FedEx to combine Freight, National LTL operations

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FedEx Corp. announced today, Sept. 16, that it will combine its FedEx Freight and FedEx National LTL operations effective Jan. 30, 2011. The company says this action will increase efficiencies and reduce operational costs, and will provide customers a choice of priority or economy less-than-truckload freight services across all lengths of haul from one integrated company. The company expects this change, along with its ongoing yield management initiatives, to substantially improve the profitability of the FedEx Freight segment in fiscal 2012.

The company estimates the cost of this program to be $150 to $200 million, primarily related to charges that will be recorded in the second and third quarters of fiscal 2011. These charges will include severance costs associated with personnel reductions, lease terminations and certain noncash charges. The net cash effect from the one-time cost of these actions is expected to be immaterial over time due to anticipated proceeds from asset sales. As a result of this combination, headcount is expected to be reduced by about 1,700 full-time employees, and about 100 facilities will be closed.

FedEx Corp. also reported revenue of $9.46 billion for the first quarter ended Aug. 31, up 18 percent from $8.01 billion a year ago. Operating income was $628 million, up 99 percent from $315 million last year, and net income was $380 million, up 110 percent from $181 million a year ago. The company said earnings increased as a result of strong FedEx International Priority (IP) growth at FedEx Express, continued growth at FedEx Ground and a benefit from the net impact of higher fuel surcharges. The reinstatement of certain employee compensation programs, higher pension, medical and aircraft maintenance expenses and an operating loss at FedEx Freight dampened the quarter’s results.

“Strong demand for our services resulted in higher volumes and better revenue per shipment at FedEx Express and FedEx Ground,” said Frederick W. Smith, chairman, president and chief executive officer of Memphis, Tenn.-based FedEx Corp. “This increased demand comes from improved global economic conditions and the benefit provided by the strength and flexibility of our unparalleled global networks, which we’ve improved during the downturn to deliver even more reliability and value to our customers.”

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For the first quarter, the FedEx Freight segment reported revenue of $1.26 billion, up 28 percent from last year’s $982 million; an operating loss of $16 million, compared with operating income of $2 million a year ago; and an operating margin of (1.3 percent), compared with 0.2 percent the previous year. LTL average daily shipments increased 29 percent and yield declined 3 percent year over year primarily due to the effects of discounted pricing in contracts signed in fiscal 2010. However, the company said yields increased 4 percent from the fourth quarter as a result of its recent yield management initiatives to improve pricing. Operating losses in the quarter were driven by lower yields and higher volume-related costs, as significantly higher shipment levels required increased purchased transportation and other expenses.

The FedEx Express segment reported revenue of $5.91 billion, up 20 percent from last year’s $4.92 billion; operating income of $357 million, up 243 percent from $104 million a year ago; and an operating margin of 6.0 percent, up from 2.1 percent the previous year. The FedEx Ground segment reported revenue of $1.96 billion, up 13 percent from last year’s $1.73 billion; operating income of $287 million, up 37 percent from $209 million a year ago; and an operating margin of 14.6 percent, up from 12.1 percent the previous year. FedEx Services segment revenue, which included the operations of FedEx Office, was down 8 percent year over year due to the Sept. 1, 2009 realignment of FedEx SupplyChain Systems into the FedEx Express segment and declines in copy product revenues.

“We expect continued strong demand for our package transportation services through at least December,” said Alan B. Graf Jr., FedEx Corp. executive vice president and chief financial officer. “Shippers of high value-added goods, especially in the technology sector, know that we have unmatched air express capacity to deliver quickly and reliably for them, even when demand surges. We expect the yield improvement initiatives we have under way, coupled with the current high utilization of our planes, vehicles and facilities, will drive higher earnings, margins and returns.”