Margin Squeeze at Federal Express

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Federal Express (FDX) this morning announced fiscal year 3rd quarter earnings and what really stood out for me was a massive margin squeeze. 

Despite a 44% drop in fuel expenses from $980 million to $551 million in their core Express segment, their operating margin in that segment dropped from 6.9% to 0.9% – reflecting a drop in segment operating income from $425 million to $45 million. 

That’s because average daily package volume dropped 5% and, here’s the one that really stood out, average revenue per package dropped 13% from $22.02 to $19.13.  Thus, even though they were able to cut expenses by 12% ($699 million) in the segment, the 18% drop in revenue ($1,079) wrecked the quarter. 

Overall net income was down 75%.

The Ground segment held up well but the core Express segment seems at risk of posting a loss if volumes and revenues per package continue declining.  They announced another $1 billion in cost cuts for FY 2010 to offset this, but it’s rough going at FedEx right now.

Disclosure: Top Gun has no position in Federal Express (FDX) shares.

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