NEW YORK (Bloomberg) - FedEx Corp. on Thursday announced more broad cost cuts — including salary reductions — as deteriorating economic conditions continue to drag down demand, warning the outlook for 2009 remains murky.

Chief Executive Frederick W. Smith said the company's earnings are "increasingly being challenged by some of the worst economic conditions in the company's 35-year operating history."

FedEx reported its fiscal second-quarter earnings rose 3 percent, narrowly topping Wall Street's expectations.

The Memphis, Tenn.-based company earned $493 million, or $1.58 per share, compared with year-ago profit of $479 million, or $1.54 per share. Revenue rose 1 percent to $9.54 billion.

Analysts polled by Thomson Reuters predicted profit of $1.57 per share on revenue of $9.87 billion.

The package delivery company said it will cut pay for senior executives and freeze 401(k) contributions for a year. On Jan. 1, CEO Smith will take a 20 percent pay cut, and the pay of other top brass will fall by 7.5 percent to 10 percent.

Smith's base salary last year was $1.43 million, according to a filing with the Securities and Exchange Commission. The figure does not include incentive pay, bonuses, company perks and the estimated value of stock holdings.

FedEx will also implement a 5 percent pay cut for all remaining U.S. "salaried exempt" personnel, which excludes hourly workers such as couriers and package handlers. Mechanics and pilots are also excluded from this category. FedEx said it has about 36,000 salaried exempt U.S. workers.

Combined, the company expects the measures to save $200 million through the remainder of the fiscal year ending in May and $600 million in the next fiscal year.

The company also said it has cut jobs and closed locations in its FedEx Office unit, anticipating slower business at its copy and shipping stores.

FedEx has already begun more than $1 billion in cost-saving measures; including job cuts across its FedEx Freight and FedEx Office divisions, a reduction of some workers' hours, elimination of certain bonuses and implementation of a hiring freeze.

FedEx did not issue a fiscal third-quarter earnings prediction, citing economic uncertainty, but said it expects to earn between 69 cents and $1.94 per share across the third and fourth quarters. Analysts polled by Thomson Reuters predict third-quarter earnings of 54 cents, and fourth-quarter earnings of 85 cents per share.

"Next quarter is going to be terrible, but analysts already expected it to be terrible," Edward Jones Senior Research Analyst Dan Ortwerth said in an interview with The Associated Press.

The performance of package shippers such as FedEx and rival UPS tends to reflect broader economic trends. Demand for business and consumer shipments is related to spending in those areas.

FedEx affirmed its forecast for 2009, after cutting the outlook last week. FedEx said that weakening global economic conditions are offsetting sizable savings from a steep drop in fuel prices and the benefit of new customers from DHL, which is dramatically scaling back its U.S operations.

Ortwerth said that long-term investors should not be put off by the company's pessimistic outlook for next year.

"My focus remains on how this downturn affects the long-term value of FedEx, and at this point there's not much doubt that FedEx can weather the storm," he said. "It's a bad storm, but they have done a lot of good things. Not all companies have (the ability) to cut costs like FedEx can."

Ortwerth said the company's freight unit is likely to take the biggest hit in the short term, because of its close ties to industrial production. It is also the youngest part of FedEx's business, he noted.

But the freight business also has the biggest potential for growth once the economy recovers, he predicts, as other companies scale back or go out of business — giving FedEx the opportunity to gain a bigger stake of the market.