FedEx Corp. (FDX:US)’s plan to increase profit $1.7 billion in three years relies heavily on streamlining its Express unit, where it plans to cut jobs and replace fuel-guzzling planes.
Express, the company’s largest division, will generate $1.55 billion of the target, executives said in a meeting with investors and creditors in Memphis, Tennessee. About $300 million will come from modernizing the air fleet and another $350 million from changes in the domestic business.
The overhaul reflects FedEx’s view that the move of some customers to ground, freight and even ocean shipping is permanent and not a temporary change linked to a slowing economy. That transition also threatens to affect United Parcel Service Inc. (UPS:US) and Deutsche Post AG (DPW)’s DHL Worldwide Express.
“We look at the world differently now,” said Dave Bronczek, head of the Express unit. “We’re more conservative. We have a lot more initiatives to conservatively go after our costs, our network repositioning, so we’re not counting solely on a global economy for our profitability.”
The division, which uses planes to expedite shipments of goods from electronics to pharmaceuticals, said more efficient aircraft such as Boeing Co.’s 757 and 767 models will allow fewer flights, each carrying more cargo. That means FedEx can reduce flight hours by the equivalent of 3 percent fewer full- time jobs.
The Express unit is also retiring about 5,000 older vehicles, replacing them with newer and more fuel-efficient models.
“The headline number sounds big: $1.7 billion is clearly an ambitious target,” said Peter Nesvold, a New York-based analyst with Jefferies Group Inc. who rates the shares hold. “However, the timing is longer than expected.”
FedEx rose 5.2 percent to $89.99 at the close of trading in New York, the largest gain since December.
The changes will help “deliver the performance to ensure the near-and long-term success of FedEx,” Chief Executive Officer Fred Smith said yesterday. “We believe we can do this even in low-growth environments for global trade and within the major economies.”
FedEx trimmed its forecast for U.S. economic growth this year to 2.1 percent from 2.2 percent and reduced the worldwide expansion forecast for next year to 2.6 percent from 2.7 percent.
“We’re not assuming that we’ll get much short-term economic help to hit the targets we’ve laid out today,” said Michael Ducker, FedEx Express chief operating officer. “We’re not ruling out a rebound, but we’re not counting on one, either.”
Companywide, about $1 billion of the profit improvement will come from job cuts, FedEx said. “Several thousand” employees (FDX:US) probably will accept a voluntary buyout announced in August, which may cost $600 million, the company said.
FedEx has “other levers” it can pull to increase the cost-reduction effort if the economy deteriorates, Smith said.
“There’s a good chance, as we get up a head of steam, that we can exceed some of these goals,” he said.
Smith said the company expects to raise its quarterly dividend, which is now 14 cents a share. Bloomberg analysts predict an increase of 2 cents a share in June, the start of FedEx’s next fiscal year.
The company will continue expanding the international side of its Express business, which Rajesh Subramaniam, senior vice president of global marketing, said remains the “crown jewel” among the shipper’s companies.
FedEx will also expand its ocean shipping business, offering a broader range of services, and invest in increasing air and ground infrastructure in Europe.
The company expects international economy shipments to account for a growing percentage of its volume, especially as long as fuel prices remain high. International priority shipments also will continue to grow, said Ducker, the FedEx Express COO.
FedEx will use technology to boost efficiency across its operations, lowering costs on its highest-value products and allowing for greater profit margins. It also plans to focus on areas that have high concentrations of customers who use primarily priority shipments, including the health-care industry.
The air-cargo company expects to achieve a significant portion of its projected cost-saving benefits by fiscal year 2015, said Smith. The 68-year-old, who pioneered the modern air- freight industry with an idea from one of his college essays, said he has no plans as of now to retire.
FedEx reiterated yesterday the revised full-year profit forecast (FDX:US) it gave on Sept. 18. Earnings will be $6.20 to $6.60 a share for the year ending in May, excluding potential benefits from cost cuts. The guidance prior to Sept. 18 was for earnings of $6.90 to $7.40. Net income for FedEx’s last fiscal year was $2.03 billion.
The forecast reduction was spurred partly by a shift in shipping methods that has boosted business at FedEx Ground as customers trade down to three- or four-day shipments, or send goods by train, truck or ship (FDX:US), rather than overnight delivery.
“We are operating in the most tepid post-recession recovery in the modern era,” Bronczek said. “Customers in key markets have been shipping less, with lower demand for priority services.”
Quarterly volumes declined through August for FedEx’s premium services for domestic and international shipments.
“We do not think the Express business is going to shrink to oblivion,” Smith said of the domestic portion of the unit’s network. “It’s just not going to be a significant growth business.”
Expense-reduction efforts have been under way since December, including the deferral of some new jet-freighter deliveries.
In June, FedEx said it was retiring 24 cargo planes and 43 older engines to match shipping volumes. It also plans to retire 21 Boeing Co. (BA:US) 727s this fiscal year. Those aircraft will be replaced with Boeing 767-300 and 757-200 aircraft that burn less fuel and cost less to fly, FedEx said.
FedEx also ordered 19 767s, to be delivered from fiscal 2015 to 2019, replacing Boeing MD-10s and Airbus SAS A310 models. The twin-engine 767s will be about 30 percent more fuel- efficient than the three-engine MD-10s, FedEx has said.
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