FedEx profits dip after winter storms add costs, hit volumes

The winter’s severe weather storms have “significantly” dented profits at FedEx, according to the latest results from the company, released today. Although the company reported strong year-on-year growth in its revenues for the quarter up to February 28, 2011, its profits were down while margins were tighter.

FedEx reported an 11% growth in its overall turnover compared to last year’s third quarter, from $8.7bn up to $9.66bn. Revenues were assisted by increased package volumes, higher surcharges and efforts to improve income per weight of shipments by reviewing unprofitable accounts.

Overall operating income was $393m and net income $231m, down respectively 6% and 3% on the same three months last year.

Only FedEx Ground, among the company’s divisions, was able to grow its profits as well as revenues.

FedEx said its yields had grown in all transportation segments, but added that “unusually severe” winter storms during the quarter disrupted its operations, reduced shipping volumes and increased costs.

In all, the company suggested the weather had hit its share earnings by 12 cents per share in the quarter, which saw earnings per diluted share of $0.73, compared to $076 a year ago.

Profits were also impacted to some extent by costs involved in the merger of less-than-truckload operations in the FedEx Freight and FedEx National LTL divisions. Other increased costs came from new benefit, pension and healthcare arrangements for employees, the reinstatement of staff bonuses and higher aircraft maintenance costs.

Commenting on the results, FedEx Corp. executive vice president and chief financial officer Alan B Graf said:”Successful yield management initiatives helped drive significant revenue growth across our transportation segments in the third quarter, although results were dampened by severe winter storms and higher-than-expected fuel costs.”

“Our FedEx Ground segment had record third quarter results. In addition, we are very pleased with the execution of the new FedEx Freight strategy, which is expected to drive FedEx Freight’s return to profitability in the fourth quarter. More broadly, we expect continued positive yield trends to improve revenues and margins in the fourth quarter and in fiscal 2012,” added Graf.

Segments

Among the different FedEx divisions, FedEx Express saw an 11% increase in turnover for the third quarter, to $6.05bn, but a sizeable 33% drop in operating income, to 178m from 265m the same period last year.

International package volumes were up 5% thanks to strengthening exports from Asia and Europe, while US domestic volumes were up 2%.

But while revenue per package was up on both international and domestic sides (up 7% and 5% respectively), and there were improvements in weight per package, overall operating margins were considerably tighter at 2.9% compared to 4.9% this time last year.

Weather, aircraft maintenance and increased employee benefits were to blame.

FedEx Ground offered brighter results for the quarter, with a 26% increase in operating income, to $325m, and an increase in operating margin from 13.5% to 14.9% year-on-year, to add to the overall 14% increase in revenues from $1.91bn up to $2.18bn.

The segment benefited from growth in the business-to-business market and home deliveries, growing average daily volumes by 6%, with yields growing 5% largely thanks to higher fuel surcharges.

The division’s low-weight residential shipping and returns service, FedEx SmartPost, saw a 17% increase in average daily volumes on the back of booming e-commerce activity and new service offerings. The service increased its yield by 7% thanks to lower postage costs, fuel surcharge increases and an increasing use of the US Postal Service to provide last-mile delivery.

Meanwhile, FedEx Freight was hit hard by the severe winter weather and from costs related to the merger of LTL operations.

Revenues were up, by 8% to $1.12bn for the quarter, but operating losses increased from $107m this time last year to $110m for the three months ending February 28, 2011.

Overall, the freight results were hit by 43m from severance and lease termination costs from the merger of FedEx Freight LTL and FedEx National LTL operations. But, FedEx said the severe winter weather had also “significantly impacted results”.

Less-than-truckload yields were up 11%, thanks to efforts by the company’s sales team to root out unprofitable accounts, but this came at a price with a 6% drop in shipment volumes, which were also affected by the weather.

4th Quarter outlook

Looking ahead, FedEx warned that its results for the fourth quarter, ending May 31, 2011, could be affected by fuel prices and the state of the economy in the wake of ongoing political turmoil in the Middle East and North Africa.

Last week’s earthquake and tsunami in Japan was also expected to have impacts on operational costs, shipping patterns, the company added, stating that the “global economy is currently uncertain”.

Nevertheless, FedEx Corp chairman, president and CEO Frederick W Smith said: “”Continued growth in the global economy is driving solid revenue gains in our transportation businesses. We expect strong demand for our services to boost our financial performance in our fourth quarter.”

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