FedEx: beware the blunt instrument of cost cuts

FedEx has a habit of overpromising and underdelivering. This is something for investors to keep in mind as they parse ambitious cost-cutting and restructuring plans announced by the US logistics giant on Wednesday.

The US company, best known for its orange, purple and white livery, is aiming to slash $4bn in costs over two years. It is targeting an additional $2bn in savings from revamping its delivery network by 2027.

These are big numbers. Analysts reckon the implied earnings per share contribution from the $4bn of cost cuts is nearly $15. That is more than the $14.33 in diluted EPS that FedEx generated for the fiscal year that ended last May.

FedEx plans to combine its two main delivery networks. Unlike rival UPS, FedEx operates two distinct delivery systems. The Express unit handles overnight air deliveries. The Ground division specialises in low-cost deliveries. Inefficiencies abound. These include separate sorting facilities and trucks making deliveries in the same area at the same time.

FedEx has therefore traded at a discount to UPS. FedEx’s struggles to integrate TNT Express are another. The two companies are close in revenues. But UPS is more profitable. It reported an operating margin of 11.8 per cent in its most recent quarter, compared with just 4.7 per cent at FedEx.

That helped UPS bank $11.5bn in net income last year. FedEx is expected to pull in just $3.8bn for the fiscal year that ends in May.

In practice, combining Express and Ground requires FedEx to merge two very distinct labour models. Express drivers are employees. Ground drivers work for third party contractors. This unit has been plagued by labour shortages.

UPS’s unionised workforce enjoys high wages and disruption is low. This makes its higher prices easier to justify.

FedEx should bear this in mind as it cuts costs. Savings programmes can be blunt instruments when workers are on the receiving end. Juicing returns in the short term is pointless if gains are unsustainable.