FedEx to close 30% of package facilities as network integration ramps up

FedEx Corp. plans to close 30% of its U.S. package distribution facilities within two years under its Network 2.0 consolidation program, which is gaining momentum and expected to contribute toward $200 million in savings this quarter, executives said during an earnings briefing.

In April, the integrated parcel and logistics giant completed the optimization of its parcel operation in Canada. The company is now turning its attention to the U.S. market, where it synthesized 45 U.S. stations in the fiscal year fourth quarter that ended May 31, CEO Raj Subramaniam told analysts Tuesday evening.

Since its founding in the early 1970s, FedEx (NYSE: FDX) has operated in a siloed manner, with each business unit running on its own. Management aims to improve the efficiency with which FedEx picks up, transports and delivers packages by integrating the legacy Express and Ground networks, with the ultimate goal of removing surplus capacity and $2 billion in annual costs. The plan is to have a single van deliver parcels to a neighborhood rather than different vans crisscrossing the same area multiple times per day. 

In June, Memphis, Tennessee-based FedEx blended the operation of 30 stations across 11 local markets and will optimize another 33 stations across nine markets by the end of the month, Subramaniam said. By then, about 2.5 million packages, or 12% of total volume, will flow through consolidated facilities on an average daily basis.

Executives said the company expects to reduce structural costs by $1 billion this year, much of it through Network 2.0. About $200 million of the total benefit will be achieved in the current quarter through the network transformation and the final stages of the Drive campaign, which has taken out $4 billion in costs since mid-2023. 

In addition to closing 100 U.S. stations, FedEx optimized 290 stations by the end of the fiscal year. 

The program was unveiled two years ago, but the company says it is on track. Management stressed that it is methodically implementing the network transformation to ensure it meets and exceeds current levels of service.

“We’re seeing good progress on both the reliability side, as well as the financial side, for those locations we have transitioned,” Chief Financial Officer John Dietrich said. “We’re seeing a 10% improvement on our pick up and delivery costs. And we’re learning and adapting along the way.”

By the end of the current fiscal year, FedEx expects about 40% of total volume to flow through redesigned facilities, Subramaniam said during the third quarter earnings briefing in March.

“We have to be mindful not to disrupt service. So this is not a speed race for us. This is a journey that we intend to get right, and we want to be sure we get it right to line up the 2.0 facilities in a way that delivers the results we want” without disrupting customers, Dietrich said last month during a Bank of America presentation. 

Dietrich said about 1 million of 1.6 million Express packages per day have a profile that allows them to be absorbed into the Ground network. 

Under a new organizational structure, FedEx Ground is now part of FedEx Express and no longer exists as a separate business unit. But the physical integration will take longer than the change at the corporate level.

“We believe there are meaningful benefits to be had from this [Network 2.0] undertaking, not just in terms of raw cost savings, but better planning and service as well,” said Stifel equity analyst Bruce Chan in a client note.

Rival UPS is also in the process or downsizing and consolidating its parcel footprint in the United States.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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