It has been no secret that FedEx is in the process of reducing costs and reconfiguring its operations to meet slower-than-expected growth in the current sluggish world economy, particularly in its Express segment. Among the changes announced over the past few months have been a delay in delivery of some of the 777Fs it has on order with Boeing, accelerated retirement of some of the older freighter types in its fleet, an early retirement offer to reduce employee headcount, and an order for an additional nineteen 767-300Fs (complementing a December order 2011 for 27 units) as part of a plan to move to a more fuel-efficient fleet.
However, at each stage of the process, FedEx added the caveat that full details would not be announced until an investors’ meeting in early October. That meeting has now been held, and while FedEx did provide some additional information, there were no major surprises. In brief, the announcements included the following:
- The target for the entire program is a $1.7 billion increase annual profitability over the next three years (i.e. through the end of fiscal 2016), with “a significant portion of the benefits achieved by fiscal 2015.” The profit improvement initiatives “do not include ongoing base profit improvements at FedEx Ground and FedEx Freight.”
- “A significant portion of the profitability improvement will come from cost reductions at FedEx Express and FedEx Services.” The Express segment is expected to generate some $1.55 billion of the total $1.7 billion, with gains coming “through a combination of cost reductions, efficiency improvements, and service repositioning.”
- Of the $1.55 billion expected to come from Express, some $300 million will come from modernizing the air fleet and another $350 million from changes in the operation of its US domestic business.
The fundamental issue is that FedEx customers have been shifting from higher- to lower-yield products. That is, from overnight to next day, from next day to deferred, and from deferred to ground. And in the international market, some customers are shifting from air to ocean. Express segment boss David Bronczek put it this way: “We are operating in the most tepid post-recession recovery in the modern era. Customers in key markets have been shipping less, with lower demand for priority services.” To which FedEx CEO Fred Smith added: “We do not think the Express business is going to shrink to oblivion It’s just not going to be a significant growth business.”
Based on current expenses at the Express business unit (12 months through Aug 2012), the $1.55 billion FedEx is promising in savings is a little over 6%. Now, if that same $1.55 billion is divided by only salaries and fuel (the most obviously controllable targets), the company will have to produce 11% savings. This assumes that the increases in depreciation and decreases in maintenance caused by re-fleeting are a wash. For all the immediate enthusiasm today from the stock market in response to FedEx’ announced intentions, FedEx seems to have handed itself a tough assignment.