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VOL. 127 | NO. 199 | Thursday, October 11, 2012

FedEx Maps Out Changes for Express

By Bill Dries

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FedEx Corp. executives detailing the terms of the company’s goal of a $1.7 billion improvement in annual profitability over the next three-and-a-half years Wednesday, Oct. 10, put much of the emphasis on how FedEx is changing the way it does business.

But at the start of the second day of the investors and analysts gathering at the Hilton Memphis, they never forgot to include the one detail the audience wanted to know – the specific amount of cost reductions that will help the Memphis-based shipping giant achieve its goal.

It’s a five-part plan with the largest single share – $400 million – coming from a combination of voluntary employee buyouts FedEx announced earlier this year as well as “streamlined transactional functions and back office functions,” according to FedEx Express CEO David Bronczek.

Bronczek said the company would have no numbers on a target for the number of buyouts the company wants until after the first of the year.

FedEx executives said the transformation of the company has been under way for years. But they also admitted the blow to the Express division’s model from the recession is a dominant factor in accelerating some of the changes.

The recession was a blow to Express because of its impact on fuel prices for the air fleet that is the heart of Express and because customers began to look for cheaper ways to move goods and other items.

The combination will mean a FedEx with fewer full-time traditional employees over the next three and a half years reflecting a market shift for Express in which FedEx customers are choosing lower cost alternative to air transportation.

FedEx executives also emphasized that their $1.7 billion goal won’t be met with growth in the Ground and Freight divisions.

The initial reaction from analysts was positive, including Sterne Agee analyst Jeff Kauffman. Initially Kauffman was among the analysts who were skeptical about FedEx founder Fred Smith’s insistence last month that the plan to come did not amount to a “restructuring” of Express – FedEx’s oldest and largest division.

Express has been especially vulnerable to the continued economic downturn as the corporation prepares to mark its 40th anniversary next year.

“What we like about it is that it’s mostly cost driven, and this plan has high probability of success, because it’s about taking excess aircraft, people and underutilized assets out,” Kauffman and the firm said in a Tuesday note. “In our view the probability of success is very high. The reason we say this is … because this is really just about purse cost takeout of relatively low hanging fruit.”

The other parts of the plan are the ongoing shift to a newer and more efficient air fleet with an acceleration in the planned retirement of older aircraft already on the way out if demand for Express erodes with accounts for $300 million in savings.

A change in the U.S. domestic market valued at $350 million will mean adjustments to the domestic pickup and delivery and air network, according to Bronczek. Air operations will reduce hours and maintenance of aircraft will be streamlined with some sourcing of parts and material sourcing.

Another $350 million in international operations will involve changing routes there as well.

And $150 million in targeted growth and yield improvement is about FedEx expanding a push into global forwarding and inventory logistics.

Smith began Tuesday with general and macroeconomic remarks to a group of 200 investors and analysts. An estimated 750 people watched a webcast of Smith’s remarks.

Smith touted technological advances linked to cloud computing that he says will improve productivity as the company’s head count is reduced in a voluntary buyout program announced earlier this year.

“We’ll be able to take out … thousands of fixed heads that are managing these systems that will move to cloud computing across the enterprise,” Smith said during a question-and-answer session with analysts.

He was also adamant that the cost reductions would mean “no diminution in service.”

“Quite the contrary, we are actually going to be able to improve the service level,” Smith said. “There absolutely is no diminution in service.”

The move to cloud computing has been under way for several years. But Smith said the economic recession in 2008 is behind much of the specific change for Express.

“The market has changed and so we’ve had to change our strategy in the Express business,” he added.

Asked specifically about the risk of the strategy and the broader strategy, Smith again cited a world economy that is slowing for different reasons in different parts of the world.

“All bets are off if you start talking about a significant recession or contraction,” he said. “Even in a low growth environment, we believe we can execute on it … with the programs you are going to see.”

Smith also announced the retirement of Dave Rebholz, CEO of FedEx Ground, effective May 31, 2013.

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