FedEx will reduce flight hours by more than 10% and park more aircraft this quarter because of continued low demand for parcel and freight shipping, executives said Thursday.
An 8% cut in aircraft utilization, sidelining nine cargo jets and downsizing to smaller aircraft on certain routes helped the integrated express logistics provider generate $1.2 billion in year-over-year savings during the 2023 fiscal third quarter. The cost reductions, along with mass layoffs, offset 45% of total revenue declines, said CEO Raj Subramaniam during an earnings briefing.
The air and international unit was the major contributor behind lower revenue and income at FedEx Corp. (NYSE: FDX). FedEx Express generated 8% less revenue and adjusted operating income plunged 81% year over year.
“We are highly focused on taking permanent costs out of the system and remain on track to generate permanent savings of $1 billion this fiscal year,” Subramaniam said. A more aggressive readjustment of the air network is a key part of the effort, he added.
Additional steps to remove fixed expenses this quarter include the phase out of the MD-11 fleet, which has served as flex capacity, and leaning more on the FedEx Ground network for domestic parcel shipments. Nine MD-11s exited the fleet during the third quarter and six more are slated for retirement in the current quarter.
FedEx currently operates 58 of the older, tri-engine jets. Rival UPS recently indicated it has started to cull MD-11s in favor of more fuel-efficient aircraft. FedEx recently completed the retirement of its last nine MD-10-30 freighters months earlier than originally planned.
Management previously said it will rely more on outsourced airlift to support future volume growth.
“Our aircraft modernization program and use of 777s and 767s affords us the ability to flex our plans,” Subramaniam said.
During the second quarter, FedEx scaled back international flight hours by 7% versus the prior year and domestic flight hours were 6% lower, officials said in December.
FedEx has 27 new 767 and six 777 freighters on order with Boeing for delivery in 2024 and 2025.
In its 10-Q regulatory filing, FedEx said it would incur significant costs if it tried to delay the timing of new aircraft deliveries. Boeing said in a letter included in the 10-Q filing that it will push back delivery of two firm orders, but the move appears related to recent production delays for 767 freighters and not to any request from FedEx. The timing is unclear because dates have been redacted.
FedEx last year launched a program called DRIVE that is designed to take out $4 billion in structural costs by the end of fiscal year 2025, while also making the network more agile and flexible.
Officials said they expect domestic and international express volumes to improve sequentially in the next couple quarters.
Headcount reductions will exceed 25,000 by the end of the fiscal year.
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