The Murphy’s Law of transportation integration projects can now add the loss of as many as 6,300 jobs to its dubious legacy.
FedEx Express, the air and international unit of FedEx Corp. (NYSE:FDX), will cut between 5,500 and 6,300 jobs as part of its continued combination of the operations of former Dutch delivery firm TNT Express LLC, the FedEx unit said Tuesday.
Memphis, Tennessee-based FedEx acquired TNT Express in May 2016 for $4.8 billion. However, the integration process has been hobbled by a multitude of problems and is unlikely to be fully completed until calendar year 2022 at the earliest.
FedEx Express said in its announcement that because it operates two large European networks that connect similar geographies, thousands of jobs have become redundant. The cuts will affect operations and back-office personnel, FedEx Express said. It is expected that most of the cuts will be at the unit’s intra-European hub in Liege, Belgium, which had been TNT Express’ hub.
The unit presented its proposal Tuesday to European employees and their representatives. Discussions will begin to work through separation measures, the unit said, adding that some employees may be reassigned to other roles and given priority access to open positions.
Because separation protocols vary by country, the process will take about 18 months to complete, FedEx Express said in the statement. FedEx Express employs about 50,000 people in EU-member nations.
In a filing Tuesday with the Securities and Exchange Commission, the parent expects to book a pretax charge of $300 million to $575 million to be incurred through fiscal 2023. The company said it expects annual savings of $275 million and $350 million starting in fiscal 2024. FedEx, which operates on a June 1 to May 31 fiscal year, is currently in the third quarter of its 2021 fiscal year.
In a late Tuesday note, analysts at the bank UBS said FedEx could realize more than $200 million in additional annual savings by rationalizing expenses such as fuel, purchased services, maintenance, rental fees and depreciation and amortization. UBS has a $386-per-share 12-month price target on FedEx shares, which as of noon ET Wednesday were trading slightly above $250 a share.
When the smoke finally clears, FedEx Express will be operating a dual-hub network on the continent. The primary hub at Paris Charles de Gaulle International Airport will handle cross-continental air deliveries. Liege, meanwhile, will operate as a secondary hub.
The European setup is similar to FedEx’s U.S.-based air hub structure, with Memphis as the primary hub and Indianapolis as the secondary hub. Indianapolis historically has been known as the “daylight sort” facility where shipments not super time critical are processed.
FedEx Express was vague in describing Liege’s future functions, saying only that the hub will “provide excellent service to customers year-round.” It has been thought that Liege would focus on supporting FedEx Express’ intra-European operations. It may also serve as a safety valve in the event that operations at de Gaulle are disrupted, said Dean Maciuba, a longtime FedEx executive and now managing partner of North America for consultancy Last-Mile Experts LLC.
When it was announced nearly four years ago, the transaction was hailed on multiple fronts. It rescued a well-known European brand that had fallen on hard times and in the process saved thousands of European jobs. FedEx Express’ global air network and TNT Express’ intra-European road system would effectively become a one-stop shipping shop for European and non-European companies on the continent and around the world. It would also position FedEx solidly for expected e-commerce fulfillment growth in Europe.
The deal elevated FedEx, which had been a market-share afterthought in Europe, into the conversation with market leader Deutsche Post DHL (OTCMKTS: DPSGY) and FedEx’s archrival UPS Inc. (NYSE:UPS), which three years earlier had abandoned a $6.8 billion bid for TNT Express after European antitrust officials came out against it. For FedEx, the deal had the dual benefit of gaining a seemingly overnight foothold in Europe and keeping TNT Express away from UPS.
It didn’t take long for the integration to run into trouble, however. TNT Express, which was already struggling when UPS made its offer, spiraled further downhill after Big Brown walked. TNT Express’ physical infrastructure and, in particular its information technology, were aging and in disarray when FedEx approached it. Shippers began to get nervous about operational problems that typically accompany an integration of large companies based on different continents. FedEx also grappled with a sluggish European economy in the latter half of the decade, as well as an unfavorable mix of lower-yielding freight generated by TNT Express’ freight forwarder customers.
Almost every aspect of the integration faced delays and the completion date became a constantly moving target. But the biggest hit was the mid-2017 “NotPetya” cyberattack on the two companies’ IT systems. The crippling attack cost FedEx about $300 million to rectify.
Even worse, TNT shippers that spent days, if not weeks, in the dark about their freight decided to migrate their future business to DPDHL and UPS. It has been difficult for FedEx Express to win back those customers, according to Maciuba. Part of the problem, he said, is that both are strong competitors with well-regarded reputations for service. Former TNT shippers may not see any need to return to the FedEx fold, he said.
Analysts lost patience long ago with the integration-related delays and with what they said was top management’s lack of transparency in communicating the challenges it faced. FedEx is expected to have spent $1.7 billion on the integration by the time the physical integration is completed sometime in FY 2022.