By Lisa Baertlein and Aishwarya Nair

(Reuters) -U.S. delivery firm FedEx Corp posted lower-than-expected quarterly earnings on Thursday, hit by ongoing labor woes and the Omicron outbreak, and said second-half Ground margins will miss internal targets.

Shares of FedEx fell 3.5% to $219.90 in extended trading.

E-commerce shipments fueled revenue at FedEx and United Parcel Service during the COVID-19 pandemic, but FedEx has been less successful than its rival at translating that additional business into profit.

While labor challenges began to ease in the latest third quarter, FedEx Chief Operating Officer Raj Subramaniam said volume was softer than forecast due to Omicron.

"As such, we expect our second-half Ground margins will be lower than our previous expectations and not reach double digits," Subramaniam said.

Executives said volume rebounded as Omicron waned. Still, analysts called out the growing gap between the Ground operations at UPS and FedEx.

"You guys are operating, give or take, at an 8% margin. UPS is on its way to 12(%). You guys used to be better," said Wolfe Research analyst Scott Group.

"We're laser-focused on improving our margins," Subramaniam said.

In January, FedEx warned that Omicron infections had caused pilot shortages and delayed shipments in its aircraft-dependent Express operation. That news came after FedEx said staffing shortages in its non-union, contractor-based Ground division were hurting profits and delaying deliveries.

Meanwhile, the unionized workforce at UPS has been a bright spot in the tight U.S. labor market. UPS offers employees better pay and benefits than their non-union peers that deliver for FedEx and Amazon.com, which have struggled to hire and retain drivers and other key workers.

Memphis-based FedEx's adjusted net income for the fiscal third quarter increased almost 30% to $1.22 billion, or $4.59 per share. However, that missed analysts' call for a profit of $4.64 per share, according to Refinitiv I/B/E/S Estimates.

Revenue for the quarter ended Feb. 28 grew nearly 10% to $23.6 billion.

FedEx on Thursday affirmed the full-year forecast it reinstated in December, again calling for earnings excluding items of $20.50 to $21.50 per share. In September, FedEx lowered that range to $19.75 to $21.00 per share.

(Reporting by Lisa Baertlein in Los Angeles and Aishwarya Nair in Bengaluru; Editing by Jonathan Oatis, Bernard Orr and Richard Pullin)