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FedEx Profit Drops, but Revenue Rises

First-quarter net income declines 22% as the economy slowed and fuel prices remained high.
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said its first-quarter net income fell 22% as the economy slowed and fuel prices remained high, and the package carrier forecast continued economic weakness ahead.

The company earned $384 million, or $1.23 a share, in the quarter ended Aug. 31. Analysts surveyed by Thomson Reuters had estimated $1.21 a share. Revenue rose 8% to $9.97 billion, marginally higher than estimates.

In the same quarter a year earlier, FedEx earned $494 million, or $1.58 a share.

While revenue rose due to fuel surcharges and higher volumes, the reduction in profits reflected "the continued weak U.S. economy, affected by ongoing high fuel prices, a significant contraction in consumer spending and a very tough pricing environment," CFO Alan Graf said Thursday on an earnings conference call. "We expect no improvement in the U.S. economy in the near term and a continued slowdown in the global economy."

Total combined average daily package volume in the FedEx Express and FedEx Ground segments grew 1% during the quarter. Operating income declined 23% to $630 million due to global economic weakness, steep fuel expenses and the related negative effects of higher fuel surcharges. Additionally, the quarter contained one fewer operating day than the same quarter a year earlier.

Despite the fact that energy prices decreased during the quarter, the average price of jet fuel was 77% higher than it was a year earlier, the company said.

Looking ahead, FedEx said it expects second-quarter earnings of $1.40 to $1.60 a share and full-year earnings of $4.75 to $5.25 a share. Analysts are calling for $1.35 in the second quarter and $5.18 for the year.

Executive Vice President Mike Glenn said FedEx has revised its economic forecasts downward, and now expects 2008 GDP growth of 1.9%, and "we expect to see similar economic conditions through 2009."

"The world has slowed down, particularly in Europe," said CEO Fred Smith. "Asia is still growing because of the emerging China economy, the intra-Asia market in particular. China still continues to grow, but at a lower rate. The world is in the midst of a slowdown, which was led by the U.S."

But Smith noted that despite turmoil in credit markets: "People sometimes forget there's the industrial economy and there's the financial sector" which, while closely related, can "march to a different drummer."

During the first quarter, FedEx Express revenue rose 9% to $6.42 billion, but operating income fell 34% to $345 million. In FedEx Ground, revenue climbed 9% to $1.76 billion, while operating income was up 3% to $196 million. In FedEx Freight, revenue rose 10% to $1.35 billion, while operating income fell 15% to $89 million.

The company said it will boost shipping rates by an average of 6.9%, effective Jan. 5. The charge will be partially offset by adjusting the price at which the fuel surcharge begins, reducing the surcharge by two points.

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