FedEx 2nd quarter profits drop 6% on fuel costs, domestic demand

FedEx 2nd quarter profits drop 6% on fuel costs, domestic demand FedEx Corp. said second quarter earnings dropped 6 percent to $479 million due to the impact of high fuel prices.
   The extra costs outweighed a 6 percent gain in revenue to $9.45 billion from $8.93 billion in the year-ago period.
   “High fuel prices and weak U.S. economic growth year over year have impacted our business,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer, in a statement. “We continue to benefit from solid international growth, which helps mitigate softness in U.S. industrial production. While we see challenging near-term economic trends, we remain confident about long-term prospects in all our business segments.”
   Operating income decreased 7 percent to $783 million in the period, ended Nov. 30.
   FedEx primarily attributed the fall in operating margins to 8.3 percent from 9.4 percent to the higher fuel costs and reduced domestic package and less-than-truckload volumes due to the soft U.S. economy.
   FedEx Freight took the biggest second quarter blow among the company’s operating segments, with operating income down 43 percent to $79 million from $138 million and operating margin down to 6.4 percent from 11.3 percent a year ago. Revenue was flat at $1.2 billion. LTL shipments were down 6 percent.
   FedEx noted that its decision last July to reduce its fuel surcharges negatively effected profits.
   The Memphis, Tenn.-based express delivery and freight logistics company warned that third quarter results are also expected to suffer from fuel costs and weak demand. It forecast earnings will be $1.15 to $1.30 per diluted share compared to $1.35 a year ago, assuming stable fuel prices and no additional weakening in the economy.
   Meanwhile, the company is reining in capital spending plans to $3.1 billion from $3.5 billion, with additional cuts possible based on the timing of certain investments.
   FedEx’s international package revenue grew 13 percent to help the FedEx Express unit achieve a 6 percent revenue gain to $6 billion and maintain relatively flat operating margins. International business was helped by favorable exchange rates, higher weight per package and higher fuel surcharges, the company said.
   FedEx Ground, the domestic U.S. ground delivery service, experienced a 10 percent drop in operating income to $173 million from $193 million, with margins down to 10.2 percent from 12.7 percent.
   Operating income and margin were lower due primarily to independent contractor incentive programs, higher net fuel costs and investments to expand capacity, FedEx said.
   FedEx Ground warned it faces increased regulatory and legal uncertainty with respect to its independent contractors. FedEx has been on the losing end of recent court cases about whether Ground drivers are employees or owner-operators. A California court recently ruled that the workers are employees and entitled to back pay.
   Meanwhile, FedEx Ground has made changes to its relationships with contractors that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by contractors. In September, FedEx Ground announced a nationwide program, which provides greater incentives to certain of its 15,000 contractors to add routes. Also, during the second quarter FedEx Ground offered special incentives to encourage California-based single-route contractors to transform their operations into multiple-route businesses or sell their routes to others. The response to the California-based single route contractor program has been exceptional, with virtually all contractors accepting the incentives, according to FedEx.
   These ongoing changes could materially increase its costs in the future, it said.