FedEx looks to integrate Express, Ground infrastructure

FedEx’s newly unveiled Network 2.0 plan shows the potential integration of Express and Ground infrastructure to reach an annual $2 billion in cost savings that would help meet FY25 financial targets and grow revenue, according to the company’s investors day conference in Memphis on Wednesday. According to the plan, FedEx expects to consolidate and co-locate its Ground, Freight and Express footprints and operate collaboratively, saving the company billions. Under the new plan, FedEx expects to eliminate more than 10% of pickup and delivery routes overall and operate 100 fewer stations. However, the plan is “similar to the existing playbook,” Morgan Stanley analysts pointed out in a note. [caption id="attachment_85613" align="alignright" width="522"] FedEx 767F. Photo courtesy of FedEx.[/caption] While the presentation’s buzzwords included “revenue quality initiatives” and “sweating the assets,” analysts said “none of these represent a radically new approach to FedEx’s strategy over the past decade.” “Perhaps the focus on not growing the physical footprint as much and trying to grow capacity through efficiency instead was new, but we believe this also represents somewhat of an acknowledgment that the e-commerce growth opportunity ahead may not be what it has been in the last decade,” Morgan Stanley analysts said. However, e-commerce remains a large market driver, with FedEx anticipating that “95% of growth will come from e-commerce,” Brie Carere, executive vice president and chief customer officer of FedEx Corporation, said at the conference. J.P. Morgan analysts shared similar sentiments regarding the integration of Express and Ground, saying that “the long-awaited opco integration wasn’t the big bang proponents of a combined network had long hoped for, but it looks like a reasonable start, even if it’s in the early stages.” Growing capacity through efficiency FedEx remains focused on “better sweating [its] existing assets,” said Richard Smith, president and CEO-elect at FedEx Express. An example would be better utilizing existing sorting facilities to add additional capacity without any capital investment, he said. FedEx is nearing the end of its fleet modernization program, which will increase capacity by 10 million pounds (4535.9 tonnes), Smith further noted. “On our international routes are more fuel efficient 777 freighters [that] will eventually replace our older, tri-motor MD-11s, and these aircraft are able to fly more freight in less time between [our] major markets in Asia, Europe and the U.S.,” Smith said. FedEx will lean on its freight forwarding division, FedEx Logistics, to procure and better manage third-party commercial lifts to drive operational and capacity efficiency improvements, he stated. “By strategically tapping into global airline partnerships and using commercial linehaul particularly on imbalanced lanes, we can connect more cost effectively some markets point to point instead of the continued overreliance on our traditional hub and spokes purple tail systems,” Smith said. “This allows us to diversify our lane flows and route volume more dynamically into gateways versus hubs leading to less capital, intensity and lowering our overall cost to serve.” This strategy supports FedEx’s commercial growth plans while avoiding adding up to 50 widebody aircraft to its fleet. Instead, flight frequencies can be flown more economically and efficiently, Smith said. Revenue roadmap FedEx outlined the roadmap to its FY25 financial targets with the intention of growing revenue between $105 billion and $110 billion — despite the risk of a softening economy — including an up to 9% adjusted operating margin in Express, 11% to 12% in Ground, and 20% to 22% in Freight. However, the “targets assume a ‘normalized’ macro environment which may be the case through FY25, but numbers could see near-term pain if the macro deteriorates in the next 12 months,” according to commentary from Morgan Stanley analysts. “While [management] said that they expect to see significant post-pandemic mean reversion in International Express in FY24, it is very hard for us to bridge the Express FY25 guide with mean reversion.” FedEx recently announced its Q4 fiscal earnings with revenue of $93.5 billion and adjusted operating income of $6.9 billion, an 11% year-over-year increase for both.

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