FedEx Looks to Save $6 Billion Via Consolidation

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FedEx is rolling up several operating divisions under one roof as the freight and shipping conglomerate aims to reduce $4 billion in costs by fiscal 2025.

This phased transition will bring air freight division FedEx Express, ground delivery division FedEx Ground, shipping services division FedEx Services and other FedEx operating companies into Federal Express Corporation. The consolidation, referred to by the logistics giant as One FedEx, expects to be complete by June 2024.

FedEx Freight will continue to provide less-than-truckload (LTL) freight transportation services as a stand-alone company under the Federal Express Corporation banner.

Raj Subramaniam will remain president and CEO of the combined organization after the restructuring, which was unveiled at the FedEx Drive investor event Wednesday morning.

The decision to integrate the businesses comes after a 2022 marred by a decrease in package volume, labor unrest from contractors, furloughs and ballooning labor and fuel costs. FedEx also has more investor eyeballs on it after failing to outperform its peers, notably UPS, the United States Postal Service (USPS) and Amazon.

According to a March survey from Pitney Bowes, FedEx saw the largest contraction in annual parcel volume in 2022, with a 4.8 percent decline in packages. In comparison, the USPS saw a 3.2 percent dip in packages, while UPS had a 2.5 percent decrease. Amazon managed to stay afloat better than the rest during the period despite the wider 2.2 percent decrease in overall U.S. parcel volumes—coming in with a 0.2 percent package volume decline, the survey said.

As the peak season came and went, the company and Subramaniam made it clear starting 2023 that the Memphis, Tenn. freight firm—like Amazon—is prioritizing ways to save money.

“Over the last 50 years, we built networks that have created a differentiated and unmatched portfolio of services,” said Subramaniam in a statement. “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 streamlining of the business makes FedEx more cosmetically similar to UPS, which has long run a single network to handle air and ground shipments.

To make the $4 billion in cuts, $1.2 billion will come from the company’s surface network, while $1.3 billion will be freed up in the air network and FedEx’s international business. Another $1.5 billion will be slashed from general and administrative (G&A) expenses.

The surface network savings come as follows: $450 million from ground linehaul operations, $300 million from ground dock operations, $150 million from ground pickup and delivery and $300 million from Express U.S. surface operations.

As part of the ground linehaul cuts, FedEx says it will increase the use of company-owned intermodal containers for 90 percent of rail volume, and plans to increase miles on rail transport from 8 percent to 15 percent. For Express, FedEx says it plans to adapt flight schedules to drive structural improvements to its ground network, and consolidate sorts and delivery routes to improve productivity and on-road performance.

Fedex’s air network will realize cost cuts of $700 million, while the international branch focused in Europe anticipates $600 million in expense reduction. The company aims to reduce flight frequencies within the air network by consolidating volumes transported, noting that there will be 30 percent fewer flights operating over the Pacific.

Additionally, FedEx expects to increase the use of commercial air freight alternatives, and intends to close its air hangar in Los Angeles to increase use in Memphis and Indianapolis.

Within G&A spending, FedEx plans to pare back $600 million in procurement, $500 million in technology and $400 million to realize “functional excellence.”

The overhauled structure will help facilitate the company’s Drive transformation, including Network 2.0, which is the company’s multi-year effort to improve the efficiency with which FedEx picks up, transports, and delivers packages in the U.S. and Canada.

On top of the $4 billion saved by 2025, Network 2.0 is expected to generate an incremental $2 billion of savings in fiscal 2027.

Hitting these goals is still going to require more added costs on FedEx’s end. FedEx projects costs of up to $2 billion by the end of fiscal 2025 to implement the Drive and Network 2.0 programs.

FedEx hopes that a more unified organization will bring distinct focus on the air network and international volume, as well as a more holistic approach to operations on the ground using both FedEx employees and contracted service providers.

“We are building a simplified experience for our customers, who are at the center of everything we do, so they can adapt to the market,” said Subramaniam. “This combination will allow us to provide customers with even greater value, offering the most advanced data-driven insights to help them make smarter decisions for their business.”

To aid in this transition, John A. Smith will become president and CEO of U.S. and Canada ground operations at FedEx Express and assume leadership of surface operations across the FedEx Express, FedEx Ground and FedEx Freight businesses effective April 16. Richard W. Smith will serve as president and CEO, airline and international at FedEx Express, overseeing all other regions and FedEx Logistics. During the transition period leading up to June 2024, there will be no change in financial reporting segments.

The changes come as FedEx saw third-quarter revenue fall 6 percent to $22.2 billion on net income of $771 million amid a cooling in consumer demand spurred by an uncertain economic backdrop. Last month, Memphis, Tenn.-based company said it would lay off 10 percent of its officers and directors as part of its wide-sweeping cost-cutting plan.

FedEx raised its shipping rates by an average of 6.9 percent in January to offset the dampening demand, the company said during its March earnings call.

Back in September, FedEx revealed it was reducing Sunday operations in some markets, shuttering 140 FedEx Office locations and closing at least five corporate offices.

Along with the organizational restructuring, FedEx also revealed that it is boosting its annual dividend by 10 percent, or 44 cents per share, to $5.04 per share for fiscal 2024.