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FedEx profit beats Street, updating Boeing fleet

By Lynn Adler

(Reuters) - FedEx Corp beat its quarterly profit forecasts and is updating its fleet with fuel-efficient Boeing aircraft while delaying delivery of other new planes to cut overall costs, driving its shares up nearly 8 percent.

Cost curbs, fuel surcharges and other higher rates paid by shippers helped increase margins as volume declined in the Express and Freight segments, analysts and investors said.

Online shopping boosted demand for FedEx's home delivery services, increasing volume and raising expectations of ongoing growth in this smaller segment.

FedEx's fleet management for its Express segment, its biggest, was an encouraging sign for a company typically seen eager to incur expenses by adding aircraft.

The company said on Thursday it is deferring delivery of 11 Boeing Co 777 freighter aircraft, adjusting for slowing volume out of Asia.

FedEx also signed an agreement to buy 27 new 767-300F Boeing aircraft, replacing some that are more than 40 years old.

The company said the 767s will provide similar capacity as the MD10s being retired, with about 30 percent more fuel efficiency and a minimum 20 percent reduction in unit operating costs.

"Delaying of the triple-7s is favorable; in general Wall Street thinks that they spend too much money on planes," said Kent Winegar, analyst at Terry McDaniel & Co in Austin, Texas, which holds both FedEx and United Parcel Service shares.

"When I go to conferences and talk to sell-side analysts, they're always complaining that (Chief Executive) Fred Smith -- he never saw a plane he wouldn't buy," he added. "They're being a bit more cautious."

FedEx expects continued moderate economic growth, with trade flows staying volatile, executives told analysts on a conference call after the company reported results on Thursday.

"FedEx Express took action during the quarter to adjust its network, particularly in Asia, as recent inventory destocking trends have impacted demand for our FedEx Express services," FedEx Chief Financial Officer Alan Graf told analysts.

"Balancing the network is a key driver in Express' profitability and the volatility of trade flows is as high as it's ever been and we think it's going to be the new normal," he said. "We're going to have to be much more adept at matching our capacity quicker. I think we're doing that."

The world's No. 2 package delivery company reported fiscal second-quarter net profit of $497 million, or $1.57 per share, up from $283 million, or 89 cents per share, a year ago.

Analysts had been expecting a profit of $1.52 a share.

FedEx also affirmed its fiscal 2012 guidance for $6.25 to $6.75 per share, after trimming it in September on tepid global economic growth and high fuel costs.

Revenue rose 10 percent to $10.59 billion. Analysts, on average, expected revenue would rise to $10.61 billion, according to Thomson Reuters I/B/E/S.

"Coming out of the downturn, we have learned that FedEx can push through price increases even on sluggish volumes," said Matt Collins, Edward Jones analyst in St. Louis. "We think we're only in the early or middle innings of FedEx's yield improvement strategy, and that pricing should help returns in the future as long as the global economy does not fall into another recession."

FedEx delivered about 17 million packages on December 12, its busiest day in its 40-year history and twice the average daily shipments, driven by online holiday orders.

"Our improved performance was largely a result of effective yield management programs and strong demand for FedEx Home Delivery and FedEx SmartPost services," Smith said. "With the healthy growth in online shopping this holiday season, demand is increasing for these residential delivery services."

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For related graphic see http://link.reuters.com/fed65s

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The massive volume of goods moved by FedEx makes its shipping trends a bellwether of consumer demand and the economic climate.

The value of packages that it handles in its trucks and planes each year is equivalent to about 4 percent of U.S. gross domestic product and 1.5 percent of global GDP.

FedEx shares rose 8 percent to end at $83.47 on the New York Stock Exchange. The stock is down about 10 percent this year, lagging the 5 percent drop in the Dow Jones transportation average <.DJT>, but up 30 percent from this year's lows in October.

Shares of larger rival United Parcel Service were up 1.3 percent at $71.55, down 1.3 percent this year.

FedEx and UPS are among transportation companies that have been able to pass through higher rates to customers, despite an uneven economic recover. Hit by recession, shippers have been keeping inventories lean and depending on just-in-time deliveries that companies like FedEx and UPS make.

FedEx this month said it will raise rates for FedEx Ground and FedEx Home Delivery in 2012 by a net 4.9 percent, on average, matching its 2011 increase. In September, FedEx Freight began a 6.75 percent general rate increase.

(Reporting by Lynn Adler; Editing by Derek Caney, Dave Zimmerman and Richard Chang)

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