As Net Sinks, FedEx Seeks Signs of Stability

By ALEX ROTH FedEx Corp. reported a 75% drop in quarterly profit, but there may be a silver lining for the global economy in the dismal performance: international shipments fell so precipitously that the company doesn't see them getting any worse. "We think that is about the bottom," said Chief Financial Officer Alan Graf Jr., after noting that international express shipments dropped 13% from the year-earlier quarter. FedEx, which is considered a bellwether of the health of the U.S. and global economies, is planning an additional $1 billion in cost cuts as volumes and revenue sag, particularly in its express shipping unit, which accounts for nearly two-thirds of the company's overall sales. The Memphis, Tenn., company said Thursday it would eliminate some personnel and reduce capacity in some areas, but said that its service and network coverage won't suffer. The streamlining will be made in part to "secure the jobs of as many of our teammates as possible," Frederick W. Smith, the company's chairman and chief executive, said in a conference call with analysts. FedEx's gloomy report comes as virtually every industry linked to the movement of parcels and freight -- including railroads, trucking, ports -- has seen large, often double-digit volume drops in recent months. Last month, FedEx's main competitor, United Parcel Service Inc., announced an 8.6% drop in its premium next-day-air service. FedEx officials said the company has gained market share in several key areas, aided in part by the exit of competitor DHL from the domestic U.S. market. But it remains under pressure by the simple fact that its customers, big and small, have fewer items to ship. Richard Low, president of Shoemaker Manufacturing in Cle Elum, Wash., said he is shipping 15% to 20% less with FedEx than he did a year ago because his own sales have dropped. The maker of parts for air-conditioning and heating systems is another casualty of the housing bust. "A lot of what we make goes into new construction," he said in an interview. "You tell me how we're doing." A spokesman for Dell Inc., another big FedEx customer, pointed to the computer company's latest quarterly report, in which profit dropped by 48%. "FedEx is a valued strategic partner, but obviously we're all operating in a challenging economic environment at this time," spokesman David Frink said. He declined to say how much the computer company had cut back its FedEx shipments. Revenue at FedEx's express unit was off 18% for the quarter ended Feb. 28, as average daily package volume for the unit fell 5%, with domestic shipments off 3%. The company's large-freight operation saw a 13% quarterly drop in daily volumes. One bright spot was FedEx ground shipping -- a less-expensive service in which packages are delivered exclusively by truck. Daily package volume was up 2%, possibly because shippers were choosing a cheaper alternative to FedEx's pricier air services. The company's quarterly performance "just highlights how weak the economy has become," said Donald Broughton, an analyst with Avondale Partners. He called FedEx's earnings "a warning salvo over everybody's bow that the economy's not just going to turn around on a dime." The company has already reduced salaries and other compensation for U.S. employees, including a 20% cut for Mr. Smith. It also laid off 900 employees at its freight unit last month, or about 2.6% of the unit's work force. For its latest quarter, FedEx posted net income of $97 million, or 31 cents a share, down from $393 million, or $1.26 a share, a year earlier. Revenue decreased 14% to $8.14 billion, hurt by reduced fuel surcharges and lower shipment weights. At the same time, FedEx has "captured more than our fair share of DHL traffic," often at higher yields than DHL was getting, Mr. Graf said. Analysts polled by Thomson Reuters had expected earnings of 46 cents a share on revenue of $8.65 billion. Looking ahead, FedEx projected fiscal fourth-quarter earnings of 45 cents to 70 cents a share, excluding an expected charge of about $100 million for its latest cost-cutting actions. Analysts were expecting 72 cents a share. Nonetheless, the company's shares were ahead 4.8% at $45.10 in 4 p.m. composite trading on the New York Stock Exchange. —Kerry E. Grace contributed to this article. Write to Alex Roth at alex.roth@wsj.com