FedEx fourth quarter results hit by air network redesign

FedEx Corp is warning of higher costs affecting earnings over the next 12 months along with a “soft” global economy, as it right-sizes its air network to cater towards demand changes. The company presented its fourth quarter results for the 2012 fiscal year today, with net income down 1% thanks to an impairment charge from restructuring its domestic US air fleet.

Revenue for the quarter was up 4% compared to the same period last year, to $11bn, and net income would have been up 14% to $634m if it hadn’t been for the air fleet restructuring, but instead was down to $550m.

Operationally, the company is seeing a shift from premium air freight services to economy air freight, and from air to both ground and ocean transport as the global economy struggles.

FedEx executives told investors this morning that the company’s three priorities going forward were continuing to improve package yields, encourage volume and redesign the global network.

Fred Smith the FedEx Corp chairman said that moves to restructure the air network, speed up services and modernise the fleet would improve the express results in the long term.

“The significant improvements, as we continue with this fleet modernisation, are a very big part of achieving double digit margins in express,” he said.

As the company seeks to reshape its network, including the speeding up of 6,000 routes, it is also modernising with a view to better operating efficiencies and fuel consumption, retiring older aircraft and bringing in more efficient new aircraft.

Looking forward, the company said it would be facing higher costs in 2013 from its labour, as well as higher depreciation costs from its fleet, but would look to more ways to counter these, particularly in express.

Alan Graf Jr, the FedEx Corp CFO, said: “We expect to mitigate these challenges by reducing costs and improving efficiencies, and are continuing to evaluate additional actions to substantially improve FedEx Express margins.”

Express

FedEx Express saw its revenue up 3% to $6.8bn for the quarter, but operating income dropped 34% thanks to the aircraft impairment costs, to $281m.

Even without the air fleet restructuring charge, the division would have seen its income down 3%, to $415m for the quarter. Its operating margin would have been 6.1%, but with the charge came in at 4.1%.

In the United States package volumes are growing by 6%, in large part thanks to e-commerce, but volumes are shifting towards FedEx Ground services and weight per package is falling 5% thanks to ecommerce growth.

FedEx executives said they were being more selective in their e-commerce volumes than rivals in order to mitigate some of the movement towards lighter weight packages, which affects earnings per shipment.

Internationally, the company has seen weakness in its Asia-Pacific business caused by key technology sector customers and their product launches, translating into a 3% drop in average daily volumes.

However, executives said operations in Europe are actually doing quite well despite the economic turmoil.

“Europe is performing very well through the crisis,” said Graf. “We have a very aggressive organic expansion going on throughout Europe, we are growing our customer base every day, and it’s going well.”

Graf noted the recent acquisitions of French firm Tatex and Polish firm Opek, and also his company’s organic expansion, opening new stations at the rate of one per week this year in Europe.

“Despite the turmoil over there, we are probably a lot more bullish than others over there as a result of what we are doing,” he said.

Ground and freight

Among the other divisions, FedEx Ground saw its revenue up 9% in the quarter compared to the same period last year, to $2.48bn, with operating income up 18% to $494m on a margin of 20%, both at a record high.

Increased rates and new services helped revenue per package increase 5% in the quarter, while average daily volumes grew 3%, driven by business-to-business and ecommerce services, with FedEx SmartPost average daily volumes increasing 16%.

FedEx Freight saw its revenue up 7% in the fourth quarter, compared to the same period last year, to $1.4bn, with operating income up 93% to $81m on a margin of 5.8%.

The improved freight performance came thanks to increases in customer demand, for example as freight shifted from air to ocean, and fuel surcharges also helped with Less Than Truckload business.

FedEx Freight rates are set to go up by 6.9% in the US from next month.