FedEx bites the bullet as margins tighten
Express companies are a reliable bellwether of economic health. In difficult times, their customers either reduce shipments or switch to slower, less expensive modes. And if further evidence were needed of the slowdown in the US economy and its increasing impact on the rest of the world, then fourthquarter figures from FedEx provide it.
Margins are getting squeezed and domestic customers are shifting from air to road transport with the effect that, although the integrator 's revenue was US$5.12bn ( t6.04bn), up 6% from last year 's final quarter, operating profit fell 48% from $426m ( t502.7m) to $223m ( t263.1m).
Net profits were down even more sharply to $113m (t133.3m), down 54% from last year 's $245m ( t289m).
All US freight carriers are suffering – and the downward trend appears to be gathering pace. The US Air Transport Association has reported a 4.8% decrease in air cargo volumes carried in May, from 2.05bn ton miles (2.99bn tonne km) to 1.95bn ton miles (2.85bn tonne km).
Domestic freight and express traffic plummeted by 8.1% and domestic mail by 5.7%.
International freight and express volume fell by 1.8%, but international mail bucked the trend, increasing by 1.1%.
In the year to date, overall traffic on US carriers is down 4.2%, with domestic volumes falling by 7.6% and international traffic by 0.6% (see Monitor, page 2).
Observers are concerned that the knock-on effect in Europe and the Far East could prolong the slump even as measures to rejuvenate the US economy take effect. And FedEx appears to be preparing for a long haul, announcing a series of cost-cutting measures which chief financial officer Alan Graf claimed would restore a positive cash flow by 2002 "depending on our ability to further cancel, defer or sell aircraft delivery and modification commitments".
He warned that the downward trend was continuing, and first-quarter earnings would be at the low end of the current range of analysts' predictions.
While postponement of aircraft orders will ultimately improve cash flow, it put a big dent in the fourth-quarter figures. FedEx has decided to scale back its MD10 conversion programme at a cost of $93m ( t109.7m), and an additional $9m ( t10.6m) in development costs of the Ayres Loadmaster has been written off.
But the company still intends to be the launch customer for Airbus's A300-600 freighter conversion.
For the full year, FedEx reported an 8% increase in revenue at $19.6bn ( t23.1bn), while operating profit fell 12% to $1.07bn ( t1.26bn).
"Continuing weak economic conditions, particularly in the hi-tech and durable goods sectors, reduced demand for our express services, " said Graf.
US domestic volume for FedEx Express showed a 6% year-on-year decline in the fourth quarter. Growth in International Priority shipments slowed to 2%. Average weight per package fell by 7%.
Offsetting this, package volume for FedEx Ground, North America's second largest provider of small package road delivery, grew 7%, largely due to growth in the company's home delivery service and to shippers transferring some business from FedEx Express.
President and CEO David Bronczek blamed "excess network capacity during a period of declining demand" for a fourth-quarter performance by FedEx Express which saw operating profit fall 53% to $159m ( t187.6m) on turnover which was 3% down at $3.85bn ( t4.54bn).
"We are aggressively working to match capacity to volume, while continuing to reduce controllable expenses and improve package yield, " said Bronczek.
Third-quarter revenues should receive a boost from FedEx's increasingly close relationship with the US Postal Service.
Last month, the company began a programme of placing 10,000 drop boxes outside US post offices, and it will begin airport-to-airport transportation of priority, express and first-class mail in August.
Posted: 09/07/2001
IFW
