FedEx provides a few clues about its cost-savings plans

FedEx today released financial and operating results for its fiscal first quarter (ended 31 August). As expected, total revenue was up a bit (2.6%), while net income was down a bit (1.1%), as strong gains in the company’s Ground and Freight Segments were not sufficient to overcome the difficulties faced by the Express Segment.  We will provide a detailed analysis of the quarterly results in the upcoming issue of Cargo Facts, but will share a summary here of some of the details that emerged regarding FedEx’s planned “restructuring” of its US domestic express business. Of course, FedEx is not alone in facing a changing world. Those of you who are interested in learning how the overall freight and express business is coping with the changes that have hit FedEx should plan to join us at the upcoming Cargo Facts Aircraft Symposium in Miami, 15 – 17 October.

Two points to start with:

• First, as FedEx boss Fred Smith made clear, the management of FedEx has never used the term restructuring.  He did not say what term the company did use, but his intent was clear enough – what FedEx is doing is simply trying to match changes in customer demand with changes in its system, in an attempt to cut costs and increase profitability.

• Second, as several FedEx executives pointed out in a conference call this morning, the changes will not be confined to the US domestic express market.

What will the specific changes be? That remains somewhat closely guarded, with the grand unveiling to be made at an investors’ meeting in the second week of October, but here are a few clues.

• There will be no layoffs, and no Draconian steps taken. (We note that FedEx has introduced a voluntary retirement initiative, but suspect that relatively few employees have taken it up.)

• Air capacity will be reduced, as freighter retirements over the next six years outnumber acquisitions by 46 units, reversing the historical pattern of fleet growth.

• Lower-yielding traffic will be moved “into the right network.” That is, FedEx will move traffic from Express to Ground, from Ground to Freight, and from air to ocean.

• The move from air to ocean will be facilitated by the recent rapid growth of the company’s forwarding arm, FedEx Trade Networks.

• The company believes the magnitude of the savings created by the changes will surprise everyone.

Regarding changes in air capacity, the chart at right shows a summary of FedEx’s planned acquisitions and retirements over the next six fiscal years, and how the changes in the composition of the fleet will affect the total available revenue payload. As one might expect, older aircraft will be retired, and newer, more fuel-efficient models will be brought in, but for the first time in its history, FedEx is entering an extended period of net reduction, as both numbers of aircraft and total available capacity shrink over the coming six years.

727-200Fs will be gone from the fleet by 2016, replaced by 757-200Fs. Likewise, a total of fifty-four MD-10-10Fs, MD-10-30Fs, and A310-200/-300Fs will exit, replaced by forty-two 767-300Fs. At the top end of the payload scale, FedEx has postponed some planned 777F deliveries, but will still acquire eight more units as fourteen MD-11Fs are retired. Interestingly, FedEx operates one type of freighter whose numbers have remained constant for many years, and will remain almost constant through the next six years: the A300-600F. FedEx acquired its seventy-first unit in 2007, and does not plan to start retirements until a single unit leaves the fleet in FY2018.