The weak global economy is still creating turbulence in FedEx's air-shipment business. But its ground-shipping unit continues to churn out strong profit — operating income was twice that of the express business.
FedEx said Wednesday that it earned $489 million in the June-through-August quarter, which topped analysts' expectations.
Shares of FedEx rose $2.78, or 2.5 per cent, to $113.46 in morning trading after hitting $115.52 earlier in the session — a 52-week high. They began the day up 21 per cent so far this year and are approaching their highest price since early 2007, before the recession.
FedEx said that it will raise U.S. express-shipping rates by an average of 3.9 per cent on Jan. 6. Prices for ground shipments in 2014 will be announced later this year; the freight segment imposed a 4.5 per cent rate hike in July.
The company left unchanged its forecast for full-year profit in the fiscal year that ends in May 2014. It expects earnings per share to rise between 7 per cent and 13 per cent, which would be between $6.63 and $7.01. Analysts surveyed by FactSet expect $6.97 per share.
"We remain confident in our full-year earnings outlook despite tepid global economic growth," said chief financial officer Alan Graf.
Express deliveries account for 60 per cent of the company's revenue, but that unit's revenue was flat in the August quarter. Graf said the company was still committed to its goal of boosting the unit's operating profit by $1.6 billion by the end of May 2016. FedEx continued to see a decline in international priority deliveries as customers shift to slower but less-expensive shipping options, including ocean freight. This trend has been noticeable in shipments of consumer electronics from Asia, and FedEx has responded by reducing air cargo capacity between Asia and the United States.
Company executives portrayed the shift in customer demand as an opportunity, not an albatross. They said international economy-express shipping grew 15 per cent from a year earlier. FedEx says international economy shipments under 150 pounds are usually delivered within five business days, while priority shipments take one to three days — typically next-day in the U.S.
"The market has changed," Chairman and CEO Fred Smith said on a conference call with analysts. "The international economy-express is a growth sector ... so we've embraced it."
Operating income in the express business jumped 14 per cent despite flat revenue, helped by lower spending on labour, fuel and maintenance.
While priority shipments move on FedEx planes, the company hires others to carry an increasing amount of its economy-class shipments as a cost-cutting measure. It is buying new, more fuel-efficient Boeing aircraft to reduce costs for its own fleet.
FedEx is also shedding workers. About 3,600 employees have accepted buyouts to leave the company, and about 1,600 have already left, officials said.
The company said that its ground business accounted for the bulk of its operating profit. Ground revenue grew 11 per cent and operating income rose 5 per cent to $468 million, compared to $236 million for the express unit.
For the fiscal first quarter, which ended Aug. 31, the $489 million net income worked out to $1.53 per share. That was up from $459 million, or $1.45 per share a year ago, and beat analysts' forecast of $1.50 per share.
Revenue rose 2 per cent, to $11.02 billion, just above analysts' forecast of $11.00 billion.