FedEx is scaling back the number of flights it operates and putting aircraft in temporary storage to offset falling revenue from sinking e-commerce demand sinks following a pandemic boom.
The express delivery giant in October eliminated eight to nine daily international flight frequencies and about 23 domestic frequencies to help achieve $2.2 billion to $2.7 billion in accelerated savings after announcing a steep drop in quarterly earnings, CFO Mike Lenz said Tuesday at the Baird Global Industrial Conference. The bulk of the savings will come from the Express division.
The integrated express delivery provider plans to chop eight to nine more domestic frequencies this month and is temporarily parking aircraft because fewer are needed, he added. The plan is to structurally lower costs by $4 billion starting in fiscal year 2025, with the air network a strong candidate for more streamlining.
FedEx (NYSE: FDX) is also consolidating its Ground network. And on Saturday, FedEx confirmed it is enacting driver furloughs in its less-than-truckload arm, FedEx Freight.
The planes being parked are mostly older aircraft with low ownership costs. Not flying them defers the next major maintenance event, saving money, Lenz said. “It’s an operationally and financially flexible way to manage capacity.”
The speed at which consumer spending shifted from goods to services caught the company by surprise.
“Unquestionably, the commencement and the speed and depth of that shift was beyond what we had certainly anticipated,” Lenz explained. “That’s why we have been taking down trans-Pacific flights.”
FedEx expected demand for premium shipping service to revert from pandemic highs, when consumers fueled by government stimulus programs spent on home goods while social distancing, but not until the second half of 2024, said Lenz.
As COVID travel barriers in Asia come down, Lenz said FedEx will take advantage of increased belly capacity on trans-Pacific passenger service to move deferred shipments, which are the primary casualty of FedEx’s freighter pullback.
FedEx’s finance chief said the cuts in trans-Pacific capacity will be permanent.
“We were up to 16 flights across the Pacific, that was the plan. There’s no scenario where we envision coming back to that level of trans-Pacific flying, even if you were to see a shift. Every downturn begets an upturn, but even in that circumstance we wouldn’t go back to that level of flying,” Lenz said.
FedEx will retire its oldest three-engine widebody aircraft, the MD-10s, at the end of the calendar year, months earlier than originally planned, and the MD-11s will be terminated next.
One network strategy
Lenz said the downturn in demand and explosion in e-commerce, which now represents nearly 100% of parcel market growth, illustrate the importance of the Network 2.0 initiative launched over the summer to improve productivity by harmonizing independent express, ground and truck networks.
But the change won’t happen overnight and has to be done carefully because the units have different systems and assets, and deploy people differently, the CFO said. An express parcel or a container from an Express airplane can’t simply be injected into a Ground station, and straight trucks can’t easily go into an Express facility.
“We will spend some cap ex there to get the facilities cross-utilized” within the broader plan of reducing annual expenditures by up to 1.5%. “We have to be thoughtful about sequencing it and be thoughtful that it’s a network and we just can’t singularly make one piece of it work while the rest of it operates another way,” he said.
(Correction: An earlier version of this story misspelled Mike Lenz’s name.)