FedEx to combine delivery units as part of $4 billion cost-cut push

By Lisa Baertlein and Kannaki Deka

LOS ANGELES (Reuters) -FedEx Corp said on Wednesday it will consolidate its separate delivery companies into a single entity, in a move to slash costs and better compete with United Parcel Service and Amazon.

The decision to integrate FedEx Ground, its outsourced package delivery arm, with the FedEx Express overnight air delivery business was announced almost a year after activist investor D.E. Shaw pushed for change and won two additional board seats.

The deflating e-commerce delivery bubble and specter of potential recession over the past year has intensified pressure on Chief Executive Officer Raj Subramaniam to streamline operations.

“We believe now is the right time to reorganize how we work together,” Subramaniam told a company meeting in New York City.

“We will be leaner, more agile and better positioned to execute on our mission to help customers compete and win with the world’s smartest logistics network.”

The combined business is expected to handle all deliveries from June 2024 as part of the wider plan by the Memphis-based group to cut $4 billion in permanent costs by the end of its 2025 financial year.

John Smith will become president and CEO of U.S. and Canada ground operations at FedEx Express and assume leadership of surface operations across the FedEx Express, FedEx Ground and FedEx Freight businesses from April 16.

FedEx Freight will continue to provide freight transportation services as a standalone company under the Federal Express Corp banner, the company added.

Shares in FedEx, which also announced a 10% dividend boost on Wednesday, were about 1% at $228.69.

‘HYBRID’ MODEL

The new structure would end roughly two decades of separate delivery operations and create an entity similar to cost-conscious rival UPS, which has outperformed FedEx despite having a more expensive union labor force.

The company is testing the new combined service in Minneapolis, executives said. FedEx Express is already handling FedEx Ground’s pickups and deliveries in Alaska and Hawaii where air service dominates.

Recent company changes have fueled concern among Ground contractors worried about their ongoing role at the company. Subramaniam said FedEx will use a “hybrid” employee and contractor model for deliveries. The CEO added that the company will remain non-union.

Executives said FedEx has been “looking” at this project for the last couple years, but analysts noted that the company’s “standstill” agreement with activist D.E. Shaw was set to expire at the end of May. That agreement put activities to influence company control or governance on hold.

Regardless of the reason for the timing, the company now has about a year to bring about massive change.

Satish Jindel, who helped found the company that eventually became FedEx Ground, attended Wednesday’s meeting and now leads consultancy ShipMatrix. He told Reuters it was an achievable goal that should boost profit and shares.

Critics noted that FedEx executives had a years-long struggle with its TNT integration in Europe and let overhead expenses swamp its labor cost advantage over UPS.

“There’s no way that this isn’t fraught with risk,” said Dean Maciuba, managing partner at Crossroads Parcel Consulting and former FedEx sales executive. But, he said, “if they do it right, they can evolve as a lower-cost service provider than UPS.”

(Reporting by Lisa Baertlein in Los Angeles and Abhijith Ganapavaram and Kannaki Deka in Bengaluru; Editing by Krishna Chandra Eluri, David Goodman, Paul Simao and Bill Berkrot)