FedEx Restructures to Combine Ground and Express Delivery Networks

The FedEx chief was among executives who outlined improvement plans at an investor event Wednesday, pledging to increase utilization of trucks and planes by getting rid of surplus equipment and get better at forecasting customer demand.

“There’s opportunity to continuously improve the efficiency of our operations,” said Mr. Subramaniam. “Our customers are going to see a difference.”

Shares of FedEx rose 1.2% in Wednesday trading.

FedEx is grappling with a monthslong downturn in shipping demand and has embarked on a plan to cut billions of dollars in operating expenses in the coming years. As of last May, the Memphis, Tenn.-based company had 412,770 U.S. employees, or about 75% of its total full- and part-time staff. It expects its U.S. head count to be down by roughly 25,000 by the end of May. 

An activist investor, D.E. Shaw, last year pushed FedEx to make changes to its business and got two people added to the company’s board.  

Mr. Subramaniam said the corporate reorganization has the support of Mr. Smith and the company’s board. 

Mr. Smith, who founded the company in 1971 and long served as its CEO, has said that FedEx’s model of each business unit operating independently with its own leadership team helped drive the company’s success. That meant operating the Express business, which often uses planes and operates as a premium service, and its less costly Ground business as separate networks to ensure that time-sensitive packages arrived on time.

A surge in e-commerce shipments in recent years and higher costs associated with delivering packages to homes pushed the company to bring the operations closer together to avoid duplication. Previously, FedEx has dispatched Express and Ground trucks to move packages in the same neighborhoods, sometimes creating confusion for customers and extra costs for itself.

Customers, for now, have to compare the pricing and dispatch windows for Express and Ground deliveries separately. With one set of business rules to consult, customer support would improve, said FedEx Chief Customer Officer

Brie Carere.

The new structure more closely resembles that of FedEx’s chief rival,

United Parcel Service Inc.,

which has long run a single network to handle air and ground shipments. Unlike UPS, which has a unionized workforce of employees who make deliveries, FedEx will continue to rely on contractors to make deliveries to customers in addition to its employees. 

FedEx expects the reorganization to be completed by June 2024 and added that its full transition to an integrated air-ground network will take several years. FedEx Freight, which consolidates small shipments into trailer loads, will continue to operate as a stand-alone company under FedEx.

FedEx Express CEO

Richard Smith

—Mr. Smith’s son—and FedEx Ground CEO John Smith will gain additional responsibilities in the new structure.

The reorganization will help shift FedEx to “one van, one neighborhood deployment” for parcel deliveries, and “one truck, one service area” for freight, John Smith told investors Wednesday.

Drivers across the Express, Ground and Freight divisions are projected to cover 3.4 billion miles in the year ending in May, or the equivalent of 100 trips to Mars.

“What I’m saying is: we want to make fewer trips to Mars,” said Mr. Smith, drawing some laughs.

FedEx added that it will use more of the freight-rail network for goods that need to move across longer distances, citing lower costs when compared with trucks.

For deliveries by air, FedEx plans to change its flight schedules to minimize the number of miles that a package travels. It also plans to make additional reductions to its trans-Pacific routes, and retire a portion of its fleet earlier than previously anticipated.

A range of companies have sought to make changes in their operations in recent months to be more efficient or cut costs, often by reducing employee head count.

Since September, FedEx has sped up changes to its cost structure to adjust to weaker levels of demand. It has reduced flights and parked more planes and equipment, suspended Sunday deliveries in more markets, furloughed drivers and laid off managers.

Shares of FedEx have risen 7.3% in the past 12 months through Tuesday’s close. The S&P 500 fell by 9.4% over the same period.

FedEx also said Wednesday it is boosting its annual dividend rate by about 10%, or 44 cents, to $5.04 a share.

Write to Esther Fung at [email protected]