Federal Express Q1 '97
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Federal Express Q1 '97
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Federal Express Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> UNION CITY, Ca., September 17, 1996/FOOLWIRE/ --- Federal Express released Q1 1997 earnings after the market close yesterday. The earnings per share were $1.08 compared to $1.33 per share reported last year in Q1. Revenues for the quarter rose 10% from last year to $2.7 billion. Net income was $62 million versus $75.3 million last year.
US domestic revenues were up 10% to $1.9 billion and US domestic operating income was $126.2 million (a year-over-year operating income increase of $0.7 million). Approximately $28 million of the increase in US domestic operating income in Q1 was due to the expiration of the US excise tax on property transported by air.
International revenues in Q1 were up 9% year-over-year to $738 million, with an operating income of $3.7 million. Last year's operating income was $23.7 million.
Package volume growth yields and operating expenses in the first quarter were consistent with recent quarters and with FedEx's own expectations. As they entered the quarter it was clear that they had a tough year-over-year comparison due to lower international air freight yields, one less operating day, rising fuel prices, and last year's unusually low maintenance expenses.
Higher jet fuel prices accounted for about $15 million of the increased fuel cost versus last year's Q1. Additionally, since the first quarter of last year, quarterly maintenance expenses which are booked as incurred have been running higher by an average of about $44 million.
Their express package growth rate remains strong in the US domestic market. The 9% increase in their average daily volume was coupled with a 0.9% increase in revenue per package excluding the excise tax benefits. This was the third consecutive quarter of improving US domestic yields due to the effectiveness of FedEx's yield management program. They are right where they expected to be in terms of volume and mix and are very pleased with that.
The international segment continued to show strong growth in their premium international priority express service which increased more than 17% year over year. The international non-express air freight market, though still weak, showed some improvement with total pounds increasing 13% over last year's levels. However, and extremely aggressive pricing environment in this market has resulted in continued lower yields which reduced international non-express air freight revenues by $7 million compared to last year's first quarter.
There were four main reasons why earnings were down year over year. First, maintenance expense in last year's first quarter was well below recent levels of expense. The remaining quarters of fiscal 1996 were much more in line with this quarter's level of maintenance expense, so the negative comparison they see in this quarter shouldn't extend into the rest of this year. Second, jet fuel prices have risen considerably since last year's Q1. Current fuel prices do include the 4.3 cent per gallon excise tax on aviation fuel that began in October of 1995. The fuel tax accounted for about $6 million of the $15 million year-over-year increase pointed out due to fuel price changes. That comparison will not be as difficult as they go forward, since beginning in October last year's numbers also include the tax. A third contributor to a difficult year-over-year comparison is the relative condition of the commodity international air freight market. Beginning in September of last year, FedEx added a large increment of capacity which opened their intra-Asian service and increased their service capabilities between the US, Asia, and Europe. It also put them more at risk in the commodity air freight market which has weakened since this time last year. The international air freight yield was $1.09 per pound last year and is down to $0.92 per pound last year. The yields in the non-express air freight market started dropping last Fall and have reached low levels. Finally, a contributor to difficult year-over-year comparisons is having one less operating day in this year's Q1 compared to last year. This means that they have one less day of revenues and a high percentage of their costs are fixed.
The company was asked about aircraft to be acquired and the deal they cut with United for 36 aircraft. The company responded that this was related to their new MD-10 program. The MD-10 has very favorable characteristics, most notably that compared to any other options the company was looking at in terms of expansion, the MD-10 is exceedingly low cost in terms of cost per ton of capacity added. Secondly, FedEx is going to put all new DC-10s, as well as the current fleet of DC-10s through a reliability improvement program and they think that the dispatch reliability of the MD-10 can approach 99%. So they will be able to improve service while lowering costs. The program provides them with a large amount of flexibility in that they can modify and add MD-10s to the fleet based on their schedule and not some manufacturer's schedule. There is a commonality in the cockpit between the MD-10 and the MD-11 such that they can get a dual type rating certificate and their crews can go from the MD-10 to the MD-11 and back, which has major implications for their ability to more efficiently schedule the fleet and for training, etc. The only plane they need to replace is the one that burned up in New York. They don't have any plans at this point to retire anything else. These planes have been purchased for incremental growth, not replacement. They will be mostly for domestic service which will give FedEx the ability to free up their MD-11s and DC-10s for the international schedule. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |