Skyrocketing fuel prices, weak economy, and lower demand for freight amid declining U.S. homebuilding and industrial production, together with a hefty charge on FedEx Kinko's name change, are taking their toll on package delivery giant FedEx Corp. (FDX), which sees a significant fall in its fourth-quarter results. The company is expected to announce the results before the market opens on Wednesday.
However, in the long run, high oil prices are expected to benefit FedEx, as an upcoming boom for Internet shopping to save driving is likely to result in FedEx lifting prices and return to growing profits.
The results of Memphis, Tennessee-based FedEx, a Dow component, will be closely watched by Wall Street, as FedEx and its main U.S. competitor United Parcel Service Inc. (UPS) are seen as bellwethers of the U.S. economy, since package volumes would be impacted when there is a rise or fall in economic growth. A drop-off in demand for delivery services could point to weakness in many other businesses.
Atlanta, Georgia-based UPS, which is likely to release its second-quarter results in late July, is also expecting poor earnings, saying that it sees no signs of economic strengthening in the quarter.
FedEx's recently announced one-time charge of about $891 million in the fourth quarter related to the name change of FedEx Kinko's stores, a provider of document solutions and business services, to FedEx Office, is likely to add pressure to the already dampening results of FedEx.
The charge primarily relates to non-cash impairment charges related to the decision to minimize the use of the Kinko's trade name and goodwill resulting from the Kinko's acquisition. FedEx bought low-end, consumer-unfriendly Kinko's for $891 million. The name change will lead to a charge of about $515 million, while goodwill impairment will lead to a $367 million in charges. The remaining $9 million will come from what the company categorizes as 'other' charges.
The hefty charge was not included in its May-released earnings forecast of $1.45 to $1.50 per share, which itself was lowered significantly from its prior forecast of $1.60 to $1.80 per share. The company cited surging fuel prices, a weak U.S. economy, and lower demand for U.S. domestic express package and less-than-truckload, or LTL, freight services for the downward revision of the guidance. The prior year's fourth quarter earnings were $1.96 per share.
However, there was no stop in oil-price surge since FedEx's forecast cut, which, together with the one-time name change charge, can take the earnings results further too down, and analysts have been busy cutting estimates.
On average, 11 analysts polled by First Call/Thomson Financial expect the company to post earnings of $1.47 per share, in a range of $1.45 per share to $1.50 per share, lower than last year's $1.90 per share. Six analysts estimate revenues of $9.60 billion, 4.9% higher than the prior year revenues.
In a May 12 research note, brokerage firm Morgan Keegan downgraded its rating on FDX to 'Market Perform' from 'Outperform'.
In late March, FedEx, which operates the world's largest airline, announced a third-quarter profit of $393 million, or $1.26 per share, 6% down from $420 million, or $1.35 per share last year, which included a $0.08 per share benefit from a reduction in its effective tax rate. However, total revenue increased 10% year-over-year to $9.44 billion, despite persistently high oil prices, sluggish U.S. growth and continued concerns in the credit markets.
For fiscal 2009, FedEx said it expects a continuation of fourth quarter trends, which would result in limited earnings growth next year.
Previously, Frederick Smith, the chairman, president and chief executive officer of FedEx said, "We are managing our costs while positioning our portfolio of global transportation solutions to increase our profitability and returns once conditions improve."
Nevertheless, the market share of FedEx, which operates in four segments, such as Federal Express Corp. FedEx Ground Package System, Inc., FedEx Freight Corp., and FedEx Kinko's Office and Print Services, Inc., will not be dragged by low-cost packaging companies, as the infrastructure needed to move cargo is lot more intensive and costly, and it requires a nationwide network to make a profit.
Till now, FedEx has been able to withstand the economic storm in the U.S. by lifting delivery rates and adding fuel surcharges. For FedEx, a higher delivery rate may not result in business loss, but just that the customers may shift from overnight delivery to two days or more.
