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FedEx CEO: We Learned Labor Lesson ‘the Hard Way’

Add FedEx to the firms course-correcting their pandemic-era hiring sprees in the face of declining demand.

After 10 percent of its high-level executives got the axe last month, on top of two separate furloughs in the freight division, FedEx now enters its next chapter: cost optimization.

“We want to make sure we have the right amount of staffing for the volume that we have,” according to CEO Raj Subramaniam, addressing the Citi Global Industrial Tech and Mobility Conference audience on Tuesday.

FedEx make the staff cuts with helps from its proprietary labor insights platform, which leverages both geography and service levels to determine how many employees it needs in a specific area and time.

“We learned this lesson the hard way, especially during the pandemic, where the availability of labor was difficult,” Subramaniam said. “We created this labor insights platform that is a very detailed way to figure out what we need when and ahead of time. We’re managing much more diligently, and you’ll see that already happening across all our networks and especially in FedEx Ground.”

In total, FedEx has reduced its headcount by about 12,000 since June 2022, when it emplyeed approximately 550,000, Subramaniam said.

He also touched on the performance of the some business areas during the peak holiday season. FedEx achieved pre-pandemic service levels at FedEx Ground, which delivered 31 percent of peak total volume early, and improved time in transit by two days compared to the prior year, he pointed out.

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Mike Lenz, FedEx’s executive vice president and chief financial officer, noted that while the prior quarter’s ground volumes were down 8 percent, margins were up roughly 150 basis points.

“That’s while we had all this incremental capacity coming online as well as the infrastructure costs associated with that,” Lenz told attendees. “So with the focus on productivity and efficiency, and utilizing that network leveraging those assets going forward, this makes us absolutely confident in the trajectory we have there and continue to see improvement going forward.”

At the company’s air freight division, FedEx Express, service levels improved over the fiscal 2022 holiday, but have yet to surpass pre-pandemic service levels. Express service levels improved by more than 4 percentage points for U.S. domestic and more than 6 percentage points for U.S. domestic overnight and Express global compared to the prior-year period.

During the season, the shipping conglomerate said it improved service levels while managing costs, reducing total flight hours by 12 percent during the peak season.

Drive’s cost cuts come from air freight, pickup and delivery reorg

Subramaniam offered additional insight into the Drive transformation program announced in December, which aims to improve profitability and support financial targets. Drive is expected to save $4 billion in costs by 2025. This is on top of the $1 billion of permanent cost savings in fiscal year 2023.

FedEx expects the Drive program will save FedEx Express approximately $400 million by increasingly relying on outsourced air freight. The Memphis-based company will deploy more digital assets to help balance its own “Purple tail” cargo planes and third-party aircraft.

Additionally, the firm is working to improve Express pickup and delivery efficiency. As such, FedEx is reorganizing this network to save about $300 million annually once the changes are fully implemented.

“[The new network] has been designed primarily with the overnight priority service, and the premium Express traffic in mind,” Subramaniam said. “The traffic profile is shifting in the U.S. the same way it is shifting globally. We have the opportunity to now reorient that system to figure out if there is a more efficient way to move this traffic.”

As part of this network reorientation, the company is scaling back its “second wave” of afternoon courier shifts that it implemented during the pandemic as package volume increased. FedEx says the cost savings will likely benefit the fourth quarter and beyond.

FedEx expects approximately one-third of Drive-related savings to occur in Europe, as the company optimizes its now-integrated physical network.

“We are deploying route productivity tools and investing in digital capabilities for planning and automation,” Subramaniam said. “Additionally, we are rightsizing our intra-Europe air network and improving processes to enhance the end-to-end customer journey.”

FedEx will host an April 5 investors event detailing the Drive program’s ongoing transformation, including FedEx Express, FedEx Ground and shared and allocated overhead expenses. The CEO said the event will detail how the company will save $4 billion.

Subramaniam reiterated the full-year guidance FedEx previously shared, with earnings per diluted share expected to come in at $13 to $14 excluding the restructuring costs on $5.9 billion in capital expenditures.

The outlook is based on volume dynamics remaining fluid, with softness expected to persist throughout the year, and yield increasingly pressured as year-over-year fuel surcharge comparisons normalize and demand slows. FedEx expects cost cuts to pick up in the second half.