FedEx Flies Even Higher

Astute planning insulated the shipper from oil-price spikes, its Asia-U.S. routes are booming, and guidance is up substantially

By Dean Foust

Given all the dark clouds hanging over the economy, FedEx's news couldn't have come at a better time. On Aug. 23, the shipping giant raised its profit forecast for both its fiscal first quarter and full year, and it said it would boost capital spending.

The bullish report from FedEx (FDX ) comes at a time when concerns are growing as to whether surging oil prices will precipitate a pullback in spending by both consumers and businesses. But FedEx -- which, like other transportation companies, is entering its busiest months as retailers begin building inventories for the upcoming holiday season -- says it doesn't foresee a slowdown.

"We're seeing strong demand across our international express, ground, and less-than-truckload services," Alan B. Graf Jr., FedEx's chief financial officer, said in a statement. "We have strong momentum in our businesses, and believe the economy continues on a sustainable expansion path."


  FedEx -- unlike many U.S. businesses -- is relatively insulated from rising fuel prices. Like rival United Parcel Service (UPS ), FedEx was smart enough several years ago to rewrite its customer contracts in ways that allow it to pass along any increases through surcharges. And at the same time, it's clear that rising fuel prices aren't deterring businesses and consumers from following through with purchases.

In its announcement, FedEx said it now expects to earn $1 to $1.10 per share in its fiscal first quarter, which ends Aug. 31. That's 10 cents more than the 90 cents to $1 per share previously forecast, and more than double what the outfit earned in the same quarter a year ago. It was also enough to convince Merrill Lynch analyst Ken Hoexter to boost his stock-price target by 4%, to $93.

FedEx also said it will increase its capital spending for the current fiscal year by some $500 million, to between $2 billion and $2.1 billion. While FedEx didn't specify how it will deploy this extra capital spending, it's a safe bet that the cash will be used to lease more aircraft on its lucrative Asia-U.S. routes. The incremental margins on its international express business are running "north of 30%," notes Morgan Keegan analyst Art Hatfield.


  From a broader perspective, the cheery news may serve to reinforce a point that some economists are making -- that the sharp spike in oil prices isn't going to sink the U.S. economy (see BW Online, 8/20/04, "The Good News About Costly Oil"). David A. Rosenberg, chief North American economist for Merrill Lynch, notes that spending on energy accounts for just 3.6% of the total U.S. economy. While every $10-a-barrel increase in oil prices tends to drain about 0.5% from overall growth, Rosenberg estimates that if oil prices hold at around $48 a barrel over the next year -- about $13 above the $35 average for the past 12 months -- growth would be shaved from the current 3.8% year-over-year pace to 3%.

True, even a drop of less than a percentage point means lost output. But as the FedEx report shows, rising oil prices aren't slowing the wheels of commerce.

Foust is BusinessWeek's Atlanta bureau chief

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