FedEx On Advertising, Asia, Oil and Taxes

Times are changing for FedEx Corporation (FDX). The delivery service powerhouse said last week that it will not advertise during the Super Bowl for the first time in 12 years. A 30-second ad on the televised Feb. 1 game reportedly costs $3 million. FedEx’s advertising director said:

“As a responsible employer of more than 290,000 employees and contractors worldwide, there is a time to justify such an ad spend and a time to step back.”

The company also announced it is cutting CEO Fred Smith’s salary by 20%, senior execs by 7.5%-10% and across the board workers will see 5% salary cuts. Merit-based salary increases will be suspended in 2009 as will all 401(k) matching contributions.

FedEx has long been considered a bellwether for economic conditions in the U.S., the company’s conference calls tell us much about other industries. Some examples from the company’s F2Q09 conference call :

On Asia:

We’ve reduced capital spending plans for this fiscal year from $3 billion at the start of the year to currently estimate at $2.4 billion for FY09.

On December 17, the first FedEx Express test flight arrived at our new Asia/Pacific hub in Guangzhou, China which will officially open now on February 6. It will be the largest FedEx facility of its kind outside the United States overtaking our large facility even in Paris in Europe and it represents a US $150 million capital investment. It will be the heart of our APAC operations which are integral to our long term growth strategy.

Q: In the International Priority business, regions that you might have seen the most pronounced declines?

A: Primarily Asia/Pacific and US International export back to Asia are the two areas that have the most significant declines. Europe, quite frankly did well for us.

On Boeing (BA):

For the remainder of fiscal 2009 we will continue to balance the need to control spending with the opportunity to make investments with high returns such as in substantially fuel efficient Boeing 757 and Boeing 777 Freighters, although we have pushed back our 777 delivery schedule. We will continue to invest in critical long term strategic projects focused on expanding our global networks and broadening our service offerings to position us for stronger growth when economic conditions improve.

We temporarily parked a few more airplanes and deferred some CapEx and reduced hours and all those kinds of things. It’s more of that than we otherwise would have.

Oil prices:

We did hit our range that we gave at the end of the first quarter but it was because we had a large benefit from fuel that offset the decline that we saw in our revenue.

Q: With fuel being so low these days if you’re rethinking potentially hedging?

A: No, all we have to do is look at the wreckage of the last year of all the airlines who did and that’s an easy one to answer.

Adjustments to our fuel surcharges provided substantial offsetting benefits to the decrease in volumes. I would say that’s not going to continue.

Jet fuel has not declined as much as oil prices have at this point.

There could be a little bit more decline in the price of jet fuel going forward. As far as what’s going to happen with oil prices we believe with the weakness in the economy they’re going to stay at these levels at least during our third quarter. We won’t see that benefit in the third and fourth quarters as we enjoyed in the second quarter.

We’ve dropped our jet fuel consumption for example by 7%. These are significant numbers for us... Declining fuel surcharges… are going to be at most 2% in February.

Death and taxes:

I personally believe that the root cause of this [turmoil] is the fact that the United States in particular has had… tax policies in place which incented the growth in the financial sector at the expense of the industrial sector.

In the early 80's... 25 years or so ago financial activities represented about 15% of the reported profits of US industry. By 2007... the financial sector was generating 32% of all profits. The deductibility of interest which incents people to leverage up [means that] while equity is taxed very significantly and capital is taxed very significantly, the companies that employ the blue collar workforce can't invest to the extent that they need to invest.

One of the things that we’ve advocated very strongly in addition to lowering the overall corporate tax rate is to expense capital and that is a policy that President Elect Obama and his team could put in place that has no downside because if you can incent business to invest all you’re doing is to defer the tax and what you do from the industrial sector is you mitigate the risk of making those investments.

We’ve reduced our capital from $3 billion to $2.4 billion. If we could make capital investments and get the money back in the year they were made it makes our workforce more productive and about $0.70 on the dollar accrues to the blue collar workforce.

Comments

[jepittman:]

I assume the last paragraph is Fred Smith's editorial. I believe what he says is correct. I do NOT believe the incoming Congress and Administration will implement anything that even remotely resembles it. It does not mean there will not be an economic recovery that will significantly benefit Fed Ex. They are a terrifically well run operation that will survive and prosper regardless of who is in charge of the government.

Jan 01 08:56 PM

[Matthew LaG...:]

I agree. I see Mr. Fred Smith as a very intelligent man who knows how to adapt and overcome. In my amatuer opinion, the company is not in terrible shape, yet he has the foresight to make cuts BEFORE things get out of hand, something that another large trucking company (YRC) has failed to do and has paid the ultimate price for. I have a great amount of respect for Mr. Smith and know that FedEx will not only survive, but will thrive through these tough economical and political times our country is currently living in. Anyone who disagrees should do a little research on Mr. Smith and you will see the fight the man has in him and the tough times that he has already pushed his company through. Thank You.

Jan 30 07:09 PM