FedEx to raise 2014 rates on U.S. express traffic; reports solid results for fiscal Q1

FedEx Corp. said today that FedEx Express, its air and international unit and the company's largest division, will raise rates by 3.9 percent on its domestic and U.S. import and export traffic, effective Jan. 6.

At the same time, FedEx executives said they were confident the unit would meet the goal of $1.6 billion in annual cost savings and productivity enhancements by fiscal year 2016—a goal outlined at a two-day analyst and investor meeting last October. The initiative will permanently restructure the business that has been the face of FedEx for more than 40 years. It was the company's strongest response yet to the reality that U.S. and global shippers are migrating, perhaps permanently, to less-expensive shipping services with slower transit times but with day-definite delivery dates.

The pace of the improvements under the initiative may not accelerate until fiscal year 2015 due to uncertainties over economic growth, customer demand, and the effects of fuel price volatility that could slow progress in the near term, according to Alan B. Graf Jr., FedEx's CFO. Still, Graf stressed that "we are well ahead of our cost goals."

FedEx said it would announce 2014 rate adjustments later this year for its ground parcel and its "SmartPost" service for business-to-consumer shipments, which is managed in conjunction with the U.S. Postal Service. Tariff rates on less-than-truckload traffic moving on its FedEx Freight network were raised 4.5 percent in July.

STRONG QUARTERLY RESULTS
The announcements came as the Memphis, Tenn.-giant reported first-quarter fiscal year 2014 results that met or bettered most analysts' estimates. Revenue rose 2 percent year over year to $11 billion. Operating and net income each rose 7 percent over the year-earlier period. Operating margin increased 7.2 percent year over year, FedEx said.

FedEx Express posted revenue of $6.61 billion, slightly below revenue of $6.63 in the year-earlier period. Operating income rose by 14 percent, and operating margin grew 3.1 percent. FedEx Ground's revenue increased 11 percent year over year to $2.73 billion, while operating income rose 55 percent from the year-earlier period. Operating margin of 17.1 percent was down from 18.1 percent in the prior fiscal year. FedEx blamed the decline on the impact of higher diesel fuel costs. SmartPost's average daily volumes jumped 26 percent due to the increased appetite for e-commerce transactions, the company said.

FedEx Freight reported quarterly revenue of $1.42 billion, up 2 percent from the year-earlier period. Operating income was up 1 percent, while margins were unchanged from last year's quarter at 6.4 percent. Yield grew by 1 percent. Weight per shipment rose 1 percent due to tonnage increases in the unit's "priority" service for deliveries within two days. Average daily shipment count grew by 1 percent due to shipment increases on its "economy" service, which generally handles lower-value freight delivered in three days or more.

Results at all three units were affected by having one less operating day than in the year-earlier quarter.

MUTED ECONOMIC GROWTH
The company expects tepid global economic growth for the balance of the calendar year and into calendar year 2014. It expects U.S. gross domestic product (GDP) growth of 2.5 percent in calendar 2014, and global GDP growth of about 2 percent. U.S. industrial production will increase 3.4 percent from the 2013 calendar year, FedEx predicted. FedEx and its chief rival, UPS Inc., are considered proxies of global economic activity because they move so much commerce.

Without much of a macroeconomic boost to propel it, the company appears focused on staying ahead of the secular trend of customers trading down in service levels. For example, 17 percent of FedEx Freight's total miles today are handled via rail intermodal service, a lower-cost alternative to over-the-road trucking. Before FedEx Freight revamped its operations at the start of 2011 to separate traffic into "priority" and "economy" segments, it used virtually no intermodal.

In addition, FedEx Express executives said they've succeeded in shifting lower-yielding international traffic to the company's FedEx Trade Networks operation, which acts in a third-party role to book shipments on aircraft outside of the FedEx air system. These planes include the lower decks of passenger aircraft that are generally priced lower than pure freighter space. The increasing use of outside resources has allowed FedEx to reduce internal air capacity out of Asia, thus helping boost the bottom line, according to company executives.

As of 11: 30 a.m. Eastern time today, FedEx stock was trading higher by $2.84 a share to $113.52 a share.