FedEx Express Changes Mapped, Reaction Positive

By Bill Dries

FedEx Corp. executives fleshing out 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 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 critical investors and analysts gathering in East Memphis, they never forgot to include with the plans the one detail the audience wanted to know, dollar figures – savings – cost reductions that those changes will mean toward the 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,” said 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.

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 the Express division – 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 morning 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.