FedEx plans up to $2.7 billion in cost cuts, higher shipping rates as demand weakens

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FedEx Corp. on Thursday announced between $2.2 billion and $2.7 billion in cost savings for the fiscal year and said it would increase shipping rates for air and ground services in January, which it said was slowing volumes. and “weak economic conditions.”

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Executive Officer, during FedEx’s FDX,
The earnings conference call, later in the day, said the higher rates were a reaction to inflation. The package delivery giant’s CEO, when questioned by analysts, expressed confidence in the executive team it is currently in, and said the company was ready for the peak holiday-period shipping season, even as it scales back and Increases prices.

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However, he said he did not expect “tremendous cost inflation” last year. And officials said they expected demand levels in late August – when they said spot rates for sea and air transport in parts of Asia took a sharp turn south – to continue for the rest of the year. .

CEO Raj Subramaniam said the company ran a complex operation that made it difficult to respond to conditions in the air and on the ground when demand was low.

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“There is a time lag between the actions we can take to reduce line-haul networks,” he said. “That’s all.”

“From a customer standpoint, our customers are incredibly sticky,” FedEx Chief Customer Officer Brie Carere said during the call. “What we experienced, especially in August, both in Asia and here in the United States, is two things: There was really no demand for them, and our customers missed their own forecasts.”

FedEx’s cost-cutting plan – which was released sooner than planned earlier Thursday in what management called a “technical problem” – followed its previously-announced quarterly results last week that stunned Wall Street. and raised deep concerns about the company and the US economy.

The cuts, which added specific figures to cost-cutting plans announced last week, will largely come from FedEx’s larger, internationally-focused express business, which provides overnight and expedited air and ground deliveries in the US and abroad.

Management said that unit would save $1.5 billion to $1.7 billion as they reduce flight frequencies and park jets. Operating income for the express business fell 69% from the year-ago period, with global package and freight volume down 11% from the year-ago period.

read alsoWhy FedEx’s profit warning is such bad news for the US economy

FedEx said $350 million to $500 million in savings would come from its ground unit, whose trucks carry packages to businesses and residences in the US and Canada. The company said halting some Sunday operations and closing others would result in cuts.

FedEx said another $350 million to $500 million would come from closing other projects, and closing about 140 FedEx office locations that handle services such as copying and digital printing, and corporate locations.

Executives on Thursday also announced a program to “accelerate progress” to save $4 billion by 2025.

FedEx shares fell 0.5% on Thursday. rival ups ups,
increased by 0.08%.

“First quarter consolidated operating results were adversely affected by softening global volumes, which intensified in the final weeks of the quarter due to weak economic conditions,” FedEx said in a statement on Thursday. “In addition, results were negatively impacted by service challenges at FedEx Express.”

“In response, the company implemented cost actions and continued its focus on yield management and revenue quality to minimize the impact of volume declines,” the statement said. “However, the impact of cost functions declined in volume and operating expenses remained high relative to demand.”

With costs rising, FedEx also said it would increase shipping rates across its express, ground and home delivery services by an average of 6.9%. Those hikes will be effective from January 2.

FedEx last week announced fiscal first-quarter earnings per share that fell well short of expectations. The company also rolled back its full-year outlook, forecasting weak trends and announcing aggressive cost cuts, halts and closures, sending shares on their biggest weekly decline since 1987. One economist said the forecast aligned with his outlook for a “massive recession”. in the US economy.

Many of those results were repeated on Thursday. The package-deliverer reported net income of $875 million, or $3.33 per share, compared to $1.1 billion and $4.09 per share in the year-ago period.

Adjusted earnings per share were $3.44 per share, compared to $4.37 in the year-ago period, and well below FactSet’s estimate for $5.14.

FedEx reported sales of $23.2 billion, compared to $22 billion in the year-ago period. But that too missed expectations of $23.6 billion.

Ahead of Thursday’s results, analysts were wondering how much of FedEx’s troubles during the quarter were due to internal challenges and weak demand globally. They were also wondering how management’s reading on package volumes had changed since June, when FedEx said it expected “extra earnings momentum” during its current fiscal year.

Demand for goods, and thus shipping them, began to decline this year, as more people began to travel, eat out, attend concerts and resume other pre-pandemic activities. Analysts have also raised concerns about the impact of inflation on demand for package deliveries.

FedEx said last week that its express business had been impacted by “macroeconomic weakness in Asia and service challenges in Europe,” causing nearly $500 million in sales losses. Sales in FedEx’s Ground business were also below the company’s forecast by about $300 million.

But other people have mentioned FedEx Long-term difficulties in increasing profits and margins, and wage tensions with some contract drivers as those drivers deal with their rising costs. Subramaniam, during the call on Thursday, played down those tensions, and said most of the 6,000 contractors in its ground business had signed up to the peak-season incentive program.

But when asked during the call why some of FedEx’s rivals aren’t calling for similar difficulties around demand and cost backdrops, Subramaniam said: “I can’t comment on what our competition is seeing or No.”

FedEx stock is down about 40% so far this year. By comparison, the S&P 500 Index SPX,
down 21% compared to that time.

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