FedEx profit tumbles, says plans to raise rates

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Frederick
Frederick W. Smith, CEO of U.S. transportation services giant FedEx speaks during the session 'The Challenges Confronting World Trade Liberalization' at the World Economic Forum (WEF) in Davos January 25, 2007. REUTERS/Pascal Lauener

Package delivery giant and U.S. economic bellwether FedEx Corp reported a 53 percent drop in quarterly profit on Thursday as the worldwide economic downturn continued to weigh on shipping volumes.

Lower energy prices also weighed on the company's numbers, resulting in what FedEx characterized as a substantial decline in fuel surcharges. But it said it planned a rate increase in the new year to help offset declining revenues from the surcharges, which lag real-time prices and had helped boost profitability over the past year as oil prices plummeted.

Looking ahead, FedEx said it saw growing signs of stability in the modestly improving global economy.

During a conference call to discuss the results, Fred Smith, FedEx's chairman, chief executive and president, predicted that the U.S. economy would grow 3 percent in the third quarter, 4.9 percent in the fourth quarter and 2.9 percent in 2010.

The tide is rising, said Dan Ortwerth, an analyst at Edward Jones. And volumes are improving faster than I thought.

FedEx also said it planned to increase U.S. shipping rates an average of 5.9 percent for U.S. domestic and U.S. export services, effective January 4 -- a sign of confidence in a market where excess capacity has pressured pricing.

This is consistent with what others are doing, said Helane Becker, managing director at Jesup & Lamont Securities, who follows FedEx. Lufthansa announced a 25 percent rate increase in August. AirFrance-KLM announced 20 percent rate increases. I think taking Express rates up 5.8 percent (core rate up 3.8 percent) is not inconsistent with the market. Also, that is their base rate; corporate customers with large volumes will get discounts off the 'rack rate'.

FedEx's main U.S. rival, United Parcel Service , has not disclosed plans to raise 2010 rates, though the two companies tend to track one another closely.

CONFIDENCE 'IMPROVING'

FedEx reported a profit of $181 million, or 58 cents a share, for the first quarter that ended on August 31, down from $384 million, or $1.23 a share, a year earlier.

Revenue fell 20 percent to $8.01 billion.

Confidence appears to be improving, the housing sector seems to have bottomed and the auto sales have picked up, Smith said. These are encouraging signs of a more stable economy.

The results were better than FedEx had originally forecast back in June, but were not a surprise.

Last week, the Memphis, Tennessee-based company preannounced its results, saying it would report first-quarter earnings of 58 cents a share and second-quarter earnings in a range of 65 cents to 95 cents -- an outlook it reiterated on Thursday. At the time, the company said it was benefiting from an increase in international priority shipments and strict cost controls.

Before the preannouncement, analysts had expected FedEx to report earnings of 43 cents a share for the first quarter and 70 cents for the second quarter.

FedEx shares, which jumped more than 6 percent last week when the company preannounced, gave back some of those gains on Thursday. They were last down 1.5 percent at $77 on the New York Stock Exchange.

(Reporting by James B. Kelleher, additional reporting by Scott Malone in Boston; Editing by Lisa Von Ahn, Dave Zimmerman)

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