FedEx Corporation (FDX - Analyst Report), one of the leading global delivery companies, announced plans to downsize its workforce in the U.S. The company intends to offer two years salary in advance so as to expedite voluntary retirement of employees beginning next year.
The voluntary retirement program will stretch over a year beginning May 31, 2013. Employees falling under this arrangement will be entitled to the maximum limit of two years base pay.
The company’s step towards reducing its employee strength is part of its restructuring program to improve its cost structure in the current economic backdrop. The company, like its peer United Parcel Service Inc. (UPS - Analyst Report), is challenged by the ongoing slowdown in demand trends given the economic impacts of the European debt crisis, and slump in Asian growth.
As a result, the company is witnessing a demand shift from premium services to deferred services within the FedEx Express segment, ultimately impacting operating margins negatively. Further, higher cost incurred through substantial compensation expenses is also pulling down business profits.
According to management, there are approximately 146,000 employees working under the Express segment and nearly two-thirds of it represents the company’s U.S. workforce. As a result, significant cost synergies are likely to occur if the company is successful in trimming employee base mostly at Express. The company expects the voluntary program to generate annual cost synergies of $1.7 billion that will be realized in a span of three years.
Apart from employee retirement plans, FedEx is also seeking operational efficiency through network realignment to match current demand levels. In June 2012, the company announced plans to purchase 19 more Boeing 767 aircraft. FedEx expects the delivery of these aircraft from 2015 through 2019.These new aircraft are expected to benefit cost structure by replacing the old MD-10 and A31-200 fleet as well as by exchanging equipment with the existing FedEx’ Boeing 757 Fleet.
Additionally, FedEx delayed the delivery of eleven 777 freighter aircraft that were scheduled to be delivered between 2013 through 2018. We believe the delayed deliveries would help better utilization of MD-11 fleet on international flights and lower overall cost and investment.
We expect the company’s near-term earnings growth to be aided by increasing profitability in Freight, given the ongoing productivity enhancement programs and significant revenue growth at the Ground segment. Additionally, improving international revenues and cost efficiency in FedEx Express will support earnings growth going forward.
However, economic volatilities, lower revenue yield at FedEx Express, rising near-term depreciation and pension expenses alongside competitive threats can pose near-term headwinds for the company.
FedEx retains a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating. For the long term, we have a Neutral recommendation on the stock.