June 18 (Bloomberg) -- FedEx Corp. posted its first quarterly loss in 11 years and projected earnings that fall short of analysts' estimates as fuel costs rise and a slowing economy curbs demand. The shares dropped 2.1 percent.

The second-largest U.S. package-shipping company had a fourth-quarter loss of $241 million on a writedown for its Kinko's unit, and predicted a ``very difficult'' environment in the coming year.

The report from FedEx, considered a proxy for the U.S. economy, suggests fuel costs and declining demand will continue to erode prospects in industries ranging from shipping to airlines. Economists have cut their U.S. growth forecasts for later this year and next as job losses, food and fuel prices and tougher lending rules hurt consumers.

``The economy is struggling and FedEx is a premium service provider at the top of the food chain,'' Art Hatfield, an analyst at Morgan Keegan & Co., said today in an interview on Bloomberg Television. ``When times get tough, their customers are looking to save, and that means going to other modes of transportation'' that are cheaper.

The net loss was 78 cents a share, compared with a year- earlier profit of $610 million, or $1.96, the company said today in a statement. Revenue rose 7.8 percent to $9.87 billion.

Excluding the $891 million charge for the Kinko's unit, which is being renamed FedEx Office, the company's profit was $1.45 a share, which missed the average $1.47 estimate of 11 analysts surveyed by Bloomberg. The writedown for FedEx Kinko's, a chain of office-supply and copy centers, was for the value of the trade name and goodwill.

`Uncertain Outlook'

FedEx fell $1.73 to $82.60 at 4:02 p.m. in the New York Stock Exchange composite trading, after dropping to $80.38 earlier.

FedEx said fiscal first-quarter earnings would be 80 cents to $1 a share, lower than the $1.34 average estimate of nine analysts surveyed by Bloomberg. Profit a year earlier was $1.58 a share. The Memphis, Tennessee-based company said earnings are ``difficult to predict'' because of volatile fuel prices and an ``uncertain economic outlook.''

For the full-year, FedEx said profit will be $4.75 to $5.25 a share, compared with an average estimate of $6.01 by 12 analysts in a Bloomberg survey.

The coming year will be ``very difficult due to the weak U.S. economy and extremely high fuel prices,'' FedEx Chief Financial Officer Alan Graf said in the statement.

Economic Bellwether

``FedEx is a bellwether for economic indicators, and what it's telling us is that the economy is still weak,'' said Christopher Low, chief economist at FTN Financial in New York. ``Obviously costs are way up, but revenues were also weaker than I expected.''

FedEx and UPS typically have a two-month lag in recovering fuel expenses through surcharges. Crude oil, from which gasoline and jet fuel are derived, averaged $115 a barrel in the three months ended May 31, up from $63 in the same period a year earlier.

FedEx's fuel bill for the fourth quarter surged 54 percent, to $1.39 billion. Jet-fuel costs jumped 80 percent from a year earlier, Graf said on a conference call with investors and analysts.

Cheaper Options

The surcharges that FedEx has been able to add so far have hurt demand for express shipments, as some customers downgrade to cheaper options such as two-day shipping or freight. FedEx's fuel surcharge on express packages is 28 percent, up from 18.5 percent in March, according to its Web site. The surcharge will jump to 32.5 percent in early July.

``Once we crossed over that threshold and started turning toward 30 percent, our customers wanted to take a second look'' at less expensive shipping options, Graf said on the conference call. The company is renegotiating rates with some customers in exchange for longer-term contracts, Graf said, without providing more detail.

FedEx's U.S. package volume dropped 3.4 percent for the fourth quarter, with a 6.5 percent decline in overnight envelope shipments, one of its most profitable offerings. International volumes rose more than 5 percent for the quarter.

FedEx's results underscore concerns among economists that higher energy and raw-materials expenses will squeeze profits in more industries as consumers resist price increases. Prices paid to U.S. producers rose more than economists forecast in May as fuel and food costs climbed, a report yesterday from the Labor Department showed.

Holding Back

``Businesses are holding back on passing along the higher costs as demand is slowing,'' said Rudy Narvas, senior economist at 4Cast Inc. in New York. ``Oil is putting pressure on prices, but the pass-through to consumers is slow.''

Economic growth for all of 2008 will be 1.5 percent, the slowest since 2001, with next year recording a 1.9 percent gain, according to the median forecast of economists surveyed by Bloomberg from June 2 to June 11.

``We continue to see some very uninspiring economic figures from the U.S. that point to some very weak growth,'' said Nicolas Lopez, head of analysis at Mercados & Gestion de Valores in Madrid. He spoke in Spanish in an interview with Bloomberg Television yesterday. ``It's going to continue for some time.''

United Parcel Service Inc., the biggest shipper, lowered its full-year profit forecast in April after reporting only its eighth drop in domestic deliveries in its 101-year history. The company's volumes almost always match or exceed U.S. gross domestic product.

UPS Chief Financial Officer Kurt Kuehn said there are ``no signs of economic strengthening'' for the quarter ending June 30.

FedEx controls about 31 percent of the U.S. package market, behind only UPS's 51 percent share, according to SJ Consulting Group Inc.

To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

Last Updated: June 18, 2008 16:19 EDT