DC Velocity - October 2012

FedEx to raise air rates 3.9% in 2013

FedEx Corp. said it will raise 2013 list—or tariff—rates by a net amount of 3. 9 percent on its portfolio of U.S. air express and cargo products, effective Jan. 7.

The full increase of 5. 9 percent will be offset by a 2-per-
centage-point reduction in fuel surcharges,
The Sept. 18 announcement came as
FedEx officially disclosed its fiscal first-quar-
ter results, which it had telegraphed to the
market two weeks previously. The company reported revenue
of $10.79 billion, up 3 percent from the year-earlier period.
Operating margins and net income were down year over year.

The company does not expect the pressure to ease in its fiscal second quarter, which had just started at the time the prior quarter’s results were announced. It expects to report quarterly earnings of between $1.30 and $1.45 per diluted share. For the same quarter a year ago, FedEx reported earnings of $1.57 per diluted share. Fully diluted shares are defined as the

total number of shares that would be outstanding if all possible convertible securities, such as convertible bonds and stock options, were turned into common shares.

For its 2013 fiscal year, which ends next May, the company projected earnings in a range of $6.20 to $6.50 per diluted share, down from a range of $6.90 to $7.40 per diluted share. Both the fiscal second-quarter and full year forecasts are below most analysts’ estimates.

The company said its projections assume jet and diesel fuel prices will remain at or near current levels and exclude the impact of savings expected to be realized from cost-cutting initiatives at its FedEx Express air and international unit.

DEMAND DOWN FOR AIR SHIPMENTS

The fly in the FedEx ointment is FedEx Express, the company’s largest unit, accounting for about 60 percent of its revenue. In the first quarter, revenue at the unit rose 1 percent year over year. However, operating income dropped 28 percent over the same period, while operating margins declined 4. 4 percent.

The unit has been struggling with a multiyear transition in domestic transportation patterns. Value-conscious shippers are increasingly building out regional warehousing and distribution networks that can be supported by less-costly ground transportation. This means fewer premium-priced shipments move on expensive equipment like airplanes.

FedEx reported a decline in domestic non-next-day deliveries, known in company lingo as “deferred” deliveries. Company executives attributed about half of that decline to a large customer’s downshifting its business to ground deliveries and to an even lower-cost option known as SmartPost, operated in conjunction with the U.S. Postal Service. FedEx wouldn’t identify the customer, but an industry source said it was a large cell-phone provider.

The problems at FedEx Express aren’t confined to the United States. In recent months, international air traffic has declined as China, the world’s largest single-country exporter, has seen demand wane in Europe and, to a lesser extent, the United States. While U.S. exports to China have been holding their own, the volume is dwarfed by the amount of traffic from the other direction.

“I’ve been somewhat amused by observers who have underestimated the impact of China’s exports on the global economy,” said Frederick W. Smith, FedEx’s founder, chairman, president, and CEO, on an analyst conference call.