Total combined average daily package volume in the FedEx Express and FedEx Ground segments grew 5% year over year for the quarter, due primarily to growth at FedEx Ground, FedEx International Priority® (IP) and an increase in international domestic express shipments resulting primarily from recent international acquisitions.

Third quarter operating margins declined, as higher fuel prices and a weak U.S. economy limited demand for U.S. domestic express, less-than-truckload (LTL) and copy and print services. The costs of retail service enhancement initiatives, increased marketing and technology expenses and higher expenses at FedEx Ground more than offset the benefits from lower variable compensation and favorable exchange rates.

Outlook

FedEx expects earnings to be $1.60 to $1.80 per diluted share in the fourth quarter compared to $1.96 a year ago. Last year's fourth quarter results included a $0.06 per diluted share net benefit from a settlement with Airbus related to the A380 order cancellation. This outlook assumes no additional increases to current fuel prices and no further weakening in the economy. 

The capital spending forecast for the year has been reduced to approximately $3.0 billion.

"Our fourth quarter earnings outlook has been impacted by higher than anticipated fuel prices and a weak U.S. economy," said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. "Looking ahead to our fiscal 2009, we are expecting a continuation of fourth quarter trends, which would result in limited earnings growth next year. We are scrutinizing all expenses and investments to realign them with the current environment."

FedEx Express Segment

For the third quarter, the FedEx Express segment reported:

IP package revenue grew 18% for the quarter, as IP revenue per package grew 10%, primarily due to higher fuel surcharges and favorable exchange rates. IP average daily package volume grew 6%, led by increases in volume originating in Latin America, the United States and Asia. U.S. domestic revenue per package increased 6% due to increased fuel surcharges and higher rate per pound, while package volume declined by 2%. 

Operating income and margin were negatively impacted by continued softness in the U.S. economy, increased intercompany charges from the FedEx Services segment and the ongoing cost of investments in the company's China domestic express service, more than offsetting the benefits from the timing lag of the fuel surcharge, one additional operating day and exchange rates.

FedEx Ground Segment

For the third quarter, the FedEx Ground segment reported:

FedEx Ground average daily package volume grew 7% year over year in the third quarter due to increased commercial business and the continued strong growth of its FedEx Home Delivery service. Yield improved 3% primarily due to fuel surcharges, extra service revenues and the impact of general rate increases.

Operating income and margin were lower due to increased intercompany charges from the FedEx Services segment and costs to enhance and defend the independent contractor model, partially offset by the benefit from one additional operating day.

FedEx Freight Segment

For the third quarter, the FedEx Freight segment reported:

LTL shipments declined 3% year over year, as demand for these services continues to be restrained by the weak U.S. economy, although average daily LTL shipments improved sequentially throughout the quarter. LTL yield improved 5% year over year as higher rates, including the impact of the January rate increase, more than offset the July 2007 fuel surcharge reduction. 

Operating income and margin decreased in the quarter due to the net impact of higher fuel costs and the fuel surcharge reduction, higher utilization of purchased transportation and fewer long-haul LTL shipments.

FedEx Services Segment

Revenue for the FedEx Services segment, which includes the operations of FedEx Kinko's and FedEx Global Supply Chain Services, was up 1% year over year. Revenue generated from new locations and higher package acceptance fees offset lower copy product revenues at FedEx Kinko's.

FedEx Services expenses, which are reallocated to the transportation segments net of revenues, increased year over year due to higher marketing and information technology costs and increased net operating costs at FedEx Kinko's associated with expansion and service improvement activities. 

FedEx Kinko's has opened 252 centers fiscal year-to-date as part of its plan to open 300 new centers this year. Given the weak economic outlook, FedEx Kinko's will significantly slow its rate of expansion in fiscal 2009, to about 70 new locations.