NEW YORK (CNNfn) - FedEx Corp. beat estimates Thursday for its fiscal third quarter, despite the effect of rising fuel prices.|
The leading express freight and letter carrier posted net income of $113 million, or 39 cents a diluted share, for the quarter ended Feb. 29, although 2 cents per share of that came from the sale of securities. Analysts surveyed by earnings tracker First Call forecast only 34 cents a share for the period.
In the year-earlier period, FedEx (FDX: Research, Estimates) earned $78 million, or 26 cents a share, but that included costs for dealing with a possible strike by pilots that never took place. Without those one-time contingency costs, the company would have earned 44 cents a share a year earlier.
Surcharge covers about a quarter of increase in fuel
Fuel costs for Federal Express, its air carrier, increased 72 percent for the quarter to $248 million from $144 million. The company said the average cost of jet fuel in the quarter was 90 cents a share, compared with 50 cents a year ago. The increase cost in fuel reduced net income the equivalent of 17 cents a share for the quarter.
The company has instituted a 3 percent fuel surcharge for its domestic express packages to try to deal with the spike of jet fuel prices, and plans another 1 percent increase effective April 1. It also has long-term fuel contracts that will reduce the cost of about half its expected fuel purchases this quarter to about 71 cents a gallon.
The company raised about $25 million from the fuel surcharge in the third quarter, and estimates the existing and new surcharges will bring in about $80 million-to-$100 million this quarter. It believes the fuel prices and surcharges will last through at least the fall, although it also believes the prices have reached a peak for now.
"We'll take those (surcharges) down if and when there's reduction in fuel costs," said Fred Smith, chairman of FedEx, in an interview on CNNfn Thursday. (327KB WAV) (327KB AIFF)
The ratio of operating expenses to revenue, a key measure of a freight carrier's financial performance, improved to 96.2 percent from 97.2 percent a year earlier.
Overall revenue rose 10 percent to $4.5 billion in the quarter from $4.1 billion a year earlier. Besides its express operations, the company operates a trucking division it recently renamed FedEx Ground, and a third-party logistics operation.
Revenue from express operations rose 9.5 percent in the quarter to $3.8 billion, resulting in improved operating margins despite the increased fuel costs. Revenue also increased because of two extra operating days in the quarter due the leap year and no day off on Jan.1.
Package volume relative flat for period
Revenue per pound rose 9 percent in the period, making up for relatively flat daily package volume. Domestic overnight deliveries averaged 2.0 million daily, up 2 percent from a year earlier.
Ed Wolfe, an analyst with Bear Stearns, said that despite beating estimates, the numbers show that FedEx is being hurt by sluggish volume growth due to growing competition from United Parcel Service (UPS: Research, Estimates) and the Internet. He said FedEx's plan to hire more sales people and merge the sales forces of its express and ground services is a good idea, but could hurt results over the next year.
"Certainly over a long-term period they're doing the right thing and are in the right businesses," he said in an interview on CNNfn's Before Hours. "However, in the near term there are some actions they're going to need to take that put concerns in our mind." (341KB WAV) (341KB AIFF)
But company officials say they made a major effort to concentrate on the better-margin business, even if it cost it package volume or market share in the period.
"What we are most concerned with at FedEx is volume growth that provides a compensatory returns," said Alan Graf, the company's chief financial officer. "I'm not as enamored with market share for market share sake as some people who like to write about it."
For the first nine months, FedEx earned $443 million, or $1.49 a diluted share, up from $410 million, or $1.37 a share, a year earlier. Revenue rose to $13.4 billion from $12.4 billion a year earlier.
Shares of FedEx gained 2-11/16, or about 7 percent, to 39-15/16 in trading Thursday.