FedEx Founder Says Airfreight Sector Changing

Date : 06/19/2012 @ 2:40PM
Source : Dow Jones News
Stock : United Parcel Service, Inc. (UPS)
Quote : 105.94  0.0 (0.00%) @ 4:57AM

FedEx Founder Says Airfreight Sector Changing

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FedEx Corp. (FDX) founder Fred Smith on Tuesday forecast wholesale changes in the global freight business, with intensifying competition on air carriers from ships and a greater focus on more customized door-to-door delivery options.

Mr. Smith pioneered the modern airfreight business and has built the world's largest cargo airline by revenue, but cautioned during a post-earnings conference call that the traditional airport-to-airport business "is not growing."

"It's very clear that the door-to-door express segment is growing, and the movement of goods on the water is growing," said Mr. Smith as FedEx reported a decline in fiscal fourth-quarter profit and outlined plans for a cost-cutting restructuring program in the autumn.

Mr. Smith said FedEx is in a strong position to take advantage of the trends despite the company's history in the express-air segment, citing its scale and combined air, ground and freight capabilities. FedEx also operates a freight-forwarding business, called FedEx Trade Networks, which provides logistics and third-party shipping for customers, including via ocean transport.

Recent industry changes have contributed to FedEx's recent pain, as some customers have opted for slower-moving, non-premium delivery services amid the soft economy. FedEx's international priority airfreight-shipping volume fell 3% in its fiscal fourth quarter ended May 31 after falling 1% in the fiscal third quarter, while its U.S. domestic express volume fell 5%, compared to a 4% decline in the previous quarter.

FedEx is planning to disclose a "comprehensive program" in October to cut costs and better align its express air fleet with anticipated market demand, Mr. Smith said, although he declined to reveal additional details.

BB&T Capital Markets analyst Kevin Sterling said it has been evident for some time that growth in the traditional air-cargo segment is on the wane, although he noted that Mr. Smith's comments are significant.

"When he speaks...people listen," Mr. Sterling said.

Mr. Sterling said he thinks the big-three integrated global airfreight shippers--FedEx, United Parcel Service Inc. (UPS) and Deutsche Post AG (DPW.XE) unit DHL--stand to benefit from the broad industry changes long term because of their scale and flexibility to offer customized services.

Bill Flynn, chief executive of air-cargo carrier Atlas Air Worldwide Holdings Inc. (AAWW), acknowledged that the industry's growth rate has slowed in recent years but said it is still solid and remains a good business.

"The rate of growth may be slowing down, but it is a rate of growth on a much larger absolute base of cargo," Mr. Flynn said in an interview.

He also noted that there is little option for perishable and other time-sensitive shipments except to move by air, particularly as ocean-going container ships move to cut fuel costs through what is known as "slow steaming."

"What we have not seen is a fundamental shift from air back to sea or to sea," Mr. Flynn said. "As the speed of [sea] vessels slows down, I just think it is going to be harder to take high-value, time-sensitive commodities off of an air carrier and onto a ship."

Still, he concurred with Mr. Smith that there is an increasing opportunity for airfreight carriers and others to offer value-added services to customers, such as tracking capabilities.

FedEx said Tuesday that earnings for its fiscal fourth quarter ended May 31 slipped 1.4%, amid the volume declines in its big express-shipping business and a $134 million charge to retire aircraft because of sluggish domestic demand.

Earnings came in at $550 million, or $1.73 a share, down from year-earlier earnings of $558 million, or $1.75 a share. Excluding the aircraft-impairment charge, per-share earnings climbed to $1.99.

Revenue grew 3.8% to $11 billion. Analysts surveyed by Thomson Reuters projected sales of $11.1 billion. Operating margin narrowed to 7.8% from 8.4%.

The company's express-shipping business--its largest top-line contributor--saw revenue rise 2.6% to $6.8 billion. The segment's operating profit declined by 35%.Pointing to the current quarter, the company predicted per-share earnings of $1.45 to $1.60, lower than the estimates of analysts polled by Thomson Reuters, who predict earnings of $1.70 a share.

For the fiscal year, FedEx predicted per-share earnings of $6.90 to $7.40, versus the consensus of $7.39, although the company stressed that the full-year guidance doesn't include "the impacts of significant cost-reduction programs currently under review" that likely will be announced in the autumn.

Its ground-shipping segment reported a 9.7% increase in revenue to $2.48 billion. Operating profit was up 18% as average daily volume grew 3%, driven by growth both FedEx Home Delivery and business-to-business services.

Write to Bob Sechler at bob.sechler@dowjones.com

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