FedEx is reducing the number of flights it operates and temporarily storing planes to offset falling revenue due to falling e-commerce demand following a pandemic boom.
The express delivery giant scrapped eight to nine daily international flight frequencies and about 23 domestic frequencies in October for faster savings of $2.2 billion to $2.7 billion after announcing a sharp drop in quarterly profits, CFO Mike said Lentz on Tuesday at the Baird Global Industrial Conference. The bulk of the savings will come from the Express division.
The integrated express delivery provider plans to cut eight to nine more domestic frequencies this month and is temporarily parking planes as fewer are needed, it added. It plans to structurally reduce costs by $4 billion beginning in fiscal 2025, with the air network a strong candidate for greater rationalization.
FedEx (NYSE: FDX) is also consolidating its ground network. And on Saturday, FedEx confirmed that it is introducing driver leave at its less-than-truckload arm, FedEx Freight.
The parked aircraft are mostly older aircraft with low maintenance costs. If they aren’t flown, the next major maintenance event will be delayed, which saves money, Lentz said. “It’s an operationally and financially flexible way to manage capacity.”
The company was surprised by the speed at which consumer spending shifted from goods to services.
“Undoubtedly, the onset, speed and depth of this shift exceeded what we safely anticipated,” Lentz said. “That’s why we stopped transpacific flights.”
FedEx expects demand for premium shipping services to return from pandemic highs when consumers, fueled by government stimulus programs, spent on household goods during social distancing, but not before the second half of 2024, Lentz said.
As COVID travel barriers fall in Asia, Lentz said FedEx will use increased belly capacity in trans-Pacific passenger service to move deferred shipments, which are the main casualty of FedEx’s freighter withdrawal.
FedEx’s chief financial officer said the cuts in trans-Pacific capacity will be permanent.
“We were up to 16 flights across the Pacific, that was the plan. There is no scenario where we envision going back to this level of transpacific flying, even if you did see a shift. Every downturn creates an upturn, but even under these circumstances, we wouldn’t go back to that level of flying,” Lentz said.
FedEx will retire its oldest widebody three-engine aircraft, the MD-10, by the end of the calendar year, and the MD-11s will be phased out next.
A network strategy
According to Lentz, the decline in demand and the explosion in e-commerce, which now accounts for nearly 100% of parcel market growth, illustrate the importance of the Network 2.0 initiative, launched this summer, to improve productivity by harmonizing independent express, ground and truck networks.
But the change won’t happen overnight and will need to be done carefully as units have different systems and assets and deploy staff differently, the CFO said. An express package or container from an express plane cannot simply port into a ground station, and direct trucks cannot simply drive into an express facility.
“We’re going to spend some cap there to share the facilities” as part of the broader plan to cut annual spend by up to 1.5%. “We have to think about sequencing and remember that it’s a network and we just can’t make part of it work while the rest works in a different way,” he said.
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