FedEx will increasingly rely on outsourced air transport for growth as it pursues an aggressive cost-cutting strategy to resize its delivery network in line with deteriorating market conditions and a structural rebalance in e-commerce sales, executives said.
“An initial priority is to optimize the global air network where we expect to generate approximately $400 million in savings. This work includes deploying digital assets that allow us to efficiently balance our purple tile airplanes and third-party lift as we build the network of the future,” said CEO Raj Subramaniam on Tuesday’s briefing about the company’s fiscal year second-quarter earnings.
The cuts in airline operations are part of an additional $1 billion in savings FedEx identified to blunt profit pressures after demand weakened faster than expected. Foreshadowing weak second-quarter performance, FedEx in September said it planned to eliminate $2.7 billion in costs in the fiscal year ending May 31, 2023, by parking aircraft, closing offices, eliminating Sunday delivery and releasing drivers at its Freight division.
Since September, FedEx (NYSE: FDX) has reduced frequencies on eight international routes and 32 domestic routes. Five aircraft have been parked, and an additional 11 widebody freighters are expected to be removed from service through the end of the fiscal year. During the second quarter, international flight hours were 7% lower than the same period a year ago and domestic flight hours were 6% lower, said CFO Mike Lenz.
The international flight reductions increased since FedEx’s last update to investors in November.
FedEx operates the largest all-cargo air fleet in the world, with 714 aircraft, according to company figures. Of those, 286 are small turboprops that serve smaller communities and are flown by regional airlines on FedEx’s behalf.. The statements suggest FedEx Express will maintain a smaller internal fleet that bakes in recent aircraft reductions because of the sharply lower volumes. DHL Aviation, the in-house airline for DHL Express, mostly charters aircraft under term charters or has joint ventures with partners that provide aircraft and crews for aircraft of all sizes.
A goal of FedEx’s DRIVE program to eliminate $4 billion in annual costs by fiscal year 2025 is to restructure the Express network to allow for more flexibility as demand shifts. Using contract carriers to support the air network would help provide needed capacity without the risk of owning and operating more aircraft of its own. Purchasing transport services also fits with management’s expectation that more businesses will opt for deferred parcel and freight products for their goods.
FedEx Express revenue declined 6% year over year on a 12% fall in volumes as global industrial production slowed and e-commerce shipping returned to pre-pandemic rates after spiking in 2020 and 2021. Express operating income fell 64%. Companywide, adjusted profit fell nearly $500 million to $815 million from the previous year.
FedEx is reducing fiscal year capital expenditures by $900 million below earlier projections to $5.9 billion. A piece of that will come from pushing out payment schedules for new aircraft, said Lenz.
FedEx is scheduled to receive eight 777 and 38 767 freighters from Boeing over the next 2 1/2 years. It is also deploying 30 new ATR 72-600 freighters for shorter feeder routes to replace aging ATR-42 aircraft and introducing 50 Cessna SkyCourier 408 cargo aircraft to help reduce the number of planes needed per feeder route and improve fuel efficiency.
The company already planned to retire its aging MD-10-30 tri-jet freighters during the current fiscal year.
“We have no firm orders beyond FY ’25 for new aircraft and the modernization of our Memphis hub, the heartbeat of the Express network, will be completed in a few years as well, and that will yield efficiencies over the long term,” Lenz said.
Many of the changes are a response to a structural slowdown in U.S. e-commerce volumes. During the pandemic, online sales as a percentage of overall retail sales peaked at 22%, up from 16% before the crisis. Management said the U.S. e-commerce market is now at about 18% to 19% of total retail sales, which is affecting the package business.
Another possible headwind to express air is the full recovery of passenger routes, especially in Asia, which will increase available belly space for freight and potentially reduce traffic for freighter operators.
Chief Customer Officer Brie Carere said year-over-year volume comparisons for the air network should improve in the fourth quarter because that is when the war in Ukraine began to disrupt air traffic between Europe and Asia.