Wednesday February 26, 2020

FedEx cuts air capacity and invests in US e-commerce ground deliveries

Fred Smith
Fred Smith

FedEx will take at least 37 planes out of operation from next January onwards to reduce air capacity as trade flows weaken and will invest more instead on expanding US ground capacity for 'post-Amazon' e-commerce deliveries for other retailers.

The company also expects to complete its “late and over-budget” integration of TNT next year in the major markets of the UK, Germany and France, executives said on the Q1 results call this week.

The moves show that FedEx is now speeding up its responses to cyclical and structural changes in the express and parcel markets, according to experts. The company already terminated its air transportation and ground delivery contracts with Amazon in the USA over the summer.

But they also come amid worsening financial results at FedEx Express, whose operating profits slumped by 27% in the June – August quarter on a 3% revenue fall and mixed US and international volume trends. FedEx’s chief marketing officer, Brie Carere, noted that FedEx Express is seeing pressure on all intercontinental lanes, including USA – Europe and especially within Asia.

FedEx will retire and park 37 planes

In terms of the air capacity reductions, CEO Fred Smith told analysts that FedEx will retire its 20 remaining MD10s over the next two fiscal years and is also “highly likely” to retire its remaining 10 A310s during this financial year. “In addition, we are parking the equivalent capacity of seven MD-11 aircraft this fiscal year,” he commented.

With 680 planes of different sizes in operation, these 37 planes would represent about 5% of the aircraft fleet. But the ongoing long-term fleet modernisation, with the introduction of more fuel-efficient planes, is not affected by these measures, executives stressed.

FedEx president and COO Raj Subramanian explained that the company expected the “current air cargo softness” to continue into 2020 and “will take action to reduce our intercontinental flights after our peak season to better match supply to demand”.

He commented: “The Express team is intensely focused on overall cost reduction. This includes deferring non-critical hiring, limiting discretionary spending, and implementing structural costs initiatives such as the United States voluntary buyout program. In addition, we're looking at every opportunity to reduce capital spending.”

TNT integration is “late and over-budget”

Regarding the drawn-out integration of TNT, CFO Alan Graf said FedEx expects integration costs of $350 million in this fiscal year and then $1.7 billion in total until the end of fiscal year 2020-21.

Smith admitted: “We were late and over budget on the TNT integration.” But he said integration in the three big markets of the UK, France and Germany “will be complete … at the end of May 2020”.

Subramanian emphasised: “We are well on our way to achieving full Ground interoperability in our pickup and delivery networks in Europe by the end of May 2020. Growing intercontinental packages into the combined European Ground network allows us to improve service, while simultaneously reducing our costs to serve.

“This will help us accelerate growth into Europe from all around the world. (The) Asia-Europe lane, which remains the largest intercontinental trade lane is particularly important in this regard. Given our strong presence in APAC and significantly enhanced presence in Europe, we expect to gain share in this lane in the months and years to come.”

Outlining commercial plans in Europe, Carere told analysts: “In Europe, we are simplifying our pricing structures and are opening the valve for e-commerce for the first time ever to further stimulate growth. … We are very excited about the e-commerce potential for our European business. We are also creating new pricing and improving our value proposition between Asia and Europe.”

Big focus on US e-commerce deliveries

Meanwhile, executives played down the impact of the decision to terminate the Amazon US air transportation and ground delivery contracts. FedEx Ground only accounts for a tiny fraction (well under 5%) of Amazon’s last-mile deliveries in the US, an accompanying slide showing figures from Rakuten Intelligence showed. According to these figures, Amazon now delivers nearly 50% of its own shipments in its home market, followed by USPS whose share has steadily fallen to about one third, and UPS with a fairly constant figure of less than 20%.

CEO Smith commented: “While the Amazon contract represented only a small proportion of our revenues, the nature of our business is such that near-term profits will be adversely affected since the last bit of volume has significant flow through to the bottom line. However, we have closed additional business to replace this traffic, which is being onboarded and we are taking out significant costs which were unique to Amazon's requirements.”

Instead, the company founder highlighted plans to profit from the overall potential of the US e-commerce market, which is forecast to double in size to 100 million packages a day by 2026. FedEx Ground is launching services such as late night collections for next-day delivery, adding thousands of additional package collection points, will switch to seven-day deliveries year-round from next January and will insource SmartPost deliveries currently handled by USPS ready for peak 2020.  

Carere explained that taking over SmartPost deliveries from the US Postal Service “goes a long way in driving density up and driving the cost per delivery down”.

She also pointed out the e-commerce potential in the LTL freight business. “Our new FedEx Freight Direct service moves large bulky items into consumers’ homes and into businesses. Backed by the power of the FedEx brand and the speed and reliability of our nationwide priority network, we are able to reach over 80% of the U.S. population, and we have a unique ability to serve a large part of this $10 billion market,” she commented.

SourceFedEx, Seeking Alpha, CEP-Research

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