FedEx provides a few clues about its cost-savings plans

  • David Harris
  • September 18, 2012
  • 2

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 (Click here for details and to register)

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. Click here for a beautiful sunrise photo of one of the A300-600Fs

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2 thoughts on “FedEx provides a few clues about its cost-savings plans

  1. Yesterday’s earnings call included many insightful comments, but one from Fred Smith, FedEx’s founder, stood out. Modal shift is always a factor to consider in air cargo, but when Smith plants a flag with sea freight, well, that deserves notice. And this concept of value per pound dropping also should be of concern to the air cargo industry.

    Kevin W. Sterling, BB&T Capital Markets, Research Division: You guys have spent a lot of time talking about customer shifting to deferred services. Are you seeing more customers maybe taking a step further and shift from the air to the ocean? And, Mr. Smith, you briefly mentioned you guys are taking market share. Does that imply that maybe you’ve taken market share from the freight forwarder community as you build out the FedEx Trade Networks?

    Frederick W. Smith, Founder, Executive Chairman, Chief Executive Officer and President: Well, what’s going on in the movement of goods internationally in the Air Cargo segment, the door-to-door Express part of it is taking share from the traditional airport-to-airport cargo segment, and that’s going to create a lot of issues as a tremendous amount of capacity that’s been brought into the market, a lot of new aircraft by the traditional airport-to-airport providers, whether they’re combination carriers or the pure freighter operators, that market is not growing at all. And, in fact, in the last several months, it’s almost contracted about, what, 3%, I think? Something along those lines. So that’s what I was talking about that Express is taking market share, and there are 3 major Express networks. We’re the biggest in terms of transporting goods by air, and then you have UPS and DHL. And then there is clearly a diversion of traffic from traditional airport-to-airport air freight onto the water, and that’s being caused by the falling value per pound of the traffic that’s being moved. I mean we all benefit, particularly in the electronics sector, with improved pricing because of technology. Well, the thing that is most correlated to air freight demand or the air cargo market demand is the value per pound. So there is traffic that’s moving onto the water because of that, and at the same time, over the last 10 years, the container liner services have gotten a lot better. I mean, there’s now daily service from almost every major port in Asia to the major ports in the United States and Europe. This will be even more pronounced once the Panama Canal has expanded to the so-called Panamax-sized ships in 2014. So that’s what I was talking about market share. The Express segment is taking market share from the traditional air freight segment, and the traditional air freight segment is losing some traffic to the sea freight area. And that’s our strategy. We’re participating in both of those, with FedEx Trade Networks in the sea freight area, which has been a major expansion effort over the last few years. It’s really fantastic what our team has done there. And we’re now an increasingly big player in that segment. And at the same time, our Express system has grown, but the customer has selected the less expensive of the 2 services that we offer, and it’s — we have to modify our system and our capacity to reflect that changed demand. So long answer, but you have to understand a lot. 

  2. There was a lot of very interesting commentary from various FedEx executives during that call. For those interested, a full transcript is available here. Definitely worth a read.

    It’s also worth pointing out that UPS made the decision to focus on freight (as opposed to just express packages) about a decade ago, soon followed by DHL. The only one of the four integrated operators that went the other way was TNT, which sold off all its logistics activities.  I think there’s a message in there somewhere.

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