FedEx Founder Fred Smith is expected to announce cutbacks to his flagship Express division at a dinner for investors tonight.
In a story that is now legendary in the American business community--Smith argued for the need for a reliable, overnight delivery service in a term paper he wrote at Yale. He built a company that rakes in more than 40 billion a year on that idea. FedEx Express is that company’s oldest and largest division, but it has struggled recently as customers switched to cheaper, but slower, shipping options. The company said it would cut costs at Express on an earnings call in June, after income at the division fell 34 percent.
“The world is waiting for this announcement,” said analyst at Dahlman Rose & Co. Helane Becker. “The markets have been anticipating it and expecting it.”
In the past 18 months, FedEx Express has taken 24 unneeded planes out of the sky, offered voluntary buyouts to some employees, and announced a four percent price increase, but the division continues to struggle. Profits at Express fell almost 30 percent last quarter and that hurt the company overall. Income at FedEx fell $459 million, or about one percent.
To explain this Smith said, “The slowdown in the global economy and global trade constrained revenue growth at FedEx Express and effected overall earnings.”
Smith has said that his goal for Express is margins of 10 percent or more. Those margins were near three percent last quarter. Becker says the only way to make up that kind of distance when demand is falling is to scale back on staff and facilities.
“If it is not a big, billion-dollar program I think the markets are going to react negatively,” Becker said.
Becker estimates FedEx can make about half that amount ($400-$500 million) by switching from three-crew airplanes to two-crew flights and she expects that to be among the changes Smith announces.
“That’s one of the few ways they are going to be able to get there,” Becker said.
She also expects FedEx to offer more voluntary buyouts to Express employees.
Rival UPS has also seen declining profits for the packages it ships internationally and its Next Day Air service within the U.S., but this hasn’t hurt the company overall as much as it has hurt FedEx. Becker says that’s because UPS is structured differently.
“They’re not really in the same business,” Becker said.
UPS started out making deliveries on foot and by bicycle in 1907 and didn’t buy their first airplane until 1981. FedEx was founded in 1973 and had planes from the get-go. Today, UPS ships more packages, but owns significantly fewer planes than FedEx. UPS owns 229 planes and charters an additional 298 as needed. FedEx owns 654 airplanes.
Becker says UPS’ business is still very much centered around its ground operation and trucks, whereas FedEx’s business is centered around its planes.
“I think most people think [UPS] Brown, you know, they think the brown trucks,” Becker explained, “FedEx is more air…and you know lately that’s been a difference because there has been a shift away from air, especially early morning air.”