To save money, online shoppers and big businesses are increasingly willing to wait a little longer for goods to arrive. While that may mean savings for consumers, it is hurting FedEx’s core business — express delivery.
On Wednesday, the FedEx Corporation cut its outlook for the year after its profits slumped by 31 percent in the latest quarter. The company said it would pare its flight capacity between the United States and Asia and might ground some cargo planes. FedEx said it was making those changes because its customers were increasingly using its cheaper shipping options, even if that meant slower deliveries.
The news startled investors. The stock fell 6.9 percent, its steepest one-day drop in 18 months, to $99.13 a share on the New York Stock Exchange.
Because it carries a wide variety of goods around the world, FedEx has long been seen as a leading indicator of the economy. But Wednesday’s news did not point to a slowdown in global business — the company’s revenue actually rose 11 percent in the quarter. Instead, it reflected a more cost-conscious attitude among businesses in a time of economic uncertainty.
“Freight is moving, but customers and shippers are trading down,” said Logan Purk, an analyst with Edward Jones. “Businesses aren’t paying for two days express shipping as much and are willing to put their goods in a boat and wait two weeks instead to cross the Pacific. A lot of consumers are in belt-tightening mode and don’t want to pay for express.”
In an effort to reduce costs and improve profitability, FedEx said it was looking to retire some of its older and less fuel-efficient airplanes. The company, which operates the world’s largest cargo airline, has a fleet of 666 planes, including older Boeing 727s and MD-10s. FedEx also said that, on April 1, it would start to pare service to Asia, a region that it said still had too much freight capacity.
“There’s a new mind-set for shoppers and businesses: people and companies have adjusted their supply chain to slower shipping,” said Kevin W. Sterling, an analyst with BBT Capital Markets. “The problem for FedEx is that it’s very expensive to operate an airplane, and it takes time to park a plane. That can’t be done overnight.”
FedEx had already warned about this problem in May, when it first cut its full-year outlook. Last October, it outlined a cost-cutting program of $1.7 billion a year over the next three years to deal with the fact that it was earning less on each package it carries. The strategy included buyouts and the retirements of senior managers and thousands of its 300,000 employees.
“The third quarter was very challenging due to continued weakness in international airfreight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slow-transit services,” Frederick W. Smith, the company’s chairman and chief executive, said in a statement. He added that the cost-cutting program was “ramping up and on track.”
FedEx, which is based in Memphis, ships about nine million items a day and has a network that spans 220 countries and territories. It has 90,000 trucks, and its airplanes fly to 375 airports.
U.P.S., the world’s largest shipper, has reported a similar decline in how much it can charge for packages. Still U.P.S., which has larger ground operations than FedEx, reported record profit in January, because of its domestic business.
Mr. Sterling, who downgraded FedEx shares from buy to hold last month, called this trend the “new normal of shipping.” Still, he said he was surprised at how much it had hurt FedEx.
“They are still busy flying a lot of stuff around, but they are doing it at a lower price,” he said. “It’s like an airline selling seats at a $100 instead of $1,000.”
The number of packages shipped by FedEx every day in the quarter increased by 8 percent, but the yield per package — the price FedEx can charge per package — declined by 4 percent. The drop was most notable in its international priority business, usually one of its most lucrative.
“It appears that FedEx is struggling to keep lower priced packages out” of the international priority network, “resulting in challenging cost comparisons and margin compression,” said Christian Wetherbee and Seth Lowry, Citi Research analysts.
Article source: http://www.nytimes.com/2013/03/21/business/fedex-cuts-forecast-as-3rd-quarter-profit-falls-31.html?partner=rss&emc=rss