FedEx cuts Q1 earnings estimates, citing weak global air traffic

FedEx Corp. said late yesterday it has reduced its estimates for its fiscal first-quarter earnings due to persistent weakness in its global airfreight business that was more pronounced than the Memphis-based company had expected.

FedEx, whose fiscal first quarter ended Aug. 31, said it expects to report earnings of between $1.37 and $1.43 per "diluted" share, compared with earlier estimates of somewhere between $1.45 and $1.60 per diluted share. In the same period a year ago, earnings came in at $1.46 per diluted share.

Fully "diluted" shares are defined as the total number of shares that would be outstanding if all possible sources of conversion, such as convertible bonds and stock options, were exercised and became common shares.

If the projections are accurate, it would represent the company's first year-over-year earnings decline since 2009.

In a statement, FedEx said that "weakness in the global economy constrained revenue growth" at its FedEx Express air and international unit "more than expected" from its earlier estimates.

The company said it has not tallied up all of its results from the quarter and will make more numbers available Sept. 18, when it officially releases its fiscal first-quarter results.

FedEx Express, the company's largest division by revenue, has been affected for years by a secular decline in domestic air traffic as many U.S. businesses have shifted to regional distribution networks supported by lower-cost ground transportation. In recent months, however, its international business has suffered as a slowing global economy has reduced global airfreight demand, especially out of the Asia-Pacific region.

The unit has also been hit by rising jet fuel prices, which climbed, on average, 8 percent from June to July and nearly 9 percent from July to August, after dropping 10 percent from May to June. The company imposes jet fuel surcharges to recoup those higher costs, but the surcharges have a lag effect that won't benefit FedEx until its fiscal second quarter.

The company would not specify whether the weakness that triggered the revised forecast was due to domestic U.S. weakness, international sluggishness, or a combination of the two. David G. Ross, analyst at Stifel, Nicolaus & Co., said in a research note that the distinction is irrelevant because air shipments feed through the same global network.

"The company had been banking, in our view, on international packages traveling in the domestic network ... to offset secular declines in domestic traffic, and it hasn't happened," Ross said.

WEAK GLOBAL DEMAND
Benjamin Hartford, transport analyst at investment firm Robert W. Baird & Co., said the FedEx announcement didn't come as much of a surprise given increasing evidence of a "very weak" international airfreight environment in July and sluggish domestic air demand that was below the normal seasonality.

In recent months, sources ranging from Hong Kong airline Cathay Pacific, Hong Kong Air Cargo Terminals Ltd.—through which a large volume of Asian air export traffic flows—and the trade group International Air Transport Association (IATA) have all reported weakening traffic trends.

IATA, which represents most of the world's airlines, said Asia-Pacific carriers reported in July a 7.6-percent drop in cargo traffic compared with the same period a year ago, the steepest year-over-year decline in any region canvassed by the group. Carriers serving the region cut cargo capacity by 4.3 percent during that time, but it wasn't enough to counteract the shortfall, IATA said. Asia-Pacific carriers have experienced virtually no growth in freight traffic since the fourth quarter of 2011, IATA said.

Worldwide freight demand in July was down 3.2 percent from the year-earlier period, IATA said.

Air volumes out of Asia are expected to experience a temporary lift once Apple Inc. begins shipping its new iPhone 5 product. In addition, demand should pick up due to seasonal factors as the marketplace heads toward the fourth-quarter peak season. But once the technology bump abates, demand is expected to fall back into a muted state, suggesting an unmemorable peak period.

FedEx is holding a two-day meeting Oct. 9 and 10 in Memphis, in which it will unveil long-awaited plans to restructure its FedEx Express division.