By Jeff Berman / www.scmr.com / April 6th, 2023
FedEx is building a simplified experience for its customers. Photo credit: Getty Images
Major changes are coming for Memphis-based global freight transportation and logistics services provider FedEx, with the company announcing that, effective June 2024, it will consolidate all of its operating companies into a single organization.
FedEx described this consolidation as a phased transition that will subsequently bring nearly all of its operating companies—FedEx Express, FedEx Ground, FedEx Services, as well as other FedEx operating companies—into Federal Express Corporation, and transition into what it called a single company operating a unified, fully integrated air-ground network. And it also noted that its less-than-truckload subsidiary, FedEx Freight, will remain as a standalone operation within Federal Express Corporation.
“Over the last 50 years, we built networks that have created a differentiated and unmatched portfolio of services,” said Raj Subramaniam, president and CEO, FedEx Corporation, whom will oversee the combined organization. “This organizational evolution reflects how we represent ourselves in the marketplace—focused on flexibility, efficiency, and intelligence. As one FedEx team, we are well positioned to execute on our mission to help customers compete and win with the world’s smartest logistics network.”
The top FedEx executive added that the company is building a simplified experience for its customers, who are at the center of everything it does, so they can adapt to the market. He also noted that this combination will allow FedEx to provide customers with even greater value, offering the most advanced data-driven insights to help them make smarter decisions for their business.
What’s more, FedEx said that this consolidation will play a key role in facilitating the company’s DRIVE initiative, which includes Network 2.0, a years-long effort focusing on the operational efficiency, in which the company picks up, transports, and delivers packages in the U.S. and Canada. Another benefit of the consolidation, it cited, is to “bring distinct focus on the air network and international volume, as well as a more holistic approach to operations on the ground utilizing both FedEx employees and contracted service providers.”
From an executive personnel perspective, FedEx said that, effective April 16, John Smith, President and CEO of FedEx Ground, will transition to President and CEO of U.S. and Canada Ground Operations at FedEx Express and also lead surface operations for the FedEx Express, FedEx Ground, and FedEx Freight Businesses. And Richard Smith, President and Chief Executive Officer of FedEx Express, will become President and CEO, Airline and International, at FedEx Express.
The company expects the consolidation to enable it to save $4 billion worth of permanent cost reductions in fiscal 2025, with $1.2 billion in Surface Network; $1.3 billion in Air Network & International; and $1.5 billion in General & Administrative. FedEx added that Network 2.0 is expected to generate another incremental $2.0 billion in savings in fiscal 2027, noting that it is projecting costs up to $2 billion by the end of 2025 to implement its business optimization initiatives, which include DRIVE and Network 2.0.
The expected $1.2 billion in Surface Network savings is pegged to come from $450 million in ground linehaul operations; $300 million in ground dock operations, $150 million in P&D (pickup and delivery) operations, and $300 million in express U.S. surface operations. FedEx said that it will be increasing the use of company-owned intermodal containers for 90% of the volume it moves by rail, while increasing its miles on rail transport from 8% to 15%, for an expected $80 million in savings, coupled with a 6% reduction for volume in international containers, as well as a 36% reduction in rates on rail compared to on-the-road transportation.
This announcement comes at a time when FedEx’s earnings have been impacted by the ongoing pair of demand weakness and inflation. That was evident in the company’s third quarter fiscal earnings, which were announced in mid-March, with quarterly revenue—at $22.2 billion—down 6% annually, and net income—at $865 million was below the $1.22 billion recorded a year ago. Diluted earnings per share—at $3.41—fell 7.4%.
FedEx said that said quarterly results were negatively affected by continued demand weakness, particularly at FedEx Express and added that operating income was negatively affected by the effects of global inflation, which were partially offset by U.S. domestic yield improvement and cost-reduction actions.
On its earnings call, Subramaniam explained that the cost-reduction actions supported margin expansion at both ground and freight, but have not yet fully offset the impact of continued pressures at Express. And he added that FedEx is committed to addressing these cost imbalances, and will be taking further actions in the coming months, including a more pronounced readjustment of the air network.
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