'We have to eat a bowl of Tricolor? Ugh': investors wary of FedEx restructure

© Fabrizio Zanier

Investors seem less than impressed by FedEx’s announcement this week that it is restructuring its air network.

In an earnings call characterised by a failure to fully answer investor questions, CEO Raj Subramaniam explained that growth in e-commerce and a change in volume mix towards deferred services had led the integrator to “reconfigure” its network to focus on speed and density.

Mr Subramanian called the process ‘Tricolor’, and said it was “momentous”.

“First,” he explained, “we will deploy what we call our purple tail fleet, which is our FedEx-owned assets’ time for delivering high-priority, high-margin volumes using the existing hub and spoke model. This is our purple network, which will be the backbone of our international priority parcel business.

“Second, we will retime a portion of our purple tail flights for what we call our orange network, which will operate off-cycle. This change will give us time to build density, de-congest our hubs during the …night … and feed into our surface networks, including our international road network, as well as FedEx Ground and FedEx Freight in the US.

“This provides us a differentiated capability to drive profitable, less capital-intensive growth in the sizable global deferred parcel and airfreight markets.

“And third, we will continue to leverage our global partner network as an adaptive capacity layer, particularly on imbalanced trade lanes. This is our white network.”

It may all feel right to FedEx, but investors had different ideas.

“I and others are getting restructuring fatigue, and now we have to eat a big bowl of Tricolor? Ugh. Frustrating,” one investor told Loadstar Premium DeskOne, which ran a live feed on the earnings call.

That investor was less-than-encouraged by Mr Subramaniam’s performance, too. “Did you hear Raj on the call? He sounded terrible. How many more lives does this cat have?”

It was only last year that Mr Subramanian – who earned $13.2m in fiscal 2023 – laid out his plans for a “new era” at FedEx.

The investor also noted that the management failed to respond to one solid question from Amit Mehrotra at Deutsche Bank, who asked: “I’m having a little bit of a hard time understanding, sequentially – revenue was up in Express, packages were up, composite yield was up, DRIVE savings were up, but then profits were down. Maybe you can dumb it down for me, but I really don’t understand why profits would be down, sequentially, when all those pieces of mix and revenue are up, sequentially?”

CFO John Dietrich carefully failed to respond, and instead said: “…you know, margins and the profits, we’re going to continue to be laser-focused on that. As I said, our cost structure did not anticipate the higher demand. You cannot underestimate the impacts of all the things … talked about. You know, if you look to the year-over-year decline in the US.

“Postal service volume, combined with, you know, some of the minimum service requirements that are required, that really has a drag on your cost. And what I will say, too, is we’re really well-positioned when volumes return in light of all the initiatives we’re taking right now.”

So that’s cleared up then – or “artfully dodged”, reckoned the investor.

But this bring us nicely to Mr Dietrich, the former CEO of Atlas Air, which delisted this year after its acquisition by Apollo and friends, while he moved on to FedEx. There is much speculation that when the private equity investors have had their fun, Atlas could be acquired by FedEx.

“I could definitely see FedEx buying Atlas Air, just not sure it would be the best thing for FedEx long-term,” noted the investor.

And possibly not Atlas either. But certainly, when FedEx is always quick to ground its aircraft, it is a bit of a stretch to think that it may want 100 or so more planes in its fleet.

Atlas is also an Amazon carrier: FedEx famously ditched Amazon’s business in 2019, saying it would focus its business on other online retailers, which many interpreted as FedEx being concerned that Amazon was too much of a competitor. Or that Amazon was too good a negotiator. Either way, they are far from besties.

To a seasoned Atlas watcher, Mr Dietrich’s talk of unions in the FedEx earnings call was also enjoyable. He answered an investor question on how the pilots – and, more importantly, their contracts – might feel about the ‘Tricolor’ restructure.

“I’ll touch on the pilot piece. Most of what we’re doing here is to increase the utilisation of our assets and leverage the purple network. So, the pilot contract, you know, allows for flex up and flex down, but you know, where we are now is looking to take full advantage of the assets that we have. So, you know, we’ll work within the agreement constraints, but we have a fair amount of flexibility to execute on Tricolor and our other initiatives here.”

Mr Dietrich was thought to be the architect of Atlas Air’s long-running and combatorial war with its pilots – a strategy (which included taking its pilots to court) many believed cost Atlas more in the long run. Perhaps he’s not best placed to “touch on the pilots”.

FedEx’s investors have a lot to think about. Its share price has increased reasonably well over the year, in contrast to that of rival UPS. But investors did not enjoy this week’s earnings call, and shares dropped more than 12%.

It turns out that purple prose may not be enough…

You can read Loadstar Premium’s analysis on the latest FedEx results here, and on all things FedEx here.