FedEx’s Cheaper Shipping Helps Profit Beat Estimates

FedEx Corp. deepened cuts in air capacity to Asia and moved more packages to cheaper shipping modes, combating a customer shift away from expensive delivery options and boosting quarterly profit that beat estimates.

The world’s largest cargo airline said today it removed a second daily flight to Asia and will seek more ways to reduce spending. That’s on top of a program initiated in 2012 to lower operating costs by $1.7 billion over three years to counter what it sees as a permanent shift by customers away from air-delivered priority services.

The stock rose 5 percent to $116.25 at the close in New York, its biggest gain since Oct. 10 and its highest value in more than six years. FedEx shares have advanced 27 percent this year, compared with a 21 percent increase for the Standard & Poor’s 500 Index.

“I’m glad to hear that they are embracing the new reality -- that packages don’t absolutely have to be there overnight anymore,” said Logan Purk, an analyst at Edward Jones in St. Louis who recommends buying FedEx. “With each quarter we’re seeing them take steps, sometimes small steps, but at least steps in the right direction. Cheaper and slower is the way to go.”

Net income in the fiscal quarter ended in August rose 6.5 percent to $489 million, or $1.53 a share, the Memphis, Tennessee-based company said today. Analysts had projected profit of $1.50 a share, the average of 28 estimates, according to data compiled by Bloomberg. Sales rose 2.1 percent to $11 billion.

Cheaper Methods

FedEx reaffirmed its full-year earnings per share forecast for growth of as much as 13 percent.

The company’s FedEx Express unit, handling global air shipments, has borne the brunt of the customer shift to slower, cheaper methods of delivery. The business is FedEx’s largest division, accounting for about 60 percent of total revenue during the quarter, and is the focus of $1.5 billion of FedEx’s total cost-reduction efforts.

Revenue from the unit’s international priority, or IP, product fell 5.1 percent to $1.58 billion in the quarter as volume slipped less than 1 percent. International economy shipping rose by 9.2 percent to $532 million as shipments jumped 15 percent.

Ocean Shipping

“As a strategy for FedEx, we are embracing international economy,” Chief Financial Officer Alan Graf said on a conference call today. “We like these growth rates. We believe strongly we can make this shift the customers are making while still growing premium services at IP. It will just be at a lower rate than we anticipated 11 months ago.”

FedEx in the past capped international economy volume because it didn’t have capacity to handle those shipments as well as priority packages within the Express network.

In addition to trimming air capacity, FedEx is moving some lower priority packages to cheaper transportation methods, including ocean shipping, the bellies of passenger planes and through third-party networks.

“The key is to continue to make sure they place the right freight into the right network,” said Kevin Sterling, a BB&T Corp. analyst who rates FedEx as hold. International economy shipments are “a lower revenue product, so if they keep it in their own expensive network, it impacts profitability.”

FedEx last October began taking steps to adjust to the growing preference for cheaper shipping, by retiring older jets, cutting a cargo flight to Asia and eliminating 3,600 jobs through buyouts.

About 45 percent of workers taking part in that program have left, with the rest departing by the end of this fiscal year, Graf said today. The employee buyout is now expected to produce $600 million in annual savings, up from the original $500 million target, he said.

FedEx Express will boost service rates 3.9 percent in January, matching last year’s increase. Pricing changes at its FedEx Ground and FedEx Smart Post services will be announced at a later time, the company said.