FedEx Pares Asia Flights Amid Shift to Cheaper Deliveries

FedEx Corp. (FDX) plans to cut cargo flights to Asia as customers accelerate their shift to the company’s slower, less expensive international services.

The shipping company is making the changes after missing analysts’ estimates yesterday on both fiscal third-quarter profit and its full-year forecast. An economic bellwether that moves goods as varied as medical supplies and auto parts, FedEx had already begun a $1.7 billion restructuring to make up for a move away from its fastest, most expensive deliveries.

“The trade lane between Asia and the U.S., in particular, remains weak in terms of air freight,” said Logan Purk, a St. Louis-based analyst at Edward Jones & Co. who has a buy rating on the shares. “With FedEx leveraged more to a discretionary air-freight model, they suffer.”

The company, which operates a shipping hub at Guangzhou, China, and plans to open one in Osaka, Japan, is also studying grounding some planes.

FedEx “got a little ahead of our skis” in putting capacity into the U.S.-Asia air freight market, Chief Executive Officer Fred Smith said on a conference call yesterday. As customers moved away from overnight shipments to deferred deliveries, the Memphis, Tennessee-based company found itself carrying too many low-priced packages on expensive aircraft.

Photographer: Victor J. Blue/Bloomberg

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Photographer: Victor J. Blue/Bloomberg

The driver for an independent contractor to FedEx Corp. delivers packages in Midtown Manhattan in New York.

The company will use the capacity cut to push lower- yielding goods to cheaper shipping networks, such as ocean and ground, within the company, said Dave Rebholz, chief executive of FedEx Express.

Cheaper Transportation

“The fact that shipper preferences are going toward cheaper transportation should not be a surprise,” said David Vernon, a Sanford C. Bernstein & Co. analyst with a market perform rating on FedEx. “We’re hearing it from our contacts across the industry. The ultimate impact on the business was much worse than anybody had expected, us included.”

FedEx dropped 6.9 percent to $99.13 at the close of New York trading, the steepest drop since Sept. 22, 2011. The company’s stock now trades at a discount of 13 percent to rival United Parcel Service Inc. (UPS)

While the company’s package volume was “pretty healthy” in the fiscal third quarter, much of the shipments involved lower-yielding freight, said Purk.

“That’s what’s biting FedEx,” he said.

The Asian cutbacks, slated to start April 1, are in addition to the existing restructuring that focuses on FedEx Express, the largest unit. There, the company plans to generate $1.55 billion in cost cuts and profit improvement by trimming jobs, replacing older planes and cutting fuel-guzzling vehicles.

Fourth Quarter

Earnings this quarter will be $1.90 to $2.10, the company said, below an estimate of $2.12 from analysts surveyed by Bloomberg.

The company reduced by $100 million the estimated pre-tax cost of a voluntary employee buyout, in part because it’s not filling open positions. The company now projects an expense of $450 million to $550 million in fiscal 2013. Eligible workers will notify FedEx by April 1 whether they will accept offers.

For the full fiscal year, which ends in May, FedEx now predicts earnings of $6 to $6.20 a share, down from an earlier projection of $6.20 to $6.60 a share.

In the fiscal third quarter, which ended in February, earnings excluding costs for the buyout were $1.23 a share. That missed the $1.38-a-share average estimate of 25 analysts, according to data compiled by Bloomberg.

Including $47 million for the buyout and related restructuring expenses, net income was $361 million, or $1.13 a share, compared with $521 million, or $1.65, a year earlier, FedEx said.

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

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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