FedEx’s Cost-Cutting Plan is Offsetting Revenue Headwinds

FedEx’s massive cost cuts are coming to fruition, enabling the parcel delivery firm to bolster its bottom line as it continues to experience revenue headwinds stemming from weakness in package volume.

The Memphis-based logistics giant’s third-quarter revenue fell 2.2 percent year over year to $21.7 billion, from $22.2 billion in the year prior. But net income totaled $879 million, up 14 percent from the year-ago period of $771 million, with operating margins increasing to 5.7 percent of sales from 4.7 percent a year ago.

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The turn of events suggests that FedEx’s Drive initiative, which is expected to generate $4 billion in savings by 2025 and $6 billion by 2027, is working. In the third quarter alone, FedEx saw $550 million in savings benefits, according to CEO Raj Subramaniam.

The delivery company expects cost reductions from the Drive transformation program of $1.8 billion throughout 2024, saying it will cut capital expenditures by roughly $300 million compared to prior guidance expectations.

In a Thursday earnings call, Subramaniam said he was encouraged by the cost-cutting progress, saying he was “highly confident in the additional $2.2 billion [in expected cuts] in fiscal year 2025.”

The company also gave a clearer picture for fiscal 2024 earnings, narrowing it in the range of $17.25 to $18.25 per share, compared with its prior forecast of $17 to $18.50 per share. For the full year, FedEx expects a low-single-digit year-over-year percentage decline in revenue.

Wall Street was impressed with the quarter, with the company’s stock leaping more than 12 percent in after-hours trading on Thursday.

Ultimately, the revenue dip has been a story of slow demand, like competitors UPS and DHL. FedEx Ground revenue was up roughly 1 percent on flat volumes, while the company’s less-than-truckload (LTL) trucking business, FedEx Freight, saw revenue decline 2.7 percent on a 3.2 percent volume decrease compared to last year.

And at the FedEx Express overnight delivery unit, revenue was down 2.4 percent year over year, driven by an 11 percent decline in volume.

FedEx is also dealing with headwinds stemming from its relationship with the United States Postal Service (USPS), whose contract with FedEx expires Sept. 29. Subramaniam acknowledged that USPS has contributed to the reduction in volumes and revenues. USPS is FedEx’s largest customer, with FedEx Express providing airport-to-airport transportation services for the postal service.

In particular, FedEx Express had been struggling with falling volumes as the USPS shifts more packages from the higher-margin air services to more economical ground services.

In the call, chief customer officer Brie Carere said FedEx has made “significant progress in negotiations for a new contract that aligns with our ongoing network transformation plan,” noting that “a new multi-year agreement would provide a more efficient network with service to fewer markets. It would allow us to better adjust our overall network to demand.”

“I think we are days or weeks away from knowing if we will have a contract, not months,” Carere said.

Carere added onto that news by saying that FedEx has retained the “vast majority” of the volume gained from UPS in the second half of 2023, when retailers and brands diverted their packages from the FedEx rival due to concerns of a strike of 340,000 union employees. FedEx added approximately 400,000 in average daily packages across its Ground and Express divisions when the UPS-Teamsters labor negotiations scared shippers into making the switch.

When an analyst asked about the company’s reported engagement with Amazon on a returns partnership last year and the overall status of FedEx’s reverse logistics network, Carere emphasized the growth of the FedEx Ground returns portfolio. She also touched on the Fdx e-commerce, fulfillment and returns platform, saying it has “some pretty big names” on board ahead of its public launch in fall 2024.

FedEx said it plans to buy back $500 million worth of its shares in the current quarter, and also said its board of directors authorized a new $5 billion share repurchase program.

Hours before the earnings results were released, roughly 75 pilots gathered outside the FedEx corporate office in Memphis as part of their push for a new labor contract. The picket was organized by the Air Line Pilots Association (ALPA), which represents the FedEx Express pilots.

The picket comes nearly two weeks after the ALPA filed mediation release with the National Mediation Board on March 8. That action was considered the first step toward a legal strike to force a new contract.