Consultant’s Insight: FedEx to spin off FedEx Freight, among other cuts

One of the worst-kept secrets this year has been that FedEx would likely spin off its less-than-truckload subsidiary, FedEx Freight. Hours before the company released its second-quarter earnings on Dec. 19, it announced that it would indeed spin off the LTL subsidiary. “This is the right time to pursue a separation as we respond to the unique dynamics of the LTL market,” FedEx President and Chief Executive Raj Subramaniam said in a statement. [caption id="attachment_56859702" align="aligncenter" width="1200"] (Courtesy/FedEx)[/caption] The spinoff announcement rewarded FedEx’s stock, but its Q2 earnings told a slightly different story. FedEx reported $22.2 billion in revenue, a less than 1% year-over-year decline, for the period ending Nov. 30. Operating income declined 18% YoY as reported and 2.8% YoY as adjusted, to $1.05 billion and $1.38 billion, respectively. Weak domestic demand A weak U.S. domestic demand environment and the expiration of the U.S. Postal Service contract weighed negatively on FedEx’s earnings. “With the expiration of the U.S. Postal Service contract, we are strategically matching capacity with demand and flexing the network as needed to transport packages more efficiently,” Subramaniam said on the Dec. 19 earnings call. “At the end of September, we reduced our U.S. domestic daytime flight hours by nearly 60% and swiftly began to reduce other associated costs.” U.S. domestic flight hours decreased 24% from Q1, mostly due to the 60% reduction in daytime flight hours, Chief Financial Officer John Dietrich said on the call. Internationally, export package volumes increased 9% in the quarter, driven by FedEx’s international economy service. The global industrial economy continued to constrain demand for FedEx’s most profitable priority, commercial services, Dietrich said. Cutting costs FedEx continues with its cost-cutting initiative, DRIVE, which provided savings of $540 million in Q2, according to the earnings report. DRIVE targets $2.2 billion in incremental savings this fiscal year. FedEx also continues with its Network 2.0 initiative and integration of Ground into Express. In early 2025, it plans to complete its Ground-Express integration in the Canadian market. Throughout its DRIVE and Network 2.0 initiatives, the company has identified areas of strategic focus. “We are designing new experiences for high-value segments and planning for above-market growth where we already have a differentiated portfolio,” FedEx Chief Customer Officer Brie Carere said on the call. “Our target segments are B2B for both health care and automotive, domestic e-commerce, global airfreight and, of course, Europe.” FedEx has experienced “tremendous success” in health care and it is the company’s priority B2B vertical, Carere told analysts. “Federal Express already has a double-digit percentage of our revenue in the fast-growing $70 billion health care segment, and this segment is an important contributor to FedEx's profit today,” she said. Revised outlook In another uninspiring quarter of little organic growth, FedEx has focused on “revenue quality” and the use of surcharges to maintain revenue per piece. The company’s revised outlook for its remaining fiscal 2025 also looks to be uninspiring and a continuation of cuts and higher surcharges. “At the top end of our range, we assume revenue is up a low-single-digit percentage, driven by a modest improvement in industrial production leading to higher flow-through from B2B demand,” Dietrich said. “At the low end of the range, we're assuming a low-single-digit decline in revenue due to incremental softness in the industrial economy and the pricing environment.” Register now for Cargo Facts' essential regional events for industry stakeholders: Cargo Facts LATAM 2025 on Feb. 10-11 at the Pullman Sao Paulo Guarulhos Airport in Brazil; Cargo Facts Asia 2025 on March 24-26 at the W Shanghai in China; and Cargo Facts EMEA 2025 on May 6-8 at the Shangri-La Bosphorus in Turkey.

Consultant’s Insight: FedEx to spin off FedEx Freight, among other cuts

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