(BLOOMBERG) – FedEx struggled with higher costs as package growth stalled, leading the courier to cut its annual earnings outlook and post quarterly profit below analysts’ expectations.

Adjusted earnings were US$4.37 a share for the quarter ending Aug 31, down from US$4.87 a year earlier, FedEx said in a statement. Analysts had expected US$4.92, according to 24 estimates compiled by Bloomberg. Unadjusted operating margin was 6.4 per cent, down from 8.2 per cent a year earlier.

The company said costs suffered because of a tight labour market, as a dearth of workers drove up wages, reduced network efficiencies and increased the need to hire outside transportation services. This led to a US$450 million (S$609 million) increase in costs from a year earlier. Average daily package volume unexpectedly fell slightly from a year earlier at both the Express and Ground units as “continued supply-chain disruptions have slowed US domestic parcel demand compared to the company’s earlier forecast”.

“The current labour environment is driving inefficiencies in the operation of our networks and significantly impacting our financial results,” said FedEx’s president and chief operating officer Raj Subramaniam.

That prompted FedEx to slash its full-year outlook for adjusted per-share earnings to a range of US$19.75 to US$21, which excludes expenses from the integration of TNT Express and variations in the pension fund value. The previous range, provided in July after the company’s 2021 fiscal year ended on May 31, was US$20.50 to US$21.50. The company left its target for capital expenditures this year unchanged at US$7.2 billion.

“For the peak season ahead, service remains our focus and we are making investments in resources and capacity to meet our customer’s needs,” Mr Subramaniam said.

FedEx’s profit margins have come under pressure as residential deliveries driven by online shopping have grown faster than commercial service. The latter has higher yields because more packages are left at one location and less driving is required between stops.

FedEx chief executive Fred Smith had taken steps to bolster profit, including moving to seven-day service and embracing large packages. Still, the pandemic has given FedEx a boost, with robust e-commerce uptake allowing the courier to raise prices and focus on higher-margin packages from small shippers. The Express unit has also benefited from running its planes more full as international commercial flights, which also carry cargo, have not yet recovered.

The company said on Monday that it will increase prices 5.9 per cent in January, after years of increases of 4.9 per cent or less. The company already announced significant surcharges for the holiday package rush.

FedEx’s quarterly revenue was US$22 billion, slightly above the US$21.9 billion analysts estimated. During the quarter, revenue per package rose 15 per cent for the Express unit and climbed 10 per cent for the Ground unit.

FedEx’s Freight unit saw both volume and yield increase, helping the unit increase operating margins to 17.3 per cent from 15 per cent a year earlier. During the quarter, revenue per package rose 15 per cent for the Express unit and climbed 10 per cent for the Ground unit.

FedEx fell 4.1 per cent in New York after regular hours. The shares have declined 3.4 per cent this year through Monday while the Standard & Poor’s 500 Index has risen 16 per cent.