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News > Companies
FDX burned by fuel costs
December 16, 1999: 1:43 p.m. ET

2Q profit down but still tops forecast; spending plans cut, surcharge mulled
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - FDX Corp., parent of express carrier Federal Express Corp., delivered a drop in earnings results Thursday for its fiscal second quarter, ended Nov. 30, although it beat analystsí estimates.
    As a result, the company is cutting or delaying capital spending by $200 million, or 9 percent, to $2.1 billion for the fiscal year ending May 31. It also will cut operating costs by an additional $75 million in the second half by such means as slowing hiring.
    FDX said the cuts are needed in response to weaker-than-expected growth of the core domestic overnight shipments at FedEx and increased fuel costs. On the revenue side, it said it is considering a fuel surcharge on customers early next year.
    For the latest quarter, FDX (FDX) had net income of $171 million, or 57 cents a diluted share, compared with $183 million, or 61 cents a share, a year earlier. Analysts surveyed by First Call had been looking for 55 cents a diluted share in income for the quarter.
    Revenue rose 8.6 percent to $4.6 billion, with RPS posting stronger revenue growth than FedEx, while international shipments at FedEx outpaced domestic by a large margin.
    
Hurt by spike in fuel costs

    The Memphis, Tenn., holding company, which also owns ground parcel carrier RPS and other trucking companies, said increased fuel cost was a key reason for the profit drop. Average fuel costs rose almost 40 percent in the quarter to about 76.6 cents a gallon for jet fuel from 55.5 cents a year ago. Those costs are above 82 to 83 cents a gallon today.
    The increase in fuel price reduced operating profit by $55 million in the quarter and may cost the company more than $200 million during its current fiscal year, rather than the $150 million increase the company was expecting three months ago. The cost cuts are a direct response to those increased fuel prices.
    

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    "I can't control what OPEC charges, but we can control our costs," said Alan Graf Jr., FDX's chief financial officer, told analysts in a conference call. "It's going to probably delay some things that we might have wanted to do that would benefit us in (fiscal year) 01 and 02, but we have to make some numbers."
    Fuel prices will continue to hurt the company's current quarter, ending Feb. 29, but hedging of fuel costs should help some by the fourth quarter. Graf admitted that a fuel surcharge could hurt revenue because its major competitor, United Parcel Service, does not plan such a surcharge.
    Several analysts on the call indicated they were impressed with the cost-cutting efforts in the recent quarter, with one saying he hoped it was a sign of things to come.
    Graf said much of the capital expenditure cut is possible because slower-than-expected domestic growth is reducing the need for additional vehicles or aircraft. Some conversions of used passenger aircraft to freighters will be delayed and other building and vehicle purchases are being scrapped or postponed as well.
    "We plan to continue to grow, so in the long run these are probably delays more than cancellations," Graf said.
    One area the company doesnít plan to delay is the launch of RPS home deliveries in most major metropolitan areas in March. RPS has been strictly a business-to-business carrier until now.
    Graf said tests of the home delivery program in the Pittsburgh area are going well, and that the company still is convinced it needs to keep RPS's home and business delivery systems separate to make it work, along with keeping RPS's delivery system separate from FedEx.
    "As far as the residential project for RPS, we've recognized from day one that was a service gap, a low-cost ground home delivery service," he said. The product is seen as important to competing with UPS to deliver online purchases by consumers.
    
Targeting smaller business customers

    FedEx also announced plans to concentrate more on the small and medium-size business customers, a market dominated by UPS. FedEx expects to boost marketing and advertising expenses and sales staffing, despite the overall hiring slowdown. It also is changing management and the compensation package for the sales force to concentrate more on package shipments and this part of the customer base.
    "Where we can do better is where they (UPS) do extremely well, with the small and medium customer," Graf told analysts.
    For the six months ended Nov. 30, FDX earned $330 million, or $1.10 a diluted share, compared with $332 million, or $1.11 a share, a year earlier. Revenue rose 7.2 percent to $8.9 billion.
    FedEx stock was up 2-1/4, or 6 percent, to 41-1/16 in midday trading Wednesday. Back to top

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