FedEx to offer buyouts to U.S. employees as part of cost-cutting plans

FedEx Corp. plans to offer buyouts to employees in its Express division—which includes a shipping hub at Indianapolis International Airport—as it cuts profit targets for the current fiscal year.

The Memphis, Tennessee-based company did not say how many positions it wants to eliminate or what locations it might be targeting.

But the announcement comes amid a darkening view of demand for shipping services outside the U.S., which prompted the company on Tuesday to slash its profit forecast and pare international air-freight capacity.

The courier cut its outlook just three months after raising it, reflecting an abrupt change in FedEx’s view of the global economy. Adjusted earnings in fiscal 2019 will be no more than $16.60 a share, FedEx said in a statement Tuesday. That’s less than the lowest analyst estimate compiled by Bloomberg.

“The peak for global economic growth now appears to be behind us,” Raj Subramaniam, a FedEx veteran who was named this month to take over the Express cargo airline, said on a conference call with investors and analysts.

FedEx is in the early stages of a seven-year, $1.5 billion expansion of its Indianapolis hub that is meant to dramatically increase its package-handling capabilities and enlarge its physical footprint at Indianapolis International Airport.

As part of the expansion, FedEx officials told IBJ in October that they planned to hire about 800 permanent, full- and part-time employees for the Indianapolis hub through 2023.

On Tuesday, the company’s chief financial officer, Alan Graf, said in a conference call that the technology that is part of the expansions at the hubs in Indianapolis and Memphis remains vital to the company. “We probably will slow some things down to see what happens,” he said. “But at the end of the day, we still need to move forward with the majority of the programs that we've got in place.”

He did not say how current or future employment at the hubs would be affected by the company’s announcements on Tuesday.

FedEx’s gloomier view sharpened concerns that the world’s economy is weakening amid rising trade tensions, especially between the U.S. and China—which the company cited as another source of trouble. As demand lags expectations, FedEx said that—in addition to the buyout program—it would reduce discretionary spending and overseas network capacity at Express.

The buyout offer for U.S. employees will save FedEx between $225 million and $275 million annually. It will also result in a pretax cash charge of $450 million and $575 million, which is expected to occur largely in the fourth fiscal quarter.

Actual costs will depend on employee acceptance rates, and similar programs are under consideration for the international workforce.

“When you have a change that comes on you as fast as this did, it’s hard to react to it,” CEO Fred Smith said on the conference call. “Our international business, especially in Europe, weakened significantly since we last talked with you during our earnings call in September.”

The shares fell 6 percent to $173.90 after the close of regular trading in New York. FedEx slid 26 percent this year through Tuesday, compared with an 18 percent drop for United Parcel Service Inc. A Standard & Poor’s index of industrial companies declined 13 percent.

‘Fast’ Change

At FedEx, international revenue fell short of company expectations in the fiscal second quarter, which ended Nov. 30. In Asia, FedEx cited “continued tariff and trade concerns” as a drag. In Europe, it pointed to deterioration in Germany and Italy, as well as worsening uncertainty in the U.K. over the country’s negotiations to leave the European Union.

The worsening European economy will delay the benefits of FedEx’s 2016 acquisition of TNT Express, a Dutch courier. As a result, FedEx said it wouldn’t meet its goal of raising operating profit at the Express unit by $1.2 billion and $1.5 billion in fiscal year 2020.

The company didn’t give a new profit goal for the division, where Subramaniam will replace David Cunningham on Jan. 1. Getting Europe back on track is “my first priority,” Subramaniam said.

The business mix also hurt results at FedEx, with higher-priced overnight services lagging the growth of slower and cheaper offerings. That was true even in the U.S., where the company said it was still seeing a “solid” economy.

‘Big Question’

“The big question is, if the rest of the world is catching a cold, does the U.S. catch it as well?” said Trip Miller, managing partner of Gullane Capital Partners, which owns FedEx shares. “The U.S. so far seems to be fairly stable for them.”

Smith said service was at “record levels’’ during the busy holiday season as investments in efficiency and automation pay off. On Monday, he said, 67 percent of packages at the company’s ground unit were delivered a day ahead of schedule.

FedEx is still positioned to benefit as the rise of online shopping spurs package shipments, CFRA analyst Jim Corridore said in a note to clients. That makes the shares a bargain at current prices.

“We remain optimistic on U.S. trade and FedEx’s ability to offset weaker mix with lower costs,’’ Corridore said. “Plus we think the low valuation more than discounts this outlook.’’

Earnings Reset

The U.S. economy is set to grow 2.6 percent next year, according to estimates compiled by Bloomberg. That’s a healthy clip but less than this year’s expected 2.9 percent expansion. Global growth is slowing because of trade headwinds and tighter financial conditions, the Organization for Economic Cooperation and Development said last month.

With growth decelerating, FedEx scaled back its profit expectations.

Adjusted earnings in fiscal 2019 will be $15.50 to $16.60 a share, down from the previous goal of $17.20 to $17.80, the company said. That compared with the $17.37 average of analyst estimates compiled by Bloomberg.

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