Analysis: FedEx Express revamp hangs on fate of USPS, pilot talks

LOS ANGELES – FedEx is waging financial battles on two fronts.

The delivery giant wants a more profitable contract with the US Postal Service (USPS) and is seeking an elusive labour deal with its pilots. How both efforts shake out will be key to improving profit at its largest business, overnight-delivery provider FedEx Express.

If the domestic contract with USPS, Express’ largest customer, lapses later in 2024, it would erase nearly US$2 billion (S$2.7 billion) in annual business that funds hundreds of pilot jobs. A failure to reach an agreement with pilots could further delay retirements and buyouts that could reduce operating costs at Express. That lack of expense relief could increase the risk that FedEx will have to furlough pilots for the first time in its 52-year history.

The pilot talks have been ongoing since May 2021 and there is no set deadline. In the midst of softening global demand, dwindling USPS revenue and some pilots postponing their retirement in hopes of more lucrative contract terms, FedEx executives have said the company’s 5,800 pilots are 700 too many. Margins in the company’s Express business remain stubbornly low and investors want chief executive Raj Subramaniam to be bolder in slashing costs.

“FedEx has too many planes and too many pilots,” said Mr Trip Miller, founder of Memphis-based hedge fund Gullane Capital Partners, which has a small stake in the company. He wants FedEx to cut Express capacity by 15 per cent to 20 per cent.

FedEx postal revenue loses altitude

FedEx is the No. 1 USPS domestic air contractor, supplying the speed for the agency’s Priority Mail and other quick services under a contract that will expire on Sept 29.

USPS payments to FedEx reached US$2.4 billion during the postal service’s fiscal year ended September 2020. That shrank to US$1.7 billion in fiscal 2023 after the postal service shifted letters and packages from planes to trucks. The switch appears to be starving the daytime air operation that FedEx created for USPS of the volume it needs to keep planes about 70 per cent full and generating profit.

“It’s a big contract and it was very profitable for a very long time. I’m not sure it is any more,” TD Cowen analyst Helane Becker said.

USPS now provides about 4 per cent of Express’ annual revenue, according to a Reuters calculation. FedEx has vowed to walk away from its 22-year relationship with the postal service if financial terms do not improve.

“We are focused on ensuring it continues to make good business sense for both parties,” FedEx said in a statement last week.

USPS, meanwhile, is reorganising its own operations to accommodate customers who are adopting’s strategy of moving distribution centres closer to people who buy their products. That proximity means that fast deliveries have less need for air services.

“There is no reason for USPS to pay more” for domestic air transport, said Mr Satish Jindel, who helped found a company purchased by FedEx. Mr Jindel analysed for Reuters almost one billion packages shipped in the United States and found a significant increase since 2008 in parcels travelling less than around 480 km – a distance easily handled by trucks.

USPS declined to comment. In its 10-year plan released in 2021, the agency said it sees opportunities in “diversifying the mix of air carriers and enhancing carrier contract management”. Its other air service providers include FedEx rival United Parcel Service, which had US$308 million in USPS business in fiscal 2023.

Pilot deal up in the air

As many as 300 pilots at FedEx could be out of work if the company loses the USPS contract in 2024, news provider FreightWaves said earlier in January 2024, citing a recording of a meeting between a FedEx executive and pilot evaluators. FedEx also hopes to convince 400 tenured pilots to take early retirement, the executive said.

That message landed as FedEx and the Air Line Pilots Association (Alpa) gathered for the first negotiations of 2024.

FedEx said the recorded comments represented that executive’s “personal speculation” and that the company is committed to reaching a fair contract agreement.

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