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FedEx Founder Says Airfreight Sector Changing

FedEx Corp. (FDX) founder Fred Smith on Tuesday forecast wholesale changes in the global freight business, with intensifying competition on air carriers from ships and a greater focus on more customized door-to-door delivery options. Mr. Smith pioneered the modern airfreight business and has built the world's largest cargo airline by revenue, but cautioned during a post-earnings conference call that the traditional airport-to-airport business "is not growing." "It's very clear that the door-to-door express segment is growing, and the movement of goods on the water is growing," said Mr. Smith as FedEx reported a decline in fiscal fourth-quarter profit and outlined plans for a cost-cutting restructuring program in the autumn. Mr. Smith said FedEx is in a strong position to take advantage of the trends despite the company's history in the express-air segment, citing its scale and combined air, ground and freight capabilities. FedEx also operates a freight-forwarding business, called FedEx Trade Networks, which provides logistics and third-party shipping for customers, including via ocean transport. Recent industry changes have contributed to FedEx's recent pain, as some customers have opted for slower-moving, non-premium delivery services amid the soft economy. FedEx's international priority airfreight-shipping volume fell 3% in its fiscal fourth quarter ended May 31 after falling 1% in the fiscal third quarter, while its U.S. domestic express volume fell 5%, compared to a 4% decline in the previous quarter. FedEx is planning to disclose a "comprehensive program" in October to cut costs and better align its express air fleet with anticipated market demand, Mr. Smith said, although he declined to reveal additional details. BB&T Capital Markets analyst Kevin Sterling said it has been evident for some time that growth in the traditional air-cargo segment is on the wane, although he noted that Mr. Smith's comments are significant. "When he speaks...people listen," Mr. Sterling said. Mr. Sterling said he thinks the big-three integrated global airfreight shippers--FedEx, United Parcel Service Inc. (UPS) and Deutsche Post AG (DPW.XE) unit DHL--stand to benefit from the broad industry changes long term because of their scale and flexibility to offer customized services. Bill Flynn, chief executive of air-cargo carrier Atlas Air Worldwide Holdings Inc. (AAWW), acknowledged that the industry's growth rate has slowed in recent years but said it is still solid and remains a good business. "The rate of growth may be slowing down, but it is a rate of growth on a much larger absolute base of cargo," Mr. Flynn said in an interview. He also noted that there is little option for perishable and other time-sensitive shipments except to move by air, particularly as ocean-going container ships move to cut fuel costs through what is known as "slow steaming." "What we have not seen is a fundamental shift from air back to sea or to sea," Mr. Flynn said. "As the speed of [sea] vessels slows down, I just think it is going to be harder to take high-value, time-sensitive commodities off of an air carrier and onto a ship." Still, he concurred with Mr. Smith that there is an increasing opportunity for airfreight carriers and others to offer value-added services to customers, such as tracking capabilities. FedEx said Tuesday that earnings for its fiscal fourth quarter ended May 31 slipped 1.4%, amid the volume declines in its big express-shipping business and a $134 million charge to retire aircraft because of sluggish domestic demand. Earnings came in at $550 million, or $1.73 a share, down from year-earlier earnings of $558 million, or $1.75 a share. Excluding the aircraft-impairment charge, per-share earnings climbed to $1.99. Revenue grew 3.8% to $11 billion. Analysts surveyed by Thomson Reuters projected sales of $11.1 billion. Operating margin narrowed to 7.8% from 8.4%. The company's express-shipping business--its largest top-line contributor--saw revenue rise 2.6% to $6.8 billion. The segment's operating profit declined by 35%.Pointing to the current quarter, the company predicted per-share earnings of $1.45 to $1.60, lower than the estimates of analysts polled by Thomson Reuters, who predict earnings of $1.70 a share. For the fiscal year, FedEx predicted per-share earnings of $6.90 to $7.40, versus the consensus of $7.39, although the company stressed that the full-year guidance doesn't include "the impacts of significant cost-reduction programs currently under review" that likely will be announced in the autumn. Its ground-shipping segment reported a 9.7% increase in revenue to $2.48 billion. Operating profit was up 18% as average daily volume grew 3%, driven by growth both FedEx Home Delivery and business-to-business services. Write to Bob Sechler at bob.sechler@dowjones.com

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