FedEx rolls out plans for annual profitabilty gains of $1.7 billion over next three years

On its fiscal first quarter earnings call last month, FedEx Chairman, President, and CEO Fred Smith said that there are “significant efforts underway” to reduce costs in the company’s Express segment, which would be discussed in full detail at the company’s investor meeting in Memphis in October.

This week, the company made some of its cost reductions plans public, rolling out a goal of an annual profitability improvement of $1.7 billion during the next three years, with a majority of the benefits to be achieved by fiscal 2015.

Smith said 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. More details regarding the profit improvement plans for FedEx are expected to be released today, the company said.

“We are revamping the Express cost structure through a combination of cost reductions, efficiency improvements, and service repositioning,” Smith said in a statement. “Our overall strategy is closely tied to effective yield management. The key is striking the right balance between volume growth and yield improvements. With slow economic growth, however, the cost reduction programs we will describe [today] are also essential to achieve our financial goals.”

The top executive at FedEx added that there are various cost reduction efforts going on, with an 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 the fiscal first quarter, the company’s net income at $459 million fell 1 percent annually from $464 million. Quarterly revenue of $10.79 billion was up 3 percent from last year’s $10.52 billion, and operating income at $742 million was up 1 percent from $737 million. Its operating margin—at 6.9 percent—was down 7.0 percent.

FedEx’ total U.S. domestic express packages at 2.429 million per day saw a 5 percent annual decline, while International Priority at 408,000 packages per day dipped 2 percent, and International Domestic was up 53 percent at 681,000 packages per day. Total revenue per U.S. domestic package at $17.33 was up 2 percent, due to higher rates while total revenue per package for International Priority and International Domestic at $62.68 and $7.00 were down 3 percent and down 2 percent, respectively.

On the quarterly earnings call, FedEx Chief Financial Officer Alan Graf said that FedEx is taking actions to reduce costs and improve efficiencies and adjust its networks to match anticipated demand to build on actions taken earlier this year and during the fiscal first quarter, including a voluntary buyout plan and decisions to retire certain aircraft and modernize its Express fleet.

Sterne Agee analyst Jeff Kaufman wrote in a research note that the probability of success for this initiative is very high.

“The reason we say this is that is because this is really just about pure cost takeout of relatively low hanging fruit,” he wrote. “[T]he Domestic Express business peaked in 2001, and has been shrinking more dramatically since 2007, yet the assets employed in that business grew, in terms of aircraft, employees, hub assets, etc. What we believe we are looking at is about $1.6 billion of the $1.7 billion is savings is from the Express business, with out $1.3 billion being related to the domestic express franchise. Of that, about 25 percent is taking out physical aircraft, many of which are old and redundant, given current volume levels. This allows for about 25 percent of the cost savings to come from back office redesign (including voluntary buyouts), and another 25 percent from re-flowing the domestic express business, including a sizing down of non-core assets.”

And on the international side, Kaufman wrote that reductions are likely to be comprised primarily of aircraft substitution of B767s for MD-11s and an expansion of the FedEx Trade Networks.