Analysts are Skeptical About FedEx's Plans to Combine Networks and Cut Costs

"It feels like a different experience after 20 years with FedEx," says one analyst - but others question how FedEx will integrate networks and the consequences this could have for its employees."

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FedEx Corp.'s plans to reduce costs and consolidate its ground and air shipping services received praise from Wall Street analysts - though logistics and labor implications remain to be seen.

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As of June 2024, FedEx FDX, +0.94% will merge its air, ground, and services businesses into Federal Express Corp. Customers will be able to do business with the company more easily following the reorganization, he said. As well as its plans to cut $4 billion in costs by fiscal 2025, management said it could save an additional $2 billion in fiscal 2027 by tightening up its delivery network.

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FedEx's earnings and margins can be expected to rise as a result of "undeniable changes" at FedEx, according to Raymond James' note on Thursday.

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FedEx has shown significant improvement in its margins and cost-saving initiatives since the company announced its consolidation of ground and express operations," they said.

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On Thursday, FedEx shares closed 0.9% higher. The company upgraded the stock to its version of a buy.

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After FedEx executives warned of weakening shipping demand in September, shareholders questioned FedEx's ability to lead the company, leading to some doubts about their leadership. After management increased its efforts to reduce costs and scale back operations, the stock recovered.

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A key operational differentiator between UPS and Stifel for most of its history has been its Express and Ground network integration, according to analysts at Stifel.

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Jack Atkins, an analyst at Stephens, said investors may be able to unlock "meaningful" value under the new structure despite logistical concerns.

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We believe the potential savings and profit improvement from this program could exceed the $6 billion mark when its two parcel companies (Express and Ground) are integrated into one operating entity. However, there are some key issues and execution risks involved (such as who will deliver packages...employees, or contractors). In the event that DRIVE is fully successful in FY27, he said, the company will save $6 billion.

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Analysts at Stifel said fusing together different logistics networks can be messy, but it also could be risky for investors and the bottom line as a whole. FedEx workers were also said to be able to unionize as a result of the combination.

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FedEx's Express business has long been classified under the Railway Labor Act (RLA), making it much more difficult for organizations to organize, while using an intricate, litigation-hardened independent contractor model to fend off organization at its Ground Division (classified under the National Labor Relations Act), they argued.

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The integration of networks could increase the risk of unionization, resulting in a 30% labor cost premium over non-union workers.

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FedEx stock has increased 13.8% over the past twelve months, while the S&P 500 SPX, +0.36% has declined about 9%.

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