FedEx provides update on profit improvement plan for Express segment

Soon after its fiscal year 2013 first quarter call last year, FedEx rolled out what it described as significant efforts to reduce costs in the company’s Express segment. These efforts, said the company, were comprised of an annual profitability improvement of $1.6 billion during the following three years, with a majority of the benefits to be achieved by fiscal 2015.

FedEx Chairman, President, and CEO Fred Smith said at the time that that much of the improvements will stem from FedEx Express and FedEx Services cost reductions, coupled with the “combined strength” of FedEx Ground and FedEx Express. And he added that FedEx would be revamping the Express cost structure through a combination of cost reductions, efficiency improvements, and service repositioning.

Other facets of the efforts cited by Smith included improved information technology function to serve as a driver to reduce costs. Among the cost reduction efforts he cited were in selling, general and administrative (SG&A) expenses spread throughout company, with an emphasis on FedEx Services and FedEx. 

In October 2012, the Wall Street Journal cited the following as some of the major components of FedEx’ plan:
-$700 million of the target amount will come from reconfiguring the company’s domestic and international networks, including the replacement of 5,000 delivery trucks;
-$300 million would come from modernizing its aircraft fleet, with $400 million gained from consolidating back-office functions;
-consolidating some domestic Express pickup locations and driving routes and combining selected international flights; and
-$150 million in cost reductions from better pricing and yield management initiatives, including European expansion

Other parts of the company’s cost reduction efforts which were previously disclosed by the company include a voluntary buyout plan, which was announced in August, and decisions to retire certain aircraft and modernize its Express fleet.

In its fiscal first quarter 2014 earnings conference call yesterday, FedEx executives provided an update on how the cost-reduction efforts are going.

On the call, Alan Graf, FedEx executive vice president and chief financial officer, said that in regards to the voluntary buyout program, as of August 31, roughly 45 percent of the 3,600 employees that have accepted the voluntary buyout have vacated their positions, adding that the additional 55 percent will depart throughout the remainder of FY14, with approximately 25 percent remaining until May 31, 2014. Total SG&A savings from the company’s profit improvement program is expected to be $600 million on an annual basis, by the end of Fiscal Year 2016, according to Graf.

“We are actually well ahead of our cost goals that we outlined 11 months ago, and I feel very comfortable about where we are on the cost side,” Graf said. “And we’ll continue to work that hard.”

Graf explained that due to shifting economic conditions since the plan was first heralded, it is likely FedEx Express will have more pressure on its base erosion, meaning the company may have to navigate a bit differently to hit its stated $1.6 billion in annual savings, explaining things may be more back-end loaded towards the second half of 2015 and into 2016.

What’s more, Graf said that for Express operations, FedEx will leverage more International Express services in the future than it had initially anticipated and less International Priority, which he said will continue to grow.

In the fiscal first quarter, FedEx’ International Economy service saw a 15 percent annual gain in revenue, while International Priority declined slightly.

Dave Bronczek, President and CEO of FedEx Express, said on the call that the specific areas the cost reduction efforts focus on are domestic cost network, international profit improvement across the world; fleet modernization; efficiency of staff functions, and targeting profitable yields and revenue growth.

Stifel Nicolaus analyst Dave Ross wrote in a research note that International volumes did better than expected, in the fiscal first quarter, with IE growing more and IP (International Priority) shrinking less than his firm forecasted.

“FedEx sees growth opportunities in IE, as it diverts that freight to other networks, and no longer has to cap the amount of low-yielding packages on its owned assets,” commented Ross.  “We’re encouraged by these developments, though IP volume loss continues to be a risk to margins, as the company’s ability to lever-down capacity is limited before service is negatively affected. Product trade-down in international express was again a hot topic, as customers continue to move down the service ladder to lower-yielding products. However, FedEx seems to be adapting well by continuing to shift International Economy (IE) product into third-party networks and reducing owned capacity.”