FedEx has portrayed its recent air network redesign by way of streamlining the high-cost overnight parcel operation, but internal communications show the express delivery giant also sees a chance to aggressively go after heavyweight cargo booked by logistic providers to offset slower growth within the principal express product and declining postal business.
FedEx Express (NYSE: FDX) historically has focused on moving small parcels by air. It gives general cargo — dry goods, hardware, textiles and other on a regular basis items — low priority. Freight forwarders are careful about tendering shipments to the airline because third-party shipments could be left behind when a plane is stuffed with shipments from FedEx customers.
Dedicating fixed space to third-party freight could be a giant change and a possible threat to other cargo airlines, experts say.
“If they alter strategy and choose that [hypothetically] one third of each FedEx plane, or a bunch of planes, is now reserved for general heavy cargo and won’t be subjected to any offload that might have a huge effect,” said a senior executive at a worldwide freight broker who asked to not be named due to company rules against speaking with the media. “Freight carriers like Cargolux, Qatar Airways, Lufthansa and Emirates, they’d not prefer to see that in any respect because for those who fly freighters you wish each kilo. You don’t have, like FedEx or UPS, one other moneymaker, that are the packages.”
In the autumn of 2022, FedEx launched an initiative to take out $4 billion in structural costs by fiscal 12 months 2025 and redesign your complete parcel distribution network to create greater efficiency. The air and international unit flew fewer hours in 2023, deactivated aircraft until demand returns, accelerated the retirement of older planes and flew more direct routes.
Along with its latest quarterly earnings on Dec. 19, management spelled out in additional detail the way it plans to reconfigure airline operations.
The brand new strategy de-emphasizes the hub-and-spoke system originally built for speed and global connectivity. As a substitute, a three-pronged approach prioritizes density and improved money flow by higher segmenting shipments between owned freighters, partner airlines, road transport and deferred freight.
FedEx CEO Raj Subramaniam, during a briefing with analysts, characterised the brand new Tricolor network design as a solution to improve efficiency, but internal company communications show it’s equally designed to propel Express into sectors by which it has not traditionally operated.
The Purple network, consisting of FedEx’s owned aircraft fleet, will underpin Express’ high priority, high-margin international parcel business utilizing the prevailing hub model. This a part of the network consists of direct flights from gateways comparable to Paris; Cologne, Germany; Osaka, Japan; and Hong Kong feeding the principal night sortation hub in Memphis, Tennessee, in addition to locations like Indianapolis and Newark, Latest Jersey.
“Capturing this priority parcel business is where FedEx Express has historically made its primary profits. Nevertheless, this worldwide market segment just isn’t projected to grow substantially. Realizing this, during the last 24 months, now we have fastidiously evaluated our network to make sure that our traditional purple tail flying carries as much high-value priority volume as possible and that aircraft gauge and density maximize our load aspects,” said Justin Brownlee, senior vice chairman of flight operations, in a Dec. 21 memo to frontline staff obtained by FreightWaves.
A portion of FedEx’s fleet will likely be reallocated to the so-called Orange network, which is able to operate off-schedule to hold heavy freight that doesn’t require maximum speed and is best fitted to a truck-fly-truck delivery model than flying your complete trip. These planes will fly into primary and regional sortation centers comparable to Newark and Oakland, California, in the course of the daytime when staff have more time to construct dense pallets.
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The item is to enhance aircraft utilization, feed the bottom parcel and freight networks, and help decongest hubs before the priority night sortation. Customers can expect transit times of three to 5 days.
“Without delay, we move all products — parcels and freight pallets, priority and deferred — in the identical way, through an air network that’s timed and structured to deliver priority goods world wide in probably the most expedited way possible. Nevertheless, the worldwide market is broader than simply priority parcel shipments, and FedEx must restructure our international network to higher capture freight shipments (pallets) and fewer time-sensitive parcels (including e-commerce) in a profitable manner,” Brownlee said. “By adjusting our network to best serve the whole thing of the worldwide market, we are able to broaden our customer base and profitably grow revenue, which is able to ultimately result in growth at our airline and increased flying.”
Orange addresses an $80 billion deferred market, of which FedEx only has a 1% share.
“With this structure, FedEx can provide the outstanding service we’re known for to customers
needing international standard air freight logistics and accomplish that with a price structure that allows our sales teams to aggressively compete on this space,” Brownlee said.
Upper management’s previous comments about reducing use of nearly 30 widebody freighters created a misperception about air realignment’s purpose, said Pat DiMento, vice chairman of flight operations and training, in a secretly recorded meeting with pilot evaluators several weeks ago that was shared with FreightWaves. “If we don’t capture a few of that middle band, we are going to never get their [shipper’s] freight that can also be within the priority range. Without delay, we don’t offer much in that middle band to get monetary savings for these firms. So that they try to capture that in order that we may also grow what’s our priority, international business.”
FedEx, UPS and DHL Express offer excess capability on their airlines at bargain rates in comparison with for-hire freighter operators since the principal parcel product covers the fixed cost base — very like passenger airlines enhance margins by selling available belly space to shippers. All-cargo airlines are challenged to compete with widebody passenger airlines, which regularly can offer lower rates because operating costs are allocated to the passenger business. The share of international cargo capability on freighters has declined the past two years as travel picked up after the COVID crisis and passenger airlines reintroduced more flights.
But freight management firms take a risk shipping with FedEx and UPS because they’re offloaded first if there isn’t enough space on a flight. The perfect time to utilize an integrated package carrier is the summer, once they aren’t as busy, in line with logistics specialists.
