FedEx Corp. today said it plans to save $1.7 billion annually over the next three fiscal years through a series of cost reductions and efficiency improvements mostly affecting its FedEx Express air and international unit.
Separately, the company announced that David F. Rebholz, president and CEO of the company's FedEx Ground division, will retire next May when he turns 60. Rebholz has led the unit for six years, during which time it has thrived as more parcel shippers have switched to ground services rather than air to get their goods to market. A successor has not yet been named.
FOCUSING IN ON SAVINGS
Memphis-based FedEx said most of the planned savings would be realized by the end of its 2015 fiscal year, which encompasses part of calendar year 2014. FedEx is also targeting cost reductions at its FedEx Services unit, which provides supply chain and e-commerce services and includes the company's FedEx Office operation, which at one time was known as Kinko's.
FedEx bought Kinko's in 2004 for $2.4 billion in cash in the hopes of creating an integrated shipping and back office solution for businesses and consumers. However, the unit, which has since been re-branded as FedEx Office, has struggled as software embedded into computer desktops eroded its relevance.
The company had not detailed the cuts at press time. Jeffrey A. Kauffman, a New York-based transportation analyst at investment firm Sterne Agee, said about $1.6 billion in savings and efficiency improvements will come from the Express unit. Of that amount, about $1.3 billion will come from the domestic business, which has struggled for more than a decade with slowing demand as companies increasingly trade down to less-costly surface transportation. The secular shift in U.S. supply chains to regional distribution has also lessened the need for airfreight services, hurting the company's Express business.
In a research note today, Kauffman estimates that of the $1.3 billion in domestic cost reductions about one quarter will come from phasing out aircraft made redundant by reduced demand. Kauffman said that, internationally, the company will begin substituting newer, more fuel-efficient Boeing 767 freighters for older MD-11s and will look to grow its FedEx Trade Networks operation that supports global trade and transportation activities.
Kauffman said FedEx stands an excellent chance of meeting its goals, noting the plan is mostly cost-driven and doesn't involve cutting into the bone of the enterprise. The strategy "doesn't take a better economy or unspecified revenue synergy to be successful," he wrote.
For FedEx, and especially for CEO Fred Smith, the plan reflects a realization that the domestic air express business—which put the company on the map more than 40 years ago and which remains its largest unit by revenue—can no longer maintain the status quo given the changes in shipper behavior.
"The domestic express business has been a sacred cow at FedEx, but this change marks an admission that the world has changed, and that the network FedEx built must change as well," Kauffman wrote.