FedEx Profit Doubles, UPS Diversions Noted

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FedEx Corp.'s quarterly profit more than doubled from a year earlier, the overnight delivery company said yesterday.


FedEx reported net income of $236 million in the fiscal fourth quarter ended May 31, compared with $113 million a year earlier. Revenue in the quarter rose 6 percent from a year earlier to $5.42 billion. FedEx, Memphis, TN, attributed much of the growth to gains in ground deliveries.


However, the company said it expects first quarter earnings to fall short of Wall Street estimates.


"FedEx Ground performance was very strong, more than doubling its profit from a year ago," said Alan B. Graf Jr., executive vice president and chief financial officer.


The ground business's operating income doubled to $128 million as revenue rose 27 percent to $743 million. Average daily package volume grew 21 percent, with about one-third of the growth coming from its home-delivery unit. FedEx said it expects volume and results at its home-delivery business to continue to improve in fiscal 2003. This year, FedEx began offering home-delivery service everywhere in the United States, a boon to catalog and Internet shoppers.


Analysts said that the increase was bolstered in part by freight diversion away from UPS prior to that company's upcoming Teamsters' contract expiration July 31. A strike against UPS in 1997 lasted 15 days, playing havoc with many U.S. businesses that relied on the service and shaking the company's reputation for reliability. Both sides have repeatedly reported progress in the current talks.


Last month, FedEx asked customers how much more they thought they would need to ship with FedEx in case of a UPS strike and urged them to begin shipping this extra volume with FedEx by mid-June. FedEx also asked customers to sign a letter that they would do this. If they don't sign, FedEx had said, the company might be unable to handle the customer's extra volume.


FedEx said there had been some diversion but that the number was insignificant.


"Now, customers who have signed a letter of understanding with us are either shipping more with us, and, if they are not shipping up to their allocation, we will be getting back in touch with them to find out exactly what their plans are and if they plan to start shipping with us," said Jesse Bunn, a FedEx spokesman. "If they don't plan to start shipping with us, then we will reallocate those volumes."


Bunn said he did not have a specific number of companies that signed the letter but that "the number is the thousands."


As for volume being affected, Bunn said that FedEx Ground experienced volume increases of 60,000 to 70,000 packages per day in the quarter. In May, the increases ranged from 90,000 to 100,000 packages per day, and in June, FedEx expects the effect to be about 150,000 packages per day.


"When you are talking about an average daily volume of 5 million packages, the percentage in terms of overall volume is still pretty small," Bunn said. "I'm not sure you could call these increases significant in terms of financial impact."


As for other FedEx divisions, FedEx Express, the air-delivery business, posted a 49 percent rise in operating income to $236 million after a charge a year earlier to write off aircraft, aircraft engines and related parts. Excluding the charge, the segment's operating income declined 9 percent. Revenue grew 4 percent to $4 billion, largely because of strong growth in weight related to the company's agreement to ship packages for the U.S. Postal Service. U.S. domestic average daily package volume declined 3 percent from a year earlier, while international volume rose 3 percent, led by Asia and Europe.


Total average daily package volume at FedEx Express and FedEx Ground grew a combined 5 percent year-over-year for the quarter.


FedEx and other shippers such as UPS, truckers and railroads have been dogged for more than a year by the sluggish U.S. economy and drops in delivery volumes. But air transport, railroad and other industry groups have reported recent pickups in shipping volumes. Executives have credited a strengthening U.S. economy for the gains.


FedEx also said it expects capital spending of about $1.9 billion in fiscal 2003 as the company takes delivery of 17 aircraft that it committed to in previous years. It also plans to increase investments in its ground network and technology.


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