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FedEx flies over forecasts
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September 19, 2000: 1:40 p.m. ET
Express carrier says it is handling fuel hikes; criticism of postal talks mounts
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Express parcel carrier FedEx Corp. overcame higher fuel costs to beat earnings forecasts for its fiscal first quarter Tuesday. But it may next have to overcome opposition to a possible alliance with the U.S. Postal Service.
Memphis, Tenn.-based FedEx posted net income of $169 million, or 58 cents a share, for the period ended Aug. 31, topping the 54 cents a share forecast of analysts surveyed by earnings tracker First Call. The company earned $159 million, or 52 cents a share, in the year-earlier quarter.
The company released the results as members of Congress and the International Brotherhood of Teamsters, one of the nation's most powerful unions, called for a Justice Department investigation into FedEx's talks with the Postal Service. A congressional hearing scheduled for Tuesday was also expected to focus on any proposed combination.
Sees chance for record fiscal year earnings
FedEx expects to set records this fiscal year for sales, profit and cash flow said Alan Graf, the company's chief financial officer.
 Graf told analysts that he's confident the company can come in with earnings per share growth at the upper end of the 10 to 15 percent growth rate given in earlier guidance. He said the economy needs to have a so-called "soft-landing," rather than falling into recession, and that fuel prices need to moderate at some point in the fiscal year to meet that target. But he said he's not looking for any immediate relief on fuel costs to reach his goal.
First Call forecasts full-year earnings of $2.63 a share, up 13.4 percent from the $2.32 made in fiscal 2000.
Revenue rose to $4.8 billion from $4.3 billion. The average composite package price increased to $16.95 from $15.99 a year earlier. The average shipment price for its deferred ground service also improved to $5.67 from $5.53. Both segments also had increased shipping volumes in the quarter.
Graf said that the company could have seen better volume growth with more aggressive pricing, but that it walked away from some business due to emphasis on improving profitability.
"Growth for growth sake is not important to this company," he said. "After tax cash flow and profitably is."
Analysts generally praised the quarter's results.
"The upside to the quarter was driven by strong cost control and benefit from its fuel surcharge," said Ed Wolfe, analyst for Bear Stearns. "Our estimates will likely creep upwards.
Rising fuel prices raised net costs by $55 million compared with a year earlier, and fuel costs are expected to add about $75 million to the current quarter's costs.
But the company said a fuel surcharge levied on customers and long-term fuel purchase contracts to control pricing should help it deal with those costs the rest of the year. The long-term contracts, known as hedges, saved the company about $27 million in the first quarter, and they are expected to save about $32 million in the current period.
Another rise in the fuel charge, which now stands at 4 percent of shipping costs, is also possible.
"We're 25 cents a gallon above the point where we raised our surcharge to 4 percent," Graf said.
Calls for scrutiny of postal alliance
Graf made very limited comments on FedEx's ongoing negotiations with the U.S. Postal Service about a potential strategic alliance. The company and Postmaster General William Henderson confirmed the talks earlier this month.
"All I can say there is a lot of work ahead on those discussions," he said.
"If alliances vs. ownership (of assets) is more appropriate to looking at the end of improving shareholder value, that's what we're going to do," he added later in the call. "They (alliances) are not easy. If they were easy, we'd have done them already."
While FedEx officials have had few comments on the talks, Henderson said in a press conference earlier this month that the talks are looking at the possibility of the Postal Service making some of the residential deliveries to more rural residences of FedEx's lower-price ground delivery packages. He said the two sides are also looking at having FedEx handle some of the express mail and priority mail volume, although not necessarily the final delivery.
The agreement could also give FedEx access to making delivery to post office boxes for the first time as well as allow FedEx drop boxes in post offices, according to Henderson.
Rep. Henry Hyde, R-Ill., chairman of the House Judiciary Committee, sent a letter Monday to Joel Klein, the assistant attorney general in charge of antitrust cases at the Justice Department, saying such an alliance "raises a variety of antitrust concerns."
"As the Postal Service has evolved, I have become increasingly concerned about its uncertain antitrust status," Hyde wrote. "As we go forward, I believe that we must re-examine the continued viability of the Postal Service's antitrust immunity if it is to compete against private businesses."
Klein announced Tuesday he plans to resign from the Justice Department at the end of this month.
The International Brotherhood of Teamsters also sent a letter to President Clinton Monday objecting to any alliance and urging a Justice Department review. The letter came the same day the union endorsed Vice President Al Gore for president.
FedEx competitor United Parcel Service (UPS: Research, Estimates), a vocal critic of any FedEx-Postal Service deal, is the largest Teamster employer, with about 200,000 union members.
A hearing was scheduled Tuesday afternoon by the House Postal Service subcommittee, which will have a number of questions about the proposed alliance. Rep. John McHugh, R-N.Y., chairman of the subcommittee, issued a press release Monday that said the postal service faces a crisis for its continued viability.
"It is no surprise that the Postal Service is seeking innovative approaches to dealing with these problems, as evidenced by its possible strategic alliance with Federal Express," McHugh said.
Officials with the Postal Service and the Justice Department did not have an immediate comment on the calls for an antitrust investigation.
Shares of FedEx (FDX: Research, Estimates) gained 95 cents to $39.56 in trading Tuesday. 
-- Click here to send e-mail to Chris Isidore
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