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FedEx is frantically cutting billions in costs as its pandemic success evaporates

FedEx is frantically cutting billions in costs as its pandemic success evaporates

Emma Cosgrove

FedEx announced $1 billion in fresh cost cuts Tuesday, bringing the total to $3.7 billion.
CEO Raj Subramanian said a soft economy and an "e-commerce reset" were to blame for slow demand.

FedEx earnings beat expectations Thursday, but the announcement was far from celebratory.

This time last year, the company said it had reached a turning point and would achieve a level of profitability not seen since the first rush of pandemic e-commerce packages. Now, it's frantically cutting billions in costs.

CEO Raj Subramanian said FedEx cut an extra $1 billion in the most recent quarter, bringing the total expected cuts in this fiscal year to $3.7 billion.

Most of the cuts are from FedEx's Express business, which makes overnight and next-day time-definite deliveries. Express package volume was down 12% and revenue was down 6% compared to last year.

FedEx's Ground business, which makes everyday e-commerce deliveries in the US, struggled to a lesser degree. Package volume was down around 9%, but revenue was up 2% year over year largely due to surcharges on top of regular pricing.

"The high rate of growth, particularly at Ground over the past few years — that's in the rearview mirror," said CFO Michael Lenz on the company's Tuesday earnings call.

Soft demand for package delivery has set in after a year of operational struggles.

At times throughout the pandemic, FedEx's on-time delivery rate fell far below that of its closest competitor, UPS. As it attempted to recover from the deluge of e-commerce packages that shocked the system for more than a year, costs began to rise and FedEx Ground's network of 6,000 delivery contractors felt the stress.

FedEx's operational missteps, combined with ballooning fuel and labor costs, created unrest among Ground delivery contractors and boosted costs across the company.

By peak season 2022, the contractor unrest had abated, largely thanks to a FedEx crackdown. The company's on-time delivery rate has mostly recovered in line with competitors, a somewhat easier task with fewer packages overall.

Subramanian said Tuesday that the US is in the midst of an "e-commerce reset." The extent of this "reset" is the central question going forward.

"As commendable as the cost actions are, the real question investors will be asking is what these actions imply about the underlying revenue base," wrote Morgan Stanley analysts.

As FedEx heads into an uncertain 2023, here are the moves and happenings that brought the company to this tenuous moment.