Monday, June 17, 2024

FedEx combining main units — except LTL — into 1 organization

In unarguably one of the most important moves in its history, FedEx Corp. said Wednesday it will combine three of its operating units, including its two largest, into one business known as Federal Express Corp.

The transition will bring FedEx’s (NYSE: FDX) air, ground parcel and FedEx Services businesses under one umbrella, effective June 1, 2024. FedEx Freight, the company’s LTL operation, will continue to operate as a stand-alone entity within the new corporation. The company didn’t explain why the unit was not included in the group, though they said it will serve a prominent role in supporting the integration.

FedEx Corp. CEO Raj Subramaniam will run the new enterprise as president and CEO, the company said.

Effective April 16, John Smith, current FedEx Ground CEO, will become president and CEO of all FedEx Express and FedEx Ground operations in the U.S. and Canada. Smith will also run surface operations across the FedEx Express, FedEx Freight and FedEx Ground units.

Richard Smith, head of FedEx Express and son of founder Frederick W. Smith, will serve as president and CEO of air and international of the Express unit.

The formal move has been a long time coming. Integrating the two key units could unlock billions of dollars in shareholder value as bottom-line costs fall dramatically, analysts have said. It also removes a pain point for many shippers that had to deal with different schedules of Express and Ground drivers, and takes away a vital negotiating point from rival UPS Inc., which has always been a single-sourced delivery provider.

Since its founding in the early 1970s, FedEx has operated in a siloed manner with each business unit running on its own. That model, which worked so well for decades, faded in relevance as a new regime led by Subramaniam took over and the elder Smith stepped away from the CEO job in 2022 to become executive chairman. 

“This is a tremendous milestone for us,” Subramaniam said during a presentation in New York, where the company gave more details on its Drive program, a multi-layered cost initiative aimed at saving $4 billion by the end of fiscal 2025. The company ends FY 2023 on May 31.

The new organizational structure, called One FedEx, is designed to underpin the company’s Drive transformation. Drive covers 14 domains across four main segments: Customer, Surface Network, Air Network & International, and General and Administrative (G&A).

Part of the program is Network 2.0, a multiyear effort to improve the efficiency with which FedEx picks up, transports and delivers packages in the U.S. and Canada. That program is aimed at reducing $2 billion in additional costs by FY 2027.

Subramaniam said the company will come to market with a more simplified operating structure that will make it better positioned for its customers to complete.

The company has been moving, albeit haltingly, towards a unified corporate and operational vision for several years. FedEx Express and FedEx Ground are testing merged delivery operations in Alaska and Hawaii.

There will be more mixing and matching at FedEx than it has seen before, and little will be left on the table. For example, FedEx Ground, which hopes to save $1.2 billion through fiscal year 2025, expects to nearly double the portion of miles it moves via rail to 15%, said John Smith. Virtually all of the volumes will move in company-owned double-stack boxes, said Smith.

Another main objective is to attain what is called the “one van, one neighborhood” proposition. Today, it is commonplace for FedEx Express and Ground vans to circle a neighborhood several times per day, sometimes within hours of each other. “If you’ve ever seen a Ground and Express truck in your neighborhood on the same day, or watched them pass each other on the street, you know what we’re trying to accomplish,” said Smith.

The air express and international business, which aims to save $1.3 billion in Drive-related costs by FY 2025, will focus on flying more balanced lanes and leveraging outside partners for non-urgent flights, said Richard Smith. The company is parking planes, cutting aircraft and flight hours, and looking for ways to substitute truck service for second air legs on international flights to and from the U.S., he said. International air shipping spend has downshifted in general as cautious businesses look for less-expensive means to move their goods.

Savings on procurement and a focus increased on functional excellence and efficient I.T. investments, which comprise the G&A segment are expected to comprise $1.5 billion out of the $4 billion figure, the company said.

Satish Jindel, CEO of ShipMatrix Inc. and a huge supporter of the concept, said as far back as four years ago that the company would be in great shape if it could shave $3.4 billion off its costs through operational integration. Adjusted for inflation and higher revenue, FedEx is heading for $4 billion, exactly where Jindel thought it should be. If FedEx hits its milestones, it will be a “grand slam,” he said in a phone interview.

Though LTL was not a direct part of the consolidation, its assets will still be involved in the operation. Company executives remain adamant about its role at the company. Subramaniam called the unit a vital part of the business. Brie Carere, the company’s chief customer officer, said FedEx is the only major carrier that offers a parcel-LTL package, which makes it very sticky to many shippers.

The macro economy remains uncertain and generally lackluster, the company said. Inflation continues as an issue though executives expect it to normalize over time. E-commerce will account for 90% of all new business through 2026, Carere said. The company’s volumes remain under pressure, which lent urgency to the moves highlighted today. But given the mindset of Subramaniam and Richard Smith that the company had outlived its siloed ways, the change seemed inevitable.

Through 2026, the company expects e-commerce to grow at a 4% to 5% rate dating to 2022. The business-to-business segment, which has struggled, “will be better in the next couple of years than it has been in the past three years,” she said.

Pricing remains solid despite the slowing economy, Carere said. FedEx implemented a record 6.9% general rate increase for 2023, and she said the company is very happy about how much of that increase it’s been able to capture.

By this year’s peak season, FedEx Ship Manager, a free tool for high-volume shippers that enables FedEx services to be integrated into the customer’s shipping and IT system, will be rolled out to 98% of the market, Carere said. The company also said that it would soon be able to give shippers a specific delivery window within a four-hour cycle.

Separately, the board of directors approved an 10% dividend hike payable on July 3 to shareholders of record June 12. The increase brings the dividend to $5.04 a share.

FedEx, which has been criticized in years past for seeing operating margins fall into the single-digit levels from its historic double-digit margin perch, said it could consistently hit 10% adjusted annualized operating margins on an intermediate-term basis despite its growing size, said Michael Lenz, the company’s CEO.

Nate Skiver, who runs LPF Spend Management, a consultancy, called the overall undertaking “massive” and wondered how FedEx can remain service-oriented and profitable while combining its two largest networks and completing a corporate restructuring at the same time. 

The post FedEx combining main units — except LTL — into 1 organization appeared first on FreightWaves.

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