FedEx targets $4 billion cost cuts by merging delivery networks

FedEx is seeking to cut $4 billion in costs by combining its two main delivery networks, in an ambitious plan by new Chief Executive Officer Raj Subramaniam to increase profit margins.

The company has for decades operated an express package business separately from its ground unit, which FedEx acquired in 1998 and depends on third-party contractors to make the last-mile delivery of parcels. As of June of 2024, it will be “a single company operating a unified, fully integrated air-ground network under the respected FedEx brand,” FedEx said Wednesday in a statement.

The courier’s shares rose 2.4% as of 8:39 a.m. before regular trading in New York. The stock has been trading almost 30% below its May 2021 peak.

FedEx has trailed United Parcel Service on profit margins even though its larger rival has a unionized workforce and pays its drivers more than twice what drivers at FedEx’s ground network make. Many analysts point to the efficiencies of UPS’s single delivery network as the reason. In the latest quarter, UPS reported adjusted operating margins of 13% compared with just 5.2% for FedEx.

The company didn’t give details in the statement on any job cuts and a spokesperson offered no specifics on the scope or timeline.

“We will continue to focus on responsible head count management in our operations as well as corporate functions,” spokesperson Rachael Simmons said in an email.

FedEx is trying to regain its footing after Subramaniam was forced to scrap profit growth goals outlined last September due to declining package volumes. He had unveiled those targets just after he officially took over as CEO in June.

The company expects to achieve $4 billion of permanent cost reductions in fiscal 2025. FedEx said it seeks to save an additional $2 billion from revamping its delivery network by fiscal year 2027. Its board also approved a 10% increase in the annual dividend for fiscal 2024 to $5.04 a share.

The plan to boost profit addresses a commitment to investors, led by activist shareholder D.E. Shaw, that FedEx made only two weeks after Subramaniam took the helm. It promised then to boost dividends, rework its executive pay rules and reduce capital expenditures. Under the agreement, D.E Shaw named two board members.

FedEx also said Richard Smith, the son of founder Fred Smith, will be in charge of Airline and International and John Smith will be in charge of all ground operations, including FedEx’s freight business.