FedEx predicts further economic woes

A Federal Express truck making a delivery in Chagrin Falls, Ohio, in May. Executives raised fears about the global economy.
A Federal Express truck making a delivery in Chagrin Falls, Ohio, in May. Executives raised fears about the global economy. (AP)
Posted: September 20, 2012

NEW YORK - FedEx Corp. says the global economy is stalling, and it's going to get worse next year.

A decline in global trade is shrinking earnings at the world's second-largest package delivery company. On Tuesday, FedEx said a continued slowdown in the developed world combined with high fuel prices will keep trade volumes at low levels.

FedEx sharply cut its earnings forecast for the fiscal year ending in May. It further warned net income in the current quarter will fall below analysts' already reduced expectations. The company also said major changes to its Express unit - the one taking the brunt of the economic hit - will be announced next month.

FedEx's forecasts are closely watched for signals of future economic health. Its results provide insight into the global economy because of the number of products it ships and the number of countries in which it does business. Rival UPS also said last month it expected the global economy to get worse before it gets better.

"I'm surprised they weren't more pessimistic," said Donald Broughton, an Avondale Partners L.L.C. analyst in Nashville, Tenn. "Great companies and weak economies get together and the weak economy, in the short term, wins."

Economic growth around the globe has slowed over the last several months. U.S. factory activity fell every month of FedEx's fiscal first quarter, while rising gas prices and high unemployment kept consumers from spending freely.

A steep decline in Asian exports due to weakness in Europe is causing most of FedEx's pain. But consumers and businesses around the globe are choosing to move goods by ground or ocean instead of by air to save money.

Fear of a further economic slowdown is driving some of that behavior, but FedEx says steadily increasing fuel prices are also playing a big role.

"The world economy has absorbed an incredible increase in the price of fuel," CEO Fred Smith said on a conference call. "And that has had very big implications on the way people think about supply chains on their decisions to move by ocean or whether they move things by air."

FedEx hasn't been able to cut costs fast enough to match the decline in demand. It's reducing flights, taking planes out of service, and last month it offered buyouts to Express unit employees.

The Memphis, Tenn., company cut its forecast for the full to year to between $6.20 and $6.60 per share, from $6.90 to $7.40 previously.

FedEx shares fell 3 percent, or $2.73, to close at $86.55.

This article contains information from Bloomberg News.

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