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FedEx is to consolidate its Express and Ground networks next year into a single unit running a fully integrated air-ground network.
The transition will also bring in other business units, like FedEx Services into the new Federal Express Corp, while FedEx Freight, the integrator’s LTL arm, will continue as a standalone company.
“This organisational evolution reflects how we represent ourselves in the marketplace – focused on flexibility, efficiency and intelligence,” said FedEx president and CEO Raj Subramaniam.
The move should also strengthen management efforts to bring down costs. Through its Drive initiative it aims to achieve $4bn of permanent cost reductions in fiscal 2025, and another $2bn in fiscal 2027.
Analysts have long criticised the strategy of running two separate parcel networks, pointing to dis-synergies like drivers of both units calling at the same address in one day.
Satish Jindel, president of SJ Consulting, has long argued there have been compelling reasons to combine the two networks. He said: “The rise of B2C traffic has accelerated a shift of domestic parcels to ground transport and a decline in premium express traffic, which led to the FedEx Ground unit generating higher operating margins than the Express division.”
Analysts have attributed the superior margins of rival UPS – achieved with a unionised work force as opposed to a mix of non-union employees at FedEx Express and contractors at FedEx Ground – in part to the unified network operation of the Atlanta-based integrator. The latest quarterly results show an adjusted operating margin of 13% at UPS, compared with a 5.3% margin for FedEx.
So the change in the set-up announced yesterday did not come as a major surprise to observers.
“They had to do this,” commented Dean Maciuba, managing partner of Crossroads Parcel Consulting and a former manager at FedEx.
FedEx founder and long-term boss Fred Smith regarded the dual structure as a competitive edge for the company, but under Mr Subramaniam, who took over last summer, the shift of parcels from Express to Ground has accelerated.
Mr Jindel said that the change should benefit FedEx customers as well as shareholders and explained: “They should get a four-hour window for deliveries, and within a few years FedEx is going to be able to cut it down to two hours.”
Management aims to complete the transformation by June next year, and Mr Jindel thinks this is feasible, adding: “It’s a lot of work, but I don’t see challenges in the integration. There’s no event that could derail that.”
Mr Maciuba wondered how the alignment of two networks with different employment models – FedEx employees in Express and drivers employed by contractors in FedEx Ground – is going to play out.
“How do you reconcile these two groups?” he asked, pointing out that there is a significant differential in their respective wage structures.
Mr Subramaniam indicated that the plan called for “a hybrid model” of using employees and contractors for first- and final-mile moves, adding that the company would continue its anti-union policy.
According to one report, FedEx is testing the combined service in Minneapolis.
At yesterday’s Drive investor event, FedEx also announced its board had approved a 10% increase in the annual dividend for fiscal 2024, and unveiled a change in its executive incentive plan for fiscal years 2024 through 2026, whereby return on invested capital would replace the current metric of capital expenditures as a percentage of revenue performance.
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