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FedEx cuts forecast as air freight weakness hits profit

Couriers load packages onto vehicles as other packages move down the belt at the Marina Del Rey, California FedEx station December 12, 2011.

© Fred Prouser / Reuters/REUTERS

FedEx Corp. cut its full-year forecast after a worse-than-expected quarterly profit as customers shift from air express to slower but cheaper modes of international shipping.

FedEx's express unit, its biggest source of revenue, has also been hit by overcapacity in the industry that has squeezed margins. Operating income in the express unit fell 66 per cent.

FedEx said the express unit underperformed due to weakness in Asia and other international markets, where margin pressures arising from excess capacity more than offset increased volumes.

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"We have a yield issue that exaggerated itself this quarter over last quarter," Dave Bronczek, CEO of FedEx Express, said on a conference call with analysts.

FedEx plans to cut express capacity to and from Asia from April 1 and is looking at reducing its fleet by retiring more of its older, less-efficient aircraft.

The actions, along with cost cuts, will help the express unit perform better in the fourth quarter, Bronczek said.

"They have got to lower their costs because they are getting paid a lot less for the packages they are shipping," said BB&T Capital Markets analyst Kevin Sterling.

"It is hard for them to adjust quickly because we are talking about planes which cannot just be parked in the garage overnight," said Sterling, who doesn't expect margins to improve for a few quarters.

FedEx, considered an economic bellwether because of the massive volume of goods it moves, forecast fourth-quarter adjusted earnings of $1.90 (U.S.) to $2.10 per share. Analysts on average expect $2.07 per share.

The company now expects a profit of $6.00 to $6.20 per share for fiscal 2013 ending May 31. It had earlier forecast $6.20 to $6.60 per share. Analysts on average expect earnings of $6.31 per share, according to Thomson Reuters I/B/E/S.

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Rival United Parcel Service Inc in January forecast weaker-than-expected 2013 profit, citing an uneven global economy.

FedEx announced a plan in October to improve profits by $1.7-billion over four years by cutting costs in the express unit.

FedEx said a number of its executives accepted voluntary buyouts in early February, and that it had notified thousands more of their eligibility for buyouts.

Third-quarter net income fell 31 per cent to $361-million, or $1.13 per share. Excluding items, FedEx earned $1.23 per share.

Revenue rose 4 per cent to $11.0-billion. Analysts expected earnings of $1.38 per share on revenue of $10.85-billion.

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