FedEx Corp.'s decision late yesterday to permanently ground 24 aircraft and 43 aircraft engines may be the first step in a deeper restructuring of the company's domestic air operations. The company is looking to adjust costs in response to a secular downshift in U.S. air cargo volumes.
The Memphis-based giant said it would retire 18 Airbus A-310 freighters and 26 related engines, as well as six Boeing MD-10 aircraft and 17 Boeing engines. Most of those planes are currently parked and not in revenue service, the company said.
"Along with the decisions to retire these 50 aircraft, we are also developing detailed operating and cost structure plans to further improve our efficiency," David J. Bronczek, president and CEO of FedEx Express, the company's air and international unit, said in a statement. Those plans will be detailed sometime this fall, Bronczek added.
The announcement follows earlier decisions by FedEx to retire 26 Boeing 727 aircraft also used in domestic service. In addition, the company said it would shorten the "depreciable lives" of 54 additional planes, allowing it to accelerate the retirement of the planes in order to make way for more efficient Boeing 757 and 767 freighters entering its fleet.
The moves are part of a larger strategy to more efficiently manage the company's air operations as air express volumes remain flat. The lack of growth is due to a shift over the last 10 to 15 years toward less-costly ground services and an increase in regional distribution systems to improve speed to market.
This change can be seen in FedEx's financial results. In the 2011 fiscal year, which is the most recent fully completed reporting year, FedEx Express reported a 14 percent year-over-year gain in revenue. However, daily volumes for its three main domestic products rose by only 1 to 2 percent over the previous fiscal year. By contrast, FedEx Ground, the company's ground parcel unit, reported a 6 percent year-over-year gain in package volumes on a similar increase in revenue.
The most striking contrast, however, is in the operating margins (revenue divided by operating income) of the two units. FedEx Express posted an operating margin of 5 percent, a 0.2 percent decline from the 2010 period. However, FedEx Ground had an operating margin of 15.6 percent, up from 13.8 percent in the year-earlier period.
FedEx Express is still by far the largest of the company's four operating units; its fiscal year 2011 revenues of nearly $24.6 billion comprise more than 60 percent of the company's total revenues of $39.3 billion. (FedEx will report its fiscal year 2012 results on June 19.)
David G. Ross, transport analyst at Stifel, Nicolaus & Co., said, barring a major snafu in execution, shippers should feel no impact from the impending restructuring. He believes that the company's objective is simply to do more with less.
OPPORTUNITIES TO STREAMLINE
As the company looks for additional ways to do more with less, one industry executive with close knowledge of FedEx recommends that the company should examine the effectiveness of its traditional operating structures.
Currently each product line has its own drivers as well as its own management hierarchy, the executive said. As a result, one driver will pick up FedEx Express packages, and another a shipment for FedEx Freight, the company's less-than-truckload unit. UPS Inc., FedEx's chief rival, operates differently. The Atlanta-based giant has a fully integrated operation where one driver picks up and delivers shipments for all of its products.
The contrast extends into the sales function, the executive said. FedEx has salespeople to cover global, corporate, retail, and national account sales, whereas UPS' sales force is more streamlined, the executive said. FedEx has "accounts with more than one salesman and accounts with just one sales rep. Which means they get paid a lot of money and don't have to do much," the source said.
The executive said that there are "very different styles of sales discipline at the two firms," adding that there is not enough accountability in sales at FedEx versus UPS and far higher sales costs per shipment at FedEx versus UPS."