Wednesday, August 15, 2012

FedEx hits a bumpy patch as it restructures its US domestic express network

Tough times for cargo providers as trade patterns shift and economies remain dicey. This week, FedEx CEO, Fred Smith, delivered his annual letter to shareholders.  Within the letter, Smith noted the difficult market and the need to remain nimble. According to Smith, the company’s strategy to enhance efficiency, improve customer experience and adapt to market dynamics will boost its competitiveness and financial performance.

As part of this strategy, last spring, FedEx announced plans to restructure its US domestic Express division. Included in the restructuring plan, the company accelerated retirement plans for older aircraft in the US and deferred delivery of some new aircraft.

Earlier this week, the company announced that it would offer buyouts to employees in an effort to reduce costs. These buyouts are expected to be mostly in the US within the Express and shared-services units and are to focus on support services rather than operational groups. Although an exact number of buyouts have yet to be decided, FedEx expects severance costs to be spread over fiscal year 2013 (June 1, 2012 – May 31, 2013) and into 2014.

Additional details on FedEx’s US domestic Express restructuring plans will be announced in October during the company’s investors’ meeting.

Until the October meeting, as the company works on their restructuring plan, a couple of other recent announcements may play a part in its plan. Firstly, the United States Postal Service (USPS) announced plans to bid its domestic express contract in September. FedEx has transported Express Mail, Priority Mail and First Class Mail on behalf of the USPS since 2001 and has become the post office’s largest contractor generating over $1bn in revenue for the company. This could be a serious blow to FedEx if all or even a part of the contract is lost.

Secondly, the US Federal Aviation Administration (FAA) has accused FedEx of “failing to properly document hazardous materials shipments” in August 2010 after it carried shipments of hazardous cargo across the US. In addition, the FAA reported that FedEx failed to give pilots accurate and legible written information regarding hazardous material shipments on a total of 19 flights. FedEx has 30 days to respond to the allegations and the FAA has proposed a $681,200 civil penalty. Even though the incidents occurred in 2010, this could have a negative effect on the company’s ability to transport hazardous materials and may result in potential customer losses.

FedEx faces strong headwinds as it adjusts its domestic Express network, however, it proved successful when adjustments were made to its LTL division last year and its ground network before that. Still, It will be bumpy ride for the company, but one in which it will likely come out leaner and nimbler – perhaps a recipe for success.