FedEx Sees First Earnings Drop Since 09 as Economy Slow

FedEx Corp., operator of the world’s largest cargo airline, projected its first decline in quarterly earnings in almost three years as slowing economic growth hurt demand for the express packages that provide most of its sales.

A slump in Europe and slowing growth in Asia may have exposed a weakness of FedEx’s express business, which was built around customers willing to pay more for speed of delivery, said analysts from Sanford C. Bernstein & Co. and Raymond James & Associates Inc.

“The economy needs to get better,” said Arthur Hatfield, an analyst with Raymond James in Memphis, Tennessee. “We see some pent-up demand but corporations aren’t spending the money until they get clarity on where policies are going.”

FedEx’s forecast marks the second time since June the company has issued a profit estimate that trailed analysts’ projections. The company is considered an economic bellwether because it moves worldwide goods ranging from financial documents to pharmaceuticals.

Profit for the quarter that ended Aug. 31 will range from $1.37 to $1.43 a share, Memphis-based FedEx said yesterday in a statement. That was less than its June 19 forecast of $1.45 to $1.60 a share and year-earlier earnings of $1.46. It would mark the first drop in adjusted earnings per share since the quarter that ended November 2009.

FedEx fell 2.9 percent to $85 as of 7:24 a.m. in early trading in New York after closing at $87.54 yesterday. FedEx released its statement after the close of regular trading. The shares rose 4.8 percent this year through yesterday’s close, trailing a 12 percent gain in the Standard & Poor’s 500 Index. FedEx is set to release quarterly earnings on Sept. 18.

Speed Focus

Even with an economic rebound, shippers probably won’t return to paying a premium for overnight service, said Dave Vernon, an analyst based in New York with Sanford C. Bernstein.

“The way that FedEx’s business is set up, it’s really geared for speed,” Vernon said. “They need to restructure that and make it a little bit more economical on how they run their network. That’s going to be a relatively slow process.”

The International Monetary Fund in July said it expects the global economy to expand 3.9 percent, down from an April estimate of 4.1 percent. FedEx in June lowered its projection for U.S. economic growth to 2.2 percent for the year that ends May 31, from a 2.3 percent forecast given six months earlier.

Manufacturing in the U.S. contracted for a third month in August, the longest slide since the recession ended and a sign the expansion may lose a source of strength. The Tempe, Arizona- based Institute for Supply Management said yesterday its factory index fell last month to the lowest since July 2009.

European Weakness

The euro-area economy is forecast to contract 0.4 percent this year, according to the average of 39 economists’ estimates compiled by Bloomberg. China’s economy is expected to slow to 8 percent from 9.2 percent in 2011, according to 30 estimates.

A decline in Asia caused average volume for international priority packages to fall 3 percent from a year earlier for the quarter ended May 31, FedEx said in its June 19 quarterly report. In the U.S., express package volume fell 5 percent.

“The global economy is weak and it’s impacting their business in the short run,” Hatfield said. “I don’t think there’s anything inherently broken with their business.”

Analysts had predicted adjusted profit in the quarter would be $1.56 a share, based on the average of 23 estimates compiled by Bloomberg. They already had lowered their projections from earlier in the year. The average for the quarter was $1.70 a share before FedEx’s outlook statement in June.

Global Weakness

“Weakness in the global economy constrained revenue growth at FedEx Express more than expected in the earlier guidance,” FedEx said yesterday.

Slowing sales may add urgency to FedEx cost-cutting efforts that include a voluntary buyout program and the grounding of some older, less-efficient cargo planes.

Buyouts will be focused on staff employees at FedEx Express and FedEx Services, which operates combined sales, marketing, administrative and technology functions across other businesses. Shea Leordeanu, a spokeswoman, said last month that FedEx hadn’t decided how many workers will need to accept offers and expects to release details at an Oct. 9-10 investor conference.

In June, FedEx said it was retiring 24 jet freighters and 43 older engines to better match shipping volumes. The company also has said it expects to retire 21 Boeing Co. (BA) 727s this fiscal year. Those planes will be replaced with Boeing 767-300 and 757-200 aircraft that are more fuel efficient and cost less to operate, FedEx said.

Cutting Costs

Restructuring the express business may remove $200 million to $900 million in costs, Hatfield said in an interview, citing analysts’ estimates.

That pullback is more significant for FedEx’s finances “in the short to medium term” than changes in earnings forecasts because of the economy, said Hatfield, who has a strong buy rating on the shares.

The larger 767s that FedEx has on order won’t be available until the end of fiscal year 2014, constraining the company’s ability to revamp the unit quickly, said Vernon, who has a market perform rating on the shares.

“The restructuring of the express business isn’t going to be cheap and it’s not going to be easy,” Vernon said. “It’s going to be a slow slog.”