FedEx says air network restructuring to save $700M annually

April 6, 2023

FedEx Corp. executives on Wednesday outlined how the company will restructure its air network by downgrading to surface transportation where possible, outsourcing more flights, implementing more direct routes and streamlining ancillary support functions like maintenance to save $700 million annually.

The integrated express carrier also will invest less in its own aircraft by relying more on partner carriers for surge capacity.

Belt-tightening within the global air network is part of an aggressive enterprisewide initiative to eliminate $4 billion in structural costs and boost profitability by the end of fiscal year 2025. Management announced it would take the seismic step of consolidating the semiautonomous express, ground and services units into a single operating company and redesign its network to prioritize efficiency, which is expected to drive an additional $2 billion in incremental cost reduction.

Structural improvements to lower service costs focus on using assets more efficiently and making the network more flexible from a cost and service standpoint.

FedEx’s (NYSE: FDX) cost-reduction strategy includes parking aircraft, accelerating the retirement of MD-11 freighters, increasing point-to-point flying and leaning more on contractors, commercial airlift and trucking. Forty percent of global air savings will stem from using less jet fuel, with crew and maintenance each representing 20% of the value associated with reduced flight hours.

“Having more flexibility in how we move volume means we can improve density and utilize our purple tail fleet for what it is intended for: to quickly move high value expedited time definite shipments around the world,” said Richard Smith, the head of FedEx Express, who will serve as president and CEO of airline and international under the reorganization. “We’re changing the fly-fly-fly model for a lot of this traffic to a much more economical truck-fly-truck model.”

The initial phase of FedEx’s efficiency campaign began months ago. During the fiscal year third quarter ended Feb. 28, FedEx cut aircraft utilization 8%, grounded nine cargo jets and downsized to smaller aircraft on certain routes. The actions contributed to $1.2 billion in savings.

Officials on Wednesday said the global cost to move a pound of freight through the system is already down 2.5% to 3% since flight reductions were implemented last fall due to weak demand. Flight hours by July are expected to be down more than 10% year over year, they reiterated.

Focus on density, asset-light model

FedEx plans to make its air network leaner by engaging in point-to-point flying, substituting truck service on certain connecting routes to enable consolidation and increase aircraft fill rates, and relying more on outside partners.

FedEx Express currently has an asset-heavy network that relies on a hub-and-spoke system. All shipments, regardless of their unit pricing or service commitment, are routed to hubs for sortation and redelivery even if it means carrying goods longer distances. The centralized system allows the company to meet next-day delivery commitments but at a high cost, especially when demand and volumes drop.

Management said in December that the company would increasingly rely on outsourced air transport for growth. The updated plan calls for a more diversified use of in-house assets, contract carriers and commercial airlift, as well as shipment segmentation. FedEx aircraft will be reserved for high-margin, time-critical routes, while increased point-to-point flying will minimize stops — allowing the logistics integrator to optimize and densify its hub-and-spoke network. Commercial freighter and passenger aircraft will move deferred parcels and freight on routes with fluctuating demand, effectively balancing lanes by flying into multiple international gateways and substituting cheaper capacity for lower-priority pieces.

Removing heavy freight from the dedicated parcel system will also reduce congestion at hubs, improving transit times, while allowing time for general cargo to be built into dense pallets for transport in alternative channels, officials said.

The changes enable logistics teams to use smaller aircraft on some routes and reduce schedule frequency, resulting in higher load factors and greater operating efficiency.

The changes will play out in a big way in the Asia-U.S. market. Beyond short-term flight adjustments due to the global economic and trade slowdown, FedEx plans to reduce trans-Pacific flying by an additional 30% in the coming years through consolidating priority volume on self-operated aircraft and primary routes.

Another alternative for nonpriority volume involves increased use of trucking and flying into regional hubs to reduce the number of transfers and miles a shipment flies. A shipment moving from Paris to Washington, for example, currently flies twice — mostly likely to the global sortation center in Memphis, Tennessee, and then back to Dulles International Airport. In the new system, the European and U.S. surface networks will allow FedEx to consolidate shipments on one international flight. A truck might move a shipment from Paris to Liege airport in Belgium for a flight to an alternative hub or gateway, such as Newark International Airport in New Jersey, with a truck moving the shipment to its final destination.

Meanwhile, FedEx said it is redesigning its domestic network to emphasize surface transportation as the first option and stimulate regional consolidation, with aircraft used for premium overnight moves.

“We’re taking the vast connectivity and capacity we’ve been building over the last 50 years and making it smarter, more efficient, and more flexible,” said Smith.

FedEx estimated the combined impact of the air network overhaul translates to $250 million in reduced spending per year. TD Cowen analyst Helane Becker said the cost savings could come at the expense of operational reliability if there is severe weather or unscheduled employee absences.

Dozens of unionized FedEx pilots picket outside the New York Stock Exchange where management presented an update on its DRIVE initiative. The pilots say they deserve an industry-leading contract for their role helping the company to record profits during the pandemic. (Photo: Air Line Pilots Association)

Dozens of FedEx pilots, upset with the pace of negotiations over a new labor contract, picketed outside the FedEx investor event at the New York Stock Exchange. In February, FedEx pilots gave leadership at the Air Line Pilots Association permission to initiate a strike authorization vote if the collective bargaining process doesn’t meet their demands. Talks have been underway for 21 months and now are under the auspices of the National Mediation Board. Under federal law, the parties must go through several more lengthy steps before a strike or lockout could occur.

In a research note, Morgan Stanley’s Ravi Shanker also questioned whether FedEx would be able to reroute parcels from express air to truck and utilize noncentral air hubs without diminishing service levels. Parcels “will make many more stops and have many more touches in the new system than today, which is demonstrably more expensive and has the potential for disruption,” he said. And more outsourcing reduces FedEx’s direct control of network operations, which could increase quality problems during peak season or periods of tight capacity.

The FedEx changes are a two-edged sword for transport suppliers like Cargojet and Atlas Air that could pick up some ancillary business but also be victim to schedule reductions they previously felt immune from on the assumption that express carriers needed to run planes full tilt no matter the load factor to keep promises to customers for fast delivery.

Smith said the company is accelerating the retirement of its MD-11 fleet by the end of fiscal year 2028. FedEx currently operates 58 of the older, tri-engine jets. Nine MD-11s exited the fleet during the third quarter, and six more are slated for retirement between April and June.

FedEx is not canceling orders for Boeing 767 and 777 freighters, or small turboprop planes used to serve rural areas, but will pull back on future growth as it relies more on long-term charter partnerships. Capital expenditures for the fleet are budgeted to fall from $2.3 billion last fiscal year to $1.5 billion in fiscal year 2025.

“We will reduce our reliance on buying more planes outside of our current commitments, while operating a smarter and more efficient airline,” Smith said.

An additional $60 million in annual savings is expected from the 2024 closing of a heavy maintenance hangar at Los Angeles Airport and shifting those functions to facilities in Indianapolis. FreightWaves was first to report that FedEx was relocating work to Indianapolis because a more modern fleet, with the phase-out of McDonnell Douglas aircraft, required less maintenance capacity. FedEx removed the last MD-10 aircraft from the fleet last year.

Fuel efficiency steps going forward include airport taxiing using a single engine.

The balance of the $700 million in air savings is expected to come from streamlined customs clearance and brokerage services, as well as from optimizing processes.

FedEx is targeting an additional $600 million in annual cost cuts from several initiatives in its European operation, which operates more than 750 regional flights per week. The cost-reduction effort includes shifting to smaller aircraft and flexing capacity through more use of partner airlines.

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