Its operating income rose 12% to $238 million, and the operating margin improved to 13%, up from11.9% the previous year. FedEx Ground average daily package volume was up 4%. Yield decreased2% primarily due to lower fuel surcharges. FedEx SmartPost average daily volume grew 63%, aided bygains from DHL’s exit from the US domestic package market. Operating income and margin grewprimarily due to increased volume and improved productivity, the company announced.
Trucking business FedEx Freight had an 11% revenue decline to $1.07 billion and had anoperating loss of $12 million, down from operating profit of $32 million a year ago.Less-than-truckload (LTL) yield decreased 12% due to the continuing effects of a competitivepricing environment and lower fuel surcharges. Average daily LTL shipments increased 3% yearover year and growth rates improved month over month throughout the quarter. Operating incomeand margin decreased in the quarter due to the competitive pricing environment, partially offset byhigher shipments.
Looking ahead, FedEx said it expects earnings per share of $0.50 to $0.70 per diluted sharein the third quarter, and $3.45 to $3.75 for fiscal 2010, which reflects the current market outlookfor fuel prices and a continued modest recovery in the global economy. The company earned$0.31 per share in last year’s third quarter. The company’s capital spending forecast remains $2.6billion.
“Our balance sheet is strong, volumes are growing, and we are encouraged by our performanceas we emerge from the worst economic downturn in FedEx history,” said Alan B. Graf Jr., FedEx Corp.executive vice president and chief financial officer. “While there is some uncertaintyregarding the sustainability of current demand trends after our peak shipping season, we expect ourstrong operating leverage to provide improved year-over-year profitability in the second half ofour fiscal year. Effective cost management remains a priority and should continue to benefitresults.”
