FedEx Corp. will cut daily flights across the Atlantic, the Pacific and between Asia and Europe as it begins the process of aligning its cost structure with what the company has said is declining worldwide demand.
FedEx (NYSE: FDX) will cut 11% of its trans-Pacific flights, 9% of its trans-Atlantic flights and 17% of its flights between Asia and Europe, the company told analysts Thursday night soon after officially releasing its fiscal 2023 first-quarter results.
The company stunned everyone last Thursday by pre-announcing very weak quarterly results highlighted by a more than $600 million year-on-year decline in operating income at FedEx Express, the unit that the company’s air and international operations fall under. FedEx acknowledged that it couldn’t cut the unit’s costs fast enough to offset the dramatic volume decline out of Asia-Pacific and Europe.
The financial impact of the flight reductions will begin to be felt in October and November, FedEx said. The company vowed that service levels will not be affected. It doesn’t plan to furlough any pilots.
During the tense and somber analyst call, FedEx said the lion’s share of the problem was macroeconomic. Its customers missed their own forecasts, indicating that demand from their customers had rapidly declined toward the end of the quarter. FedEx’s fiscal year starts on June 1.
“This is a market trend, not a FedEx trend,” said Brie Carere, executive vice president and chief marketing and communications officer. Carere said that everyone is being impacted by the slowdown in demand.
FedEx was also plagued by ongoing network integration issues in Europe, the legacy of a difficult six-year European integration following its acquisition of TNT Express in 2016. The company completed the integration of the physical networks in March. However, FedEx Express continues to struggle to consistently hit time-definite delivery targets across country borders, said Carere.
With macro weakness expected for the rest of its fiscal year, FedEx for now has abandoned growth initiatives in favor of cost-cutting and margin protection. It announced on Thursday night a plan to cut between $2.2 billion and $2.7 billion in costs in the current fiscal year, and an additional $4 billion in costs during fiscal years 2024 and 2025.
Along with the reduction in flights, FedEx this fiscal year plans to park an undetermined number of aircraft. The capacity decline due to the parking of planes is the equivalent of eight narrow-body aircraft, according to a company spokesperson.
FedEx will also trim the number of ground delivery routes in Europe in moves it said will enhance productivity.
At Fedex Ground, its ground delivery unit, FedEx will consolidate sortation operations, reduce a portion of its costly Sunday delivery network, and defer or cancel projects. At the corporate level, FedEx said it would close 140 FedEx Office and five corporate office locations.
Company executives fielded analyst questions that were, as expected given the events of the past week, pointed and uncomfortable. Brandon Oglenski of Barclays posited that the company needs to reevaluate the model it’s followed for the past 20 years and change or jettison parts of its model that have repeatedly not worked and may never work. Another, Jack Atkins of Stephens, noted a “clear lack of outside talent” at FedEx and questioned if the right people are in place to run the company.
Raj Subramaniam, FedEx’s president and newly minted CEO, said the best team is in place to run the company in today’s environment.