The Orange network is already being organized. In February, FedEx plans to launch two recent daytime flights from Liege, Belgium, to Memphis and Indianapolis. “We’re also evaluating the suitable timing for extra flights from Liege to Oakland and Newark. In Europe, the Liege hub is a key a part of the strategy, given its purpose-built capabilities for freight handling and optimal pallet construct,” Brownlee said.
He described the changes to the priority parcel network as rightsizing, moderately than downsizing, the airline. Some aircraft on low-volume lanes have been parked, but the corporate also plans to grow in other markets this 12 months. FedEx Express, for instance, intends to start out a route by September serving El Salvador and Guatemala, utilizing a Boeing 757 freighter. Management is also working to launch service to Argentina, Chile and Ecuador in April with a Boeing 767 cargo jet, subject to crucial government approvals.
Finally, FedEx will use third-party carriers — the White network — as flex capability and to backfill imbalanced trade routes. “This isn’t an approach that costs anyone jobs or puts in danger the longer term of FedEx flying. Somewhat, it gives us extra scalable capability … which in turn helps us grow our market share in all sectors of the worldwide air freight market,” Brownlee said.
A FedEx worker, who asked to not be identified due to concerns about possible job retaliation, agreed the color-coded strategy actually might be a positive development for pilots, who’ve seen their billable flight hours sharply reduced up to now 12 months. By handling priority shipments individually from deferred freight, FedEx can go after a greater share of the less time sensitive heavy palletized airfreight and e-commerce markets in a profitable manner.
DiMento stressed within the meeting that FedEx is “not attempting to drive product all the way down to other carriers, we’re not attempting to wet-lease [outsource] anything. All of that stuff is just crazy talk.”
Can general cargo be profitable?
But logistics experts query whether FedEx could be viable long run in the final cargo sector given its elevated cost structure, including pay scales for pilots that far exceed those of international freighter operators, and the relatively low margins.
“To make a competitive product is difficult and it runs the danger of diluting your core international Express products,” said Derek Lossing, a former head of world freight procurement at Amazon who now runs Cirrus Global Advisors. “It’s not an incredible time to make loads of money in air cargo due to low rates. There’s not loads of margin” because freight forwarders buy airport-to-airport transportation as a commodity within the wholesale market, and aren’t keen to pay a premium, he explained.
And rates, which have fallen back near 2019 levels excluding fuel surcharges, could go lower this 12 months as more capability enters the market. The availability of cargo space is about 7% to 13% greater 12 months over 12 months and 4% greater than pre-pandemic levels, primarily due to strong return of passenger aircraft and their associated belly storage, in line with the International Air Transport Association and others. More widebody passenger aircraft are expected to hit the market as China fully reopens to air travel this 12 months.
Some Wall Street analysts consider FedEx hasn’t truly come to terms with the quantity of structural cost reductions crucial to realize decent profits. The DRIVE cost initiative is already losing steam, going from $1.4 billion in savings within the quarter ended May 31 to $600 million within the quarter ended Nov. 30. In Express, expense reduction went from $500 million to $200 million over the identical six-month period. FedEx Express’ operating margin was an all-time low of about 2.2% within the prior quarter. Meanwhile, management guidance suggests the subsequent two quarters might be the worst ever for Express profitability.
FedEx has 407 mainline aircraft in its fleet, while rival UPS operates about 290 aircraft, in line with fact sheets from each company.
“We applaud management for trying something recent with the air network, but suspect that is lending back to the FedEx of old, focused on service improvements. While reallocating air capability to enhance transit times is admirable, the overarching and long-term problem at Express has been
and stays excess network capability,” said Barclays transportation analyst Brandon Oglenski, in a research report. “While it might initially hurt, we expect true margin improvement and at last earning returns in excess of the high levels of capital required to run Express would take a structural 20%-to-30% reduction in capability from current operations, which just doesn’t appear to be within the cards with current management plans.”
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Within the memo, Brownlee said FedEx has deferred taking down 4 MD-11 freighters within the second half of the fiscal 12 months, ending May 31, due to incremental volume increases within the Asia, Middle East and Africa regions. Nonetheless, the retirement plan for the aging aircraft has not modified. One MD-11 was faraway from service at the tip of December and 13 more will likely be idled by the tip of May.
Throughout the second quarter, which ended Nov. 30, FedEx parked six aircraft — three Boeing 757s and three Airbus A300s. Since September, it also took delivery from Boeing of six recent aircraft — 4 767s and two 777s. The airline plans to receive 4 more 767s from Boeing by June.
Financial pinch
FedEx revenues within the second quarter were $22.2 billion, down $600 million from the year-earlier period as the corporate continued to grapple with sluggish demand and shrinking business from the U.S. Postal Service.
The Express unit struggled probably the most in the course of the most up-to-date quarter, with revenue and adjusted operating profit dropping by 6% and 49%, respectively, whilst group profits increased. Adjusted operating margin dipped 1.5% 12 months over 12 months to 1.7%. Express revenues proceed to fall faster than total revenue, partly as a consequence of lower delivery surcharges and a shift to lower-yielding services.
FedEx cut its fiscal 12 months 2024 revenue forecast, saying it now expects a single-digit year-on-year revenue decline as an alternative of flat revenue.
FreightWaves recently reported that FedEx Express is more likely to lose half its business with the U.S. Postal Service, its largest customer, later this 12 months when an existing contract expires. The Postal Service is converting the majority of its mail transportation to ground services as a part of a multiyear efficiency campaign while FedEx is negotiating for higher terms in future contracts because its postal work barely makes money.
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