There is a reverse in the trend in declining airfreight costs over the past few years, and airfreight costs are rising for two reasons, higher oil prices, and a weaker dollar. According to some analysis, higher energy prices are affecting transport costs in an unprecedented rate. According to some analysts', FDX would see a significant gain in profit if oil price decline and the economy starts to grow again.
It is anticipated that US wages and prices will face downward pressure by the lower tradability of goods from China and other low wage countries, which will make FedEx's efforts to maintain price stability more difficult.
Putting pressure to the already struggling performance, FedEx recently was made a party to a lawsuit filed by ATA Airlines, accusing FedEx of breaking a written agreement. ATA said it was told by FedEx that it would no longer receive military passenger service for the government fiscal year ending 2009. ATA remarked that the share of the military contracts was most of its charter business, and the airline claimed that the decision forced it to seek bankruptcy protection and destroyed its finances. The airliner had flown military charter flights as part of the FedEx team for more than two decades. The pending lawsuit does not ask for a specific damage amount, however, the company put actual damages at more than $30 million and said that special or consequential damages could rise past $150 million.
FedEx's main competitor, Atlanta, Georgia-based UPS currently expects second-quarter earnings to be in the range of $0.97 - $1.04 per share. Wall Street analysts have a consensus earnings estimate of $0.98 per share for the second quarter.
UPS recently lowered its earnings guidance for full-year 2008 to a range of $3.90 to $4.20 per share, as most analysts expects the current anemic conditions to prevail for the remainder of the year. Previously, the company expected 2008 earnings in the range of $4.30 - $4.50 per share. Analysts' consensus earnings estimate is $4.00 per share for the full year.
The company previously noted, 'Our international and supply chain businesses continue to offer great opportunity. In the U.S., we're positioning our small package business to weather this downturn and to be poised for economic recovery.'
In its first quarter, UPS reported a 7.5% rise in net income to $906 million, and 11.5% rise in earnings per share to $0.87, amid weakening U.S. economic activity. The prior year results included an impairment charge related to aging jet aircraft and expenses for a voluntary separation program, excluding which, first quarter 2008 adjusted net income declined 11.8% and earnings per share dropped 9.4%. Total revenue for the quarter grew 6.5% to $12.3 billion.
In late May, UPS said it would work towards an agreement to provide air-shipping services to Deutsche Post AG's loss-making US business DHL Express. UPS said it expects a final contract to be reached later this year. The agreement, when finalized, is expected to extend for 10 years and generate up to $1 billion in additional annual revenue for UPS.
Meanwhile, FedEx reportedly said that it will likely win clients from DHL Express following DHL's announcement that it plans to outsource flying to UPS. FedEx believes the strategic move will benefit itself as UPS could create disruption among its customers. FedEx said, 'FedEx welcomes this business opportunity as customers undoubtedly will move into the FedEx network when DHL closes or consolidates 33% of its U.S. facilities. Unfortunately for our competitors, it will be difficult to transition from two separate airlines without customer interruption and employee dislocation.'
Deutsche Post acquired DHL in 2002 and expanded U.S. operations with the purchase of Airborne Express in 2003. However, the express unit hasn't made a profit in the U.S. since then, as it is struggles to compete with UPS, and FedEx. For the current fiscal year, DHL Express is expected to report an underlying loss of $1.3 billion before interest and tax, reducing to $300 million in 2011.
FDX settled at $84.33 on Tuesday's trade, down $1.70 or 1.98%, on a volume of 4.8 million shares. For the past 52 weeks, shares have been trading in a broad range of $80-$119.10.
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June 12, 2026 17:14 ET Major central bank action was the focus this week in economic news. The European Central Bank became the first major central bank to move in response to the rising inflationary pressures in the backdrop of the conflict in the Middle East. In North America, the U.S. inflation and trade data as well as Canada’s central bank decision gained attention. The Chinese trade data was the main news in Asia.