Report offers up further details on cost reduction efforts at FedEx

Earlier this week, global transportation and logistics bellwether FedEx announced its awaited plans to reduce costs, announcing a goal of an annual profitability improvement of $1.7 billion over the next three years, with the majority of benefits to be achieved by fiscal 2015.

As reported in LM, FedEx Chairman, President, and CEO Fred Smith 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. Smith said that FedEx is revamping the cost structure through a combination of cost reductions, efficiency improvements, and service repositioning. He added that the company’s overall strategy is closely tied to effective yield management and striking the right balance between volume growth and yield improvements.

A report in the Wall Street Journal shed some additional light on the company’s cost reduction efforts that were not publicly disclosed by the company.

The WSJ report 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

FedEx is expecting nearly $1.6 billion of the profitability improvement to come from its Express division, according to the WSJ.

“Customers in key markets have been shipping less, with lower demand for priority services,” said Dave Bronczek, president of the Express unit in the report. “We must implement a plan to compete effectively and profitably in this evolving market.”

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.

Earlier this week, FedEx’ top executive Smith said 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. 

Jerry Hempstead, president of Orlando, Fla.-based parcel consultancy Hempstead Consulting, said that in regards to making changes on the Express side, FedEx is in a strong position in that it can make changes to its flight routes to obtain cost savings and not be at a competitive disadvantage. He also explained that trucks that FedEx replaces would be more fuel efficient although buying planes and trucks comes at a cost although there are some tax benefits associated retiring trucks and planes.

In addressing the voluntary employee buyouts, Hempstead said that moving staffers off the payroll will have a “tremendous impact” on its balance sheet, especially when the American Health Care and Affordability Act takes effect.

“I would suspect this is the most important project for FedEx…because packages, in particular air packages (the coal that stokes the FedEx engine) are regressing and no change is on the horizon,” he said. “FedEx has a lot of career veteran employees because it has been such a great company to work for, but I suspect they will financially encourage folks with a combination of age and years of service to get off the P&L and onto the pension plan.”

The company’s emphasis on yield improvement is certain to spell higher rates for shippers, Hempstead said. The reason for this, he explained is that FedEx needs to extract more money from the packages they transport because packages are not growing.

“This will be done by a combination of means such as raising base prices and reducing discounts offered to existing shippers or to attract new customers,” he said. “The best protection a shipper has is to know its spend by service type, weight and zone. Both transports provide a consistent predictable high quality service experience so don’t be afraid to switch if there is a significant cost reduction opportunity for your firm to do so.”