By Lisa Baertlein and Ananta Agarwal

(Reuters) -FedEx reported a steep quarterly profit drop and lowered its full-year revenue forecast on Thursday after its customers continued to trade down from speedy, pricey delivery to cheaper, slower options.

Shares in the Memphis-based delivery giant tumbled almost 11% to $267.74 in after-hours trading, dragging shares in rival United Parcel Service down 2.5%.

The shift to less-profitable packages is squeezing profits at FedEx and UPS. While the latter pinned the blame on a flood of volume from China-linked e-commerce players that Reuters identified as Temu and Shein, FedEx pointed to a drop in priority shipments between businesses.

CEO Raj Subramaniam said industrial demand was softer than expected. Shipments between manufacturers and other companies in that segment are the most profitable for FedEx, which is often seen as a bellwether for the U.S. economy.

"The magnitude of the Fed rate cuts yesterday signals the weakness of the current environment," Subramaniam said, referring to the Federal Reserve's decision to cut interest rates by half of a percentage point on Wednesday.

Subramaniam is leading a complex restructuring at FedEx that involves slashing billions of dollars in overheads and merging its separate Ground and Express delivery units.

Cost cuts failed to offset the drag from weak demand for lucrative priority services and one fewer operating day in the latest quarter, FedEx said.

The company now expects revenue for fiscal 2025 to grow by a low single-digit percentage. It previously called for low-to-mid single-digit percentage growth.

FedEx also lowered the top end of its full-year adjusted operating income to between $20 and $21 per share, versus its previous range of $20 to $22 per share.

On an adjusted basis, profit fell to $3.60 per share from $4.55 per share a year ago.

FedEx is winding down contract work for the United States Postal Service, its largest customer, and expects a $500 million headwind from the loss of the contract in the current fiscal year.

FedEx's unprofitable USPS air contract, which accounted for about $1.75 billion in revenue to FedEx during the postal service's latest fiscal year, will end on Sept. 29. UPS picked up that business.

Executives are also assessing whether to spin off or sell its FedEx Freight business.

(Reporting by Lisa Baertlein in Los Angeles and Ananta Agarwal in Bengaluru; Editing by Lisa Shumaker and Stephen Coates)