Dec. 20 (Bloomberg) -- FedEx Corp., the largest air-cargo carrier, said second-quarter profit rose 8.5 percent on global demand and forecast earnings that trailed analyst estimates, sending shares to their biggest drop in nine weeks.

Net income increased to $511 million, or $1.64 a share, in the three months ended Nov. 30, from $471 million, or $1.53 a share, a year earlier, the Memphis, Tennessee-based company said today. Sales climbed 10 percent to $8.93 billion.

The shipper said third-quarter profit would be damped by an increase in fuel prices. FedEx's second-quarter results provided the 12th consecutive quarterly profit increase for the company, which hasn't reported a loss since 1997.

``They had strong growth in the second quarter,'' said Jim Corridore, a New York-based Standard & Poor's analyst who rates FedEx a strong buy. ``Obviously, they can't control fuel prices. Their core business is just fine.''

FedEx said third-quarter earnings will be $1.20 to $1.35 a share, and fourth-quarter profit will be $1.98 to $2.13. The company is expected to earn $1.55 and $2 in those periods, the average of analyst estimates compiled by Bloomberg. FedEx kept its full-year earnings forecast at as much as $6.65 a share, including the up-front contract cost.

Shares of FedEx fell $2.15, or 1.9 percent, to $111.85 at 4:19 p.m. in New York Stock Exchange composite trading. The stock has risen 8.2 percent this year.

Fuel Surcharge

Surcharges FedEx uses to blunt the impact of higher oil costs lag behind current prices by two months. The company benefited last quarter and in previous periods when fuel prices fell at a steeper rate than the surcharges.

FedEx gained about 20 cents a share last quarter as fuel prices fell, said William Greene, a Morgan Stanley analyst. Ed Wolfe, a Bear Stearns analyst, said today the benefit was probably 6 cents a share. The company declined to provide the impact of the surcharge.

``Last year's third quarter benefited from the timing lag in setting the surcharge, and this year the opposite is going to occur,'' Chief Financial Officer Alan Graf said on a call with analysts. ``What you see here is us maintaining guidance for the full year, with the second quarter outperforming and the third quarter underperforming because of fuel.''

FedEx doesn't expect a significant disparity between prices and the surcharge in the fourth quarter, which ends in May.

The FedEx Express fuel surcharge is adjusted monthly based on a rounded average of the U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel. The surcharge at FedEx Ground is based on a rounded average of the U.S. retail price for a gallon of diesel fuel.

December Rate

The FedEx Express surcharge for December is 11.5 percent and declines to 9.5 percent for January.

Results at FedEx and other shipping companies, including truckers and railroads, are often seen as indicators of broader economic growth or contraction. While FedEx has seen some slowing from a year earlier, the third-quarter outlook was based solely on fuel prices, not the U.S. economy, Graf said.

Average daily package volume at FedEx Express and FedEx Ground grew a combined 7 percent in the second quarter. At the Express segment, FedEx's largest division, sales rose 6 percent to $5.69 billion.

Increased online Christmas shopping in November also helped FedEx. As much as 30 percent of the company's volume is in business-to-consumer shipments, Greene said. The busiest day of the season was Dec. 18, after the quarter ended, when FedEx transported a record 9.8 million packages.

Holiday Shipments

``Package volumes are solid this holiday season, and we see continued global economic growth in 2007,'' said Chairman Frederick Smith.

FedEx's second quarter included a cost of $143 million, or 25 cents a share, for bonuses and up-front payments under a new labor contract approved by its pilots on Oct. 17. Excluding that, the company was expected to earn $1.73 a share, the average of 13 analyst estimates compiled by Bloomberg.

Operating profit at FedEx Express rose 5 percent to $502 million on a 6 percent increase in one- to three-day shipments between countries. Sales at FedEx Ground climbed 16 percent to $1.52 billion as operating income rose 17 percent to $191 million and the number of shipments climbed 14 percent.

Freight

FedEx Freight sales increased 31 percent, helped by the $780 million purchase earlier this year of Watkins Motor Lines. Profit rose 2 percent to $138 million as the company spent money to integrate the Watkins assets.

FedEx Kinko's, a chain of copying and printing stores, saw sales fall 2 percent to $519 million as operating profit tumbled 50 percent to $8 million on costs to train employees.

``As we ramp up and expand stores at a faster rate, FedEx Kinko's is not going to be a contributor in earnings of and by itself,'' Smith said of the division acquired in 2004. ``For the next two or three years, you can expected FedEx Kinko's to be around break even.''

For the first half of the year, net income climbed 22 percent to $986 million, or $3.17 a share. Sales increased 11 percent to $17.5 billion

The company's 3.5 percent note due in 2009 rose 0.1 cent to 96.5 cents today, yielding 5.1 percent, according to Trace, the NASD's bond-price reporting service.

FedEx, the largest transporter of express packages in the U.S. and Asia, has continued to focus on international expansion. FedEx said Dec. 18 that it purchased U.K. delivery company ANC Holdings Ltd. for about $234 million to help it compete against United Parcel Service Inc., Dutch shipper TNT NV and Deutsche Post AG's DHL shipping unit.

FedEx last month purchased an Indian air-freight company and bought out its joint venture partner in China to strengthen its dominance in the Asian shipping market.

To contact the reporter on this story: Mary Schlangenstein in Dallas maryc.s@bloomberg.net

Last Updated: December 20, 2006 16:24 EST