FedEx profits drop, company looks to China expansion

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FedEx Corp. said third-quarter profits fell 2 percent for the first time in three years, as a slowing U.S. economy, lower fuel surcharges and winter storms damped shipping demand.

Net income of $420 million dropped from $428 million a year ago, Memphis-based FedEx said. The company also reported an operating margin of 7.5 percent, down from last year's 8.9 percent, and operating income of $641 million, down 10 percent from $713 million a year ago. Revenue, however, was $8.59 billion, up 7 percent from $8 billion the previous year. Total combined average daily package volume at FedEx Express and FedEx Ground grew 4 percent year-over-year for the quarter, led by ground and international express package growth.

"The U.S. economy grew at a lower rate than we expected in the third quarter, and we saw continued adjustments in the automotive and housing markets," said Frederick W. Smith, chairman and president/CEO of FedEx Corp., in a teleconference last week. "I believe, however, this represents a healthy transition for the economy as it phases into a more sustainable growth rate. FedEx is in [an] excellent position to take full advantage of global economic-growth trends and deliver overall outstanding financial results in the long run."

In the call, Mr. Smith also discussed how FedEx Express, a subsidiary of FedEx Corp., will offer guaranteed next-day deliveries within China for the first time beginning May 28. The move underscores the increasing sophistication of transportation and logistics services in the country.

"This will surely be a milestone in FedEx history," he said. "This latest service offering underscores the ongoing FedEx commitment to China, a market we have been in for 23 years and one of the fastest growing markets in the express industry."

The new domestic services - expected to be fully operational in June 2007 - will serve China's burgeoning market with next-business-day, time-definite overnight delivery service to 19 of China's biggest cities and a day-definite service to more than 200 cities throughout the country. FedEx will offer real-time package tracking and a money-back guarantee for the next-business-day express service.

During the quarter, FedEx Express completed the acquisition of the express business of China's DTW Group on March 1. It is through this acquisition that FedEx will initiate its China domestic express service.

Satish Jindel, a transportation analyst at SJ Consulting Group, Sewickley, PA, said the new service announcement is important for FedEx for two reasons.

"One is that FedEx has not had great success in offering intra-country air express service like it does in other parts of the world," he said. "Second, it is a milestone that FedEx is going to be offering guaranteed overnight service in a region that is growing at three and a half times the rate of the U.S."
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