Two days do not constitute a trading trend. FedEx Corp. shares, on the other hand, are rising for the second day in a row.
FedEx (NYSE: FDX) shares were up nearly 6.3%, or more than $12, at the close of trading Thursday. This follows a 4.2% gain at the close of business on Wednesday.
The catalyst for the cumulative share gains was the company’s announcement on Wednesday that it would lay off at least 10% of its global director and officer workforce as part of an ongoing plan to eliminate 12,000 employee positions — some of which will be vacant — by the end of its 2023 fiscal year on May 31, 2024.
The broad cuts began at the start of the fiscal year 2023, when FedEx’s FedEx Express air and international unit experienced a sudden and sharp drop in international air volumes. The company stunned everyone in mid-September when it pre-announced extremely poor fiscal first-quarter results, owing primarily to a dramatic drop in trans-Pacific air volumes.
Estimates of high-level employees affected by Wednesday’s action vary widely. According to a source who spoke to FreightWaves on Wednesday, the director and officer cuts would be minimal because there were only 100 of those executives across FedEx’s global network. Satish Jindel, president of the consultancy ShipMatrix, refuted that assertion. According to Jindel, who has been with FedEx for about 25 years, the company has around 1,000 executives at those levels.
Ken Hoexter, an analyst at BofA Securities, stated in a Thursday note that there were approximately 4,000 employees working at those higher levels. FedEx has not disclosed the number of employees who hold director and officer positions.
Hoexter increased his 12-month price target on FedEx stock to $233 from $204. He estimated that the headcount reduction announcement will save the company $60 million, with an additional $500 million in potential savings from losing the 12,000 positions. According to Hoexter, these savings are on top of a total of $7 billion in cost cuts announced by the company between Thursday and fiscal year 2027.
FedEx Express’ margins are rising from 14-year lows, thanks to a reduction in its air route network, according to the analyst. FedEx Express cut 40 routes in its fiscal second quarter, the majority of which were in the United States, according to Hoexter.
FedEx was praised by Hoexter for making “cost-cutting aspirations” a reality. “We are more optimistic about FedEx’s future as it reduces excess capacity and increases productivity,” he wrote.
UBS analyst Tom Wadewitz agreed, raising his 12-month target to $225 per share. Wadewitz described Wednesday’s announcement as “meaningful but not significant.” However, Wadewitz stated that the move was necessary to demonstrate to investors that FedEx is serious about implementing cost-cutting measures.
Wadewitz hinted that more layoffs were on the way as the company worked its way down the organizational chart. Although senior managers and managers earn less than their upper-level counterparts, there are more of them.
Long overdue relocation
Jindel thought Wednesday’s announcement was long overdue. He has long chastised FedEx for having a bloated organizational structure and failing to place the same emphasis on cost and efficiency as rival UPS Inc. (NYSE: UPS). He called the June reductions “impressive,” and praised FedEx CEO Raj Subramaniam, who took over from founder Frederick W. Smith last year, for taking unprecedented action that goes against the company’s long-standing culture.
Jindel claims that in all the years he has been associated with FedEx, the company has never laid off more than 2,000 employees at once.
FedEx is unlikely to go beyond the 12,000 cuts by the end of the current fiscal year, according to Jindel. FedEx employs approximately 500,000 people worldwide, but this does not include driver contractors and drivers who only work for FedEx Ground, the company’s domestic ground-parcel delivery unit.
However, this does not imply that the work is finished. According to Jindel, further streamlining is expected in fiscal years 2024 and 2025 as FedEx moves forward with a plan to integrate its domestic Express and Ground operations and shift the majority of deliveries to its lower-cost Ground unit.
According to BofA’s Hoexter, operations in Alaska have been integrated, and Hawaii will follow suit soon.
Jindel believes that the integration will eventually render certain Express operations obsolete. Except for their pilots, all Express employees are non-union. Because of the close integration of the air and ground functions at Express, FedEx will be hesitant to fire Express employees. It will instead wait for them to retire before replacing them.
According to Jindel, the cuts in the next two fiscal years will be less severe than in the current fiscal year. “It will be more surgical and a trimming process,” he said, adding that it is a better way to reduce headcount and costs than mass layoffs.
