Wednesday, June 6, 2012

FedEx restructures its US domestic Express division as domestic volumes decline

The US domestic air cargo market has been in decline since well before the 2009 recession. As shippers “trade down” to other modes of freight transport and a slow recovery domestic economy, FedEx announces plans to restructure its domestic Express division.

The US domestic air cargo market has been shrinking since well before the 2009 recession. According to the US Bureau of Transport Statistics, at its peak in 2004, the US domestic air cargo market moved over 16.5bn cargo revenue ton-miles, however by 2011 it dropped to 12.1bn cargo revenue ton-miles, a 4.33% decline. For the same period, FedEx’s US domestic cargo revenue ton-miles declined 1.1% while UPS’ increased 2.18%.

Modal shifts to “less expensive” modes of transportation such as trucking and the recession of 2009 along with a slow, struggling economy are among the reasons for the decline.

FedEx noted during its third quarter earnings (December-February) that average daily domestic cargo declined 4%. The Express division is the largest of FedEx’s groups. However, operating margins in the Express unit have not recovered to pre-recession levels even as revenue in the prior fiscal year was strong. For the third quarter, Express had an operating margin of 5.3% compared to 18.8% for FedEx Ground. FedEx Ground’s operating margin causes one to wonder how much it has cannibalized domestic Express.

As such, the company announced plans to restructure its domestic Express division. Firstly, it announced the retirement of 24 planes - 18 Airbus 310-200 jets and six Boeing MD-10-10 freighters. Both models are out of production, and according to FedEx, most "are currently parked and not in revenue service."

Besides the retirement of planes, Express Chief Executive Officer David Bronczek said, “We are also developing detailed operating and cost structure plans to further improve our efficiency. We expect to provide additional information on these plans in the fall.” It appears trimming the workforce will also be included in these plans.

As the company prepares to realign its domestic Express network, it is possible some existing customers may opt to move to FedEx’s Ground or seek other alternatives.

Finally, it is likely as FedEx prepares for its fourth quarter and fiscal year earnings report on June 19th, it may not be an impressive one particularly as the impairment charge of the retired planes was noted for the fourth quarter ending May 31. Recent acquisitions and declines in global air cargo will also impact the company’s bottom line as well.