FedEx poised to adjust air network in efficiency drive – MASHAHER

ISLAM GAMAL29 May 2024Last Update :
FedEx poised to adjust air network in efficiency drive – MASHAHER


FedEx will retire nine MD-11 freighters (pictured) by the end of the fiscal year on Friday. (Photo: Jim Allen/FreightWaves)

FedEx will accelerate its transformation toward a leaner enterprise in the second half of the year when it ramps up segmentation of its air assets and sheds daytime flying capacity tied to an expiring U.S. Postal Service contract, said Chief Financial Officer John Dietrich at a recent Bank of America conference.

Efficiencies gained by those restructuring efforts are positioning the integrated parcel and logistics giant for growth when the freight market eventually improves, Dietrich explained. FedEx (NYSE: FDX) has experienced 10 consecutive quarters of negative growth in U.S. package volumes.

“We’re putting ourselves in a position to really capitalize on a stronger market, which we’re simply not seeing right now” due to weak industrial production and depressed demand for parcel shipping, FedEx’s CFO said during a Q&A session at the conference in mid-May.

Dietrich, who has been in his role for nine months after heading all-cargo airline Atlas Air, said

FedEx Express will have more flexibility to reorganize its air network once the Postal Service business winds down in September because it won’t have to dedicate more than 100 freighter aircraft to unprofitable daytime flying.

“We’re doing everything in our control to rationalize our capacity with the volumes and the demand we’re seeing across all our operating companies. The USPS situation will allow us to better adapt to a changing environment in the market because we will not be as wedded to the daytime operations on the Postal Service contract as it exists today,” he told investors.

FedEx will continue to provide daytime service for other customers, but flight activity will be tailored to better maximize aircraft utilization, Dietrich added. The company has previously stated the Postal Service business is a $400 million drag on profit for the fiscal year that ends this Friday.

Brandon Oglenski at Barclays Bank in March estimated FedEx could cut 50% of its daytime network capacity without the Postal Service commitment, saving the company $1.5 billion per year.

FedEx two years ago launched a comprehensive restructuring program designed to lift the corporation’s flagging profits after the pandemic surge wore off, specifically aimed at reducing redundant infrastructure and associated costs.

The Drive initiative to take out $4 billion in structural costs by mid-2025, coupled with pickup and delivery efficiencies from a new consolidation of separate operating companies into one organization, has helped achieve three consecutive quarters of operating income and margin expansion despite revenue declines. The company anticipates $2.2 billion in Drive savings in the upcoming fiscal year.

Implementing color-coded air network

Through fiscal year 2025, FedEx has targeted structural cost savings of $700 million in the air network. FedEx first outlined its Tricolor strategy for streamlining the air network a year ago. It has also temporarily parked about three dozen aircraft because of the weak parcel and international shipping demand.

Tricolor intends to align the Express network with various product categories and demand, but fleet segregation along those lines is just beginning, Dietrich said.

“We’re not going to see huge results in Tricolor certainly this [fiscal] year, and we’ll see some benefits in the next year [that starts in June]. So it’s going to be some lead time to get it fully up and running. There’s some investment we’re making,” the CFO explained.

The so-called Purple network is geared toward international parcel customers willing to pay the most for the fastest speeds using dedicated aircraft that are well timed to go overnight into FedEx hubs for next-day delivery. Expedited priority parcel has always been FedEx’s core air product, but fewer large freight shipments will now be mixed in, to maximize density on aircraft and sorting efficiency, according to executives.

Orange-designated flights will operate during the daytime and focus on priority international freight. Management describes this deferred air network as an extension of its European and U.S. less-than-truckload networks, designed to attract high-yield freight, such as pharmaceuticals, perishables, electronics and automotive components, that is more profitable per pound than heavier, general consignments. FedEx says it will mix in deferred parcels to fill out the aircraft.

The White network will handle e-commerce and other low-priority shipments, much of it processed through the company’s freight forwarding arm, FedEx Trade Networks. Those loads will utilize the belly space of commercial passenger aircraft operating between major international gateways that can be integrated into the FedEx Ground network in the U.S.

Dietrich said FedEx is still setting up block space agreements — reservations for guaranteed container space — with international carriers to execute the third-party network.

The segmentation of FedEx’s air network doesn’t mean shipment categories won’t bleed together sometimes, because the ultimate goal is to maximize utilization of each aircraft, said Derrick Lossing, an e-commerce supply chain consultant and former executive within Amazon’s logistics operation.

Lossing said the network structure is conceptual because FedEx may not have the perfect network out of every major city, which means that on certain days Orange or White shipments may be carried on Purple aircraft.

“No one departs an airplane internationally without taking the last bit of what they can. I would be absolutely baffled if they left spaces on the airplane purposely empty because you only wanted parcels on that airplane,” he said. Instead, FedEx likely will take a lower-margin load and simply move it by truck to a non-Express facility, as it has for a long time.

The new Orange network may simply reflect how FedEx will operate with a streamlined fleet and fewer flights while demand remains weak. As FedEx downsizes the number of daily flights from a particular city, it will have to prioritize capacity for the Purple network.

“If they had 160 tons going a day on two flights and they have to go down to one flight that can only carry 100 tons, they’re going to have to figure out which 60 tons of customers they’re effectively turning into an Orange customer and say, ‘Hey, you know, you used to get a three- day service. Now it’s going to be four-day because it’s leaving 12 hours later.’”

Rebuilding profit engine

Besides the unprofitable postal business and depressed parcel demand, Express finances have been impacted by softer yields, reduced collection of demand surcharges and an $800 million shift in package flow from priority to economy delivery.

Dietrich said he expected less severe headwinds in the upcoming 12 months, with potential for volume gains from inventory restocking and e-commerce growth.

FedEx guidance is for Express margins to be down 5% year over year in the current quarter but up sequentially from 2.5% in the third quarter. The low margins for a premium product help explain the motivation for the cost measures and restructuring.  Bank of America forecasts Express margins will come in at plus 4.4% from the prior quarter.

More downsizing is planned for FedEx Freight, the less-than-truckload business, as the company focuses on more profitable customers. FedEx recently said it will close an additional seven freight facilities in the near future after closing 29 last August, while also expanding door counts in other facilities across its network.

Click here for more FreightWaves stories by Eric Kulisch.

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