Consultant Insight: FedEx sees positive side of cost cuts

The light at the end of the tunnel is getting brighter as FedEx reported promising earnings for its fiscal third quarter despite declines in financials and volumes. Total revenue in the period that ended Feb. 28 fell 5.9% to $22.2 billion, while operating income declined 21.8% to $1.04 billion as reported and 23.5% to $1.17 billion adjusted. Volumes were down across all of FedEx’s divisions. [caption id="attachment_76185" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo Next columnist[/caption] “We’ve continued to move with urgency to improve efficiency, and our cost actions are taking hold, driving an improved outlook for the current fiscal year,” President and Chief Executive Raj Subramaniam said in a statement. Indeed, as the company continues to park airplanes, sell a freight facility and cut staffing and additional costs, FedEx sees signs of improvement. Expenses in its ground division were down 8% year over year due to reduced salaries, benefits and purchased transportation costs. Total operating income increased 32% when combined with FedEx’s focus on revenue quality. In addition, FedEx successfully utilized dynamic pricing during the peak holiday season to adjust residential surcharges based on individual customers’ weekly peaking factor by delivering $150 million in profit, according to Executive Vice President and Chief Customer Officer Brie Carere. Meanwhile, to maintain the freight division’s revenue quality and manage its costs, employees were furloughed to match staffing with volume levels, which declined 12% during the quarter. Also, equipment was sold within the freight division to reduce its fleet and maintenance costs. This included the sale of a freight facility. As a result, revenue per shipment increased by 11%, and $30 million was gained by selling the facility. Cutting costs for Express More cost-cutting was announced for its largest division, Express. “At Express, our cost base is constrained in the short-term, where the Express network is vast and complex and requires time to adjust to changing demand conditions. Therefore, we’re taking additional steps to address our fixed expense structure,” Subramaniam told analysts. As such, flight hours were reduced by 8%, salary and benefit expenses were reduced by 4% and nine additional aircraft were parked. According to Subramaniam, 45% of total revenue declines on an adjusted basis were mitigated based on these reductions. Its fleet is also being rightsized as MD-11s are retired. Carere told analysts that having a freight and parcel bundle for its customers in Europe “differentiates us from the rest of the market.” This differentiation was shared after it reopened its Duiven, Netherlands, road hub, a former TNT European Road hub, last October. Freight and parcel bundle also is important in its U.S. Domestic Express services as it continues integrating Ground with Express. In February, it announced it would shift to a single daily dispatch of couriers. According to Subramaniam, the change will improve its hub and ramp efficiency with an expected $50 million in savings during its fourth quarter and $300 million annually by fiscal 2024. However, while FedEx should be applauded for its achievements, it needs to speed up its cost-cutting measures or risk losing out to its competitors or its largest customers, such as the U.S. Postal Service . Their contract expires Sept. 30, 2024, which is still more than a year away. But as the USPS continues to shift more mail and parcels from air to road, the impact could be detrimental to FedEx if the contract is not renewed or altered to include more international Express service and, perhaps, assistance in last-mile delivery in Europe — utilizing its bundled solution.

Consultant Insight: FedEx sees positive side of cost cuts

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