FedEx today announced a near-100% rise in Q1 operating profits driven by higher volumes andbetter yields, more Asia flights to cope with strong demand and a merger of its two US freight
trucking businesses, with 1,700 job losses, to improve the division’s profitability.In the quarter ending August 31, 2010, FedEx increased group revenues by 18% to $9.46 billion,largely due to strong International Priority (IP) growth at FedEx Express, continued growth atFedEx Ground and a benefit from the net impact of higher fuel surcharges.
The company’s operating profit surged 99% to $628 million, driving the operating margin up to6.6% from last year’s 3.9% figure. Net income more than doubled to $380 million, up 110% from $181million a year ago. The reinstatement of certain employee compensation programs, higher pension,medical and aircraft maintenance expenses, and an operating loss at FedEx Freight dampened thequarter’s solid results.
“Strong demand for our services resulted in higher volumes and better revenue per shipment atFedEx Express and FedEx Ground,” said CEO and chairman Fred Smith. “This increased demandcomes from improved global economic conditions and the benefit provided by the strength andflexibility of our unparalleled global networks, which we’ve improved during the downturn todeliver even more reliability and value to our customers.”
Looking ahead to the traditional autumn peak season, Smith told analysts in a conference callthat FedEx “sees signs of a solid shipping season” with customers trading up to express services.Express CEO Dave Bronczek added: “We expect a very solid peak season.”
FedEx Express increased Q1 revenue by 20% to $5.91 billion. Its operating profit soared by 243%to $357 million, up from $104 million a year ago. The operating margin nearly tripled to 6.0%, upfrom 2.1% the previous year. Higher profits were driven by volume and yield growth and a positivefuel surcharge effect. The composite package yield improved 9% while the overall freight yield wasup 17%.
International business remained the key growth driver at FedEx Express in the quarter. IPaverage daily package volume increased 19%, led by exports from Asia, while IP revenue per packagegrew 4% primarily due to higher fuel surcharges and weight per package. IP Freight poundsincreased 41%, led by exports from Latin America, Asia and the US, with revenue per pound up10%. Non-US domestic volumes grew 10%.
FedEx Express is adding more transpacific flights to cope with the rise in Asian exports. Atenth daily scheduled transpacific flight was added in August, and an eleventh one earlier thisweek. Two additional Boeing 777Fs, delivered in August, are scheduled to go into internationalservice in October, replacing MD11s. There will be one extra flight to Shanghai and to Hong Kongrespectively, Express chief Bronczek said. CEO Fred Smith stressed that the longer-range B777senable FedEx to adjust flight times to offer later end-of-day departures from Asia and earlierarrivals, thus improving transit times for customers. FedEx currently operates six B777Fs.
In the USA, the large domestic express business saw a 3% rise in average daily packagevolume. But revenue per package grew 7% due to higher fuel surcharges, weight per package and rateper pound.
The US parcel business, FedEx Ground, continued to grow well in the first quarter, increasingrevenues by 13% to $1.96 billion. Its operating profit rose 37% to $287 million and the alreadyhigh operating margin further improved to 14.6%, up from 12.1% the previous year. Operating incomeand margin increased due to higher package yield and volume, as well as a benefit from the netimpact of higher fuel surcharges and lower self-insurance expenses.
FedEx Ground average daily package volume grew 7% in the first quarter driven by increases inthe business-to-business market and FedEx Home Delivery. Yield increased 5% primarily due tohigher fuel surcharges and package weight. FedEx SmartPost average daily volume increased 9%,with net yield increasing 19%. The increase in FedEx SmartPost yield was primarily due tolower postage costs as a result of increased deliveries to U.S. Postal Service final destinationfacilities and increased fuel surcharges.
In contrast, FedEx Freight plunged into the red in Q1 despite increasing revenues by 28% to$1.26 billion. The US trucking division, with a $44 million loss in 2008/09 and a $153 million lossin 2009/10, made a Q1 operating loss of $16 million, compared with an operating profit of $2million a year ago, and the operating margin fell to -1.3%, compared with 0.2% the previousyear.
Operating losses were driven by lower yields and higher volume-related costs, as significantlyhigher shipment levels required increased purchased transportation and other expenses. LTL averagedaily shipments increased 29%. But yield declined 3% year over year primarily due to the effects ofdiscounted pricing in contracts signed in fiscal 2010. However, yields increased 4% from thefourth quarter as a result of the company’s recent yield management initiatives to improvepricing.
In a major strategic move, the company has decided to merge the two separate FedEx Freight andFedEx National LTL companies as of January 30, 2011 to reduce operating costs and improve thefreight division’s profitability. About 100 terminals will be shut down and 1,700 jobs out of the34,000 headcount will disappear. The merger programme will cost the company $150 to $200 million,primarily related to charges in the next two quarters for staff severance costs, lease terminationsand various other costs. But these costs are expected to be compensated in the medium-term by assetsales.
The new integrated FedEx Freight company will offer a choice of priority or economyless-than-truckload (LTL) freight services across all distances and continue to focus on betteryields. The cost savings would bring the business back into profit, according to officials. “Freight will have double-digit margins in the foreseeable future,” predicted Smith.
Looking ahead, FedEx said it projects earnings to be $1.15 to $1.35 per diluted share in thesecond quarter and $4.80 to $5.25 per diluted share for fiscal 2011, up from the company’s previousestimate of $4.60 to $5.20 per diluted share. This guidance excludes any FedEx Freightcombination costs, and also assumes the current market outlook for fuel prices and continuedmoderate growth in the global economy. The company reported earnings of $1.10 per dilutedshare in last year’s second quarter. The capital spending forecast for fiscal 2011 hasincreased to $3.5 billion, primarily due to anticipated aircraft purchases for continuedinternational growth.
The earnings ranges above exclude the costs from the FedEx Freightcombination. Including the expected cost of this program, $0.14 to $0.18 per diluted share forthe second quarter and $0.30 to $0.40 per diluted share for fiscal 2011, earnings are expected tobe $0.97 to $1.21 per diluted share for the second quarter and $4.40 to $4.95 per diluted share forfiscal 2011. The actual cost will be dependent on the number and timing of employee departuresand lease terminations.
“We expect continued strong demand for our package transportation services through at leastDecember,” said CFO Alan Graf. “Shippers of high value-added goods, especially in thetechnology sector, know that we have unmatched air express capacity to deliver quickly and reliablyfor them, even when demand surges. We expect the yield improvement initiatives we haveunderway, coupled with the current high utilisation of our planes, vehicles and facilities, willdrive higher earnings, margins and returns.”
