FedEx 1Q profit falls, sees improving economy

NEW YORK - September 17, 2009

The world's second-largest package delivery company, considered a bellwether of economic health, said fiscal 2010 first-quarter earnings fell 53 percent - matching its prediction released last week. It also reiterated a fiscal second-quarter view that implies a modest uptick in worldwide economic activity.

FedEx indicated it might start beefing up schedules for flight crew and hourly personnel as package volume improves, but it doesn't expect that to happen soon. It also doesn't expect to start adding back employees it cut during the worst of the downturn in the near future.

Over the last year, the company has laid off workers and cut wages for thousands of employees to cut costs.

The Memphis, Tenn.-based company reported earnings of $181 million, or 58 cents per share for the quarter ended in August, compared with $384 million, or $1.23 per share, a year ago.

Revenue fell 20 percent to about $8 billion.

Analysts predicted profit of 58 cents per share on revenue of $8.24 billion.

In late July its larger rival - UPS Inc. - said its second-quarter profit sank 49 percent and warned that its near-term outlook probably wouldn't be any better.

FedEx said sales are still hurt by the soft economy, as people ship slower and less often. Lower fuel costs also meant FedEx collected lower fuel surcharges - fees passed on to customers based on the price of fuel.

In its Express segment, U.S. package revenue fell 22 percent on lighter and less expensive packages and lower fuel fees. But the number of packages FedEx shipped domestically grew slightly.

FedEx's Ground segment revenue fell 2 percent and average daily volume slipped 1 percent.

But FedEx said it was able to offset some of the shortfall by "vigilantly" cutting costs. Volume in International Priority - its most profitable segment - was also better than expected.

"For more than a year, we have vigilantly managed costs without sacrificing service, invested wisely and minimized job losses so that FedEx will emerge a stronger, more profitable company as the global economic recovery takes hold," FedEx Chairman, President and CEO Frederick W. Smith said.

The company expects to save about $3 billion by the end of fiscal 2010 in May from cost cuts made since June of 2008. CFO Alan Graf Jr. said as volume and profitability improve over time, the company will reinvest about half of that to rebuild merit programs and restore workers 401(k) matching plans suspended this year. The rest will remain as permanent cost cuts.

FedEx reiterated its profit prediction of 65 to 90 cents per share for the second quarter ending in November. That's down from $1.23 a year ago.

It also said it will raise express shipping rates by an average of 5.9 percent in January. The rate is a standard annual increase that FedEx generally announces in the fall. FedEx Ground and SmartPost rates and surcharge changes for 2010 will be announced later this year.

In a conference call with analysts, the company said it expects more packages will be shipped domestically over the next three months as the U.S. economy regains some footing with a bottoming housing market, improving auto sales and other positive economic data.

"With the misty crystal ball that I have, we do expect year-over-year growth in the US domestic package business," CFO Graf said. "We also have a possibility that we can grow International Priority on a year-over-year basis. Those aren't going to be spectacular growth numbers, but they're going to feel good if they're not in red."

FedEx shares fell $1.20 to $77 in morning trading.

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