FedEx profits fall in fragile ground business

The effect of rising fuel costs on the shipper's bottom line may lead to strategic restructuring.

By Benzinga Jun 19, 2012 7:52PM
By Katey Stapleton, Benzinga Staff Writer

FedEx's (FDX) ground-business stumbles tarnished stronger-than-expected fourth-quarter profits on Tuesday.

The transportation holding company reported a profit of $550 million, which was largely overshadowed by the fact that FedEx's express business saw average daily package volumes fall by 5%.

While there are numerous reasons why customers may have avoided sending packages in recent months, none are more prevalent than the fact that shipping costs have increased and will continue to do so as gas prices climb.

FedEx is not the only traveling express mail carrier that has taken a hit following the flux in fuel cost. United Parcel Service (UPS) experienced a rough first quarter earlier this year, as profits were weak and shares fell due to slower global exports.

With difficulties posing earnings problems for both UPS and FedEx, business restructuring is becoming more and more necessary.

According to UPS CEO Scott Davis, the mail carrier reached an agreement with TNT Express in March which laid out a merger between the two companies. UPS agreed to purchase TNT Express for $6.8 billion in an effort to put itself on the map overseas as the largest European shipper.

Conversely, FedEx will likely have to pull a stunt of similar magnitude in the future.

"The shipper is expected to detail more of its restructuring of the express segment in October. The express business' shipping volumes and margins slipped during the recession, and lagged behind recoveries in FedEx's other businesses," Forbes reported earlier this morning.

Accordingly, research firms see meaningful profitability improvement on the horizon for the company if FedEx stays on task with plans for domestic express makeover.

Deutsche Bank (DB) stated yesterday that three specific areas where improvement should be made are in the permanent retiring of old and inefficient aircraft, the movement of deferred product into high margin ground network, and scaling the express network for more realistic volumes overall.

While management hinted back in March at developing strategies that will reposition the company in a more favorable light, it appears that analysts and investors will get their way. Come fall, traders and customers can expect a FedEx restructuring that will more-than-likely combat escalating fuel costs and increase revenues.

FedEx closed at $91.01 Tuesday, up almost 9% this year, while UPS closed at $78.16, up 6.79% this year.

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