To offset declining earnings from declining e-commerce demand after a pandemic boom, FedEx is reducing the number of flights it flies and storing aircraft temporarily.
After reporting a sharp decline in quarterly earnings, the express delivery giant cut eight to nine daily international flight frequencies and roughly 23 daily domestic flight frequencies in October to help achieve $2.2 billion to $2.7 billion in accelerated savings, according to CFO Mike Lenz, who spoke at the Baird Global Industrial Conference on Tuesday. The Express segment will account for the majority of the savings.
He noted that because fewer planes are required, the integrated express service provider is temporarily storing aircraft and reducing eight to nine more domestic frequencies this month. Starting in the fiscal year 2025, there will be a structural cost reduction of $4 billion, with the air network being a prime candidate for further streamlining.
The Ground network of FedEx (NYSE: FDX) is also being consolidated. Additionally, FedEx revealed on Saturday that its less-than-truckload division, FedEx Freight, is implementing driver furloughs.
Most of the parked aircraft are older models with affordable ownership costs. Lenz claimed that by not flying them, the next major maintenance event can be postponed and money saved. “It’s a flexible method to manage capacity from an operational and budgetary standpoint.”
The corporation was taken aback by how quickly consumer spending changed from commodities to services. Undoubtedly, the start, the speed, and the depth of that shift were above what we had undoubtedly anticipated, according to Lenz. “We have been shutting down trans-Pacific flights because of this.”
Until the second half of 2024, FedEx anticipated that demand for premium shipping services would return from epidemic highs, when customers supported by government stimulus programs spent on home goods while socially isolating themselves, according to Lenz.
The reductions in trans-Pacific capacity, according to FedEx’s finance chief, will last forever.
The idea called for up to 16 flights across the Pacific. Even if you saw a shift, there is no scenario where we envisage returning to that level of trans-Pacific flight. Even in that situation, we wouldn’t return to that level of flying because every downturn leads to an upturn, according to Lenz.
The MD-10s, one of FedEx’s oldest three-engine widebody aircraft, will be retired at the end of the year, months ahead of schedule, and the MD-11s will follow.
One network technique
According to Lenz, the decline in demand and the rapid growth of e-commerce, which now accounts for almost all of the growth in the parcel market, highlight the significance of the Network 2.0 initiative, which was started over the summer with the goal of enhancing productivity by coordinating disparate express, ground, and truck networks.
According to the CFO, the move would take time to implement because the units have unique systems, resources, and personnel deployment practices. Straight vehicles cannot easily enter an express facility, nor can an express cargo or container from an express airplane be injected into a ground station.
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