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FedEx hopes new color-coded air network will shore up profits

FedEx Corp. announced Tuesday evening a restructuring of its FedEx Express international air network in an effort to boost its largest unit’s sagging profits amid continued macro weakness.

The tri-color initiative, as the name implies, will divide the network into three colors: Purple will focus on priority deliveries of packages. Orange will emphasize the deferred package and air freight segments, where much of the air shipment density lies, and will be handled through FedEx’s (NYSE: FDX) nonurgent sortation network.

Packages and freight moving under both colors will be serviced by the company’s air fleet, with the yellow network tied into FedEx’s ground operations, including FedEx Ground and less-than-truckload unit FedEx Freight in the U.S. The tie-in with the surface infrastructure, in the manner it is being brought to market, is a first for the company.

The third color, white, will incorporate the airlift of what will be FedEx’s air partner network.

The company has talked about this change in broad strokes before. However, it is believed to be the first time it has codified it with a brand initiative. The goal is to match the profit profiles of each international air shipment with the right delivery mechanism, executives said.

The announcement comes as the unit struggles to find its footing amid a weak macro environment that isn’t expected to improve through the remaining approximately six months of the 2024 fiscal year. In fact, the company lowered its full-year revenue forecast to what will be a single-digit decline instead of flat growth year over year.

On a non-GAAP basis, FedEx Express’ second fiscal quarter operating margin came in at 1.7%, about half the margin reported in the second quarter of fiscal 2023. The company’s overall margin for the 2024 quarter was about three times that of the Express unit. The overall margins were bolstered by a nearly 11% margin at FedEx Ground, the company’s U.S. ground network.

Express is being buffeted on multiple fronts: A global downturn in industrial production has hit demand, especially for international air freight. Budget-conscious shippers are trading down to cheaper but lower-yielding air services. Fuel and delivery surcharge revenue is down year over year. The U.S. Postal Service, a big Express customer, is diverting domestic air packages to ground from air. At the same time, it requires Express to maintain certain service requirements, which is a cost headwind for the carrier. The current contract expires Sept. 29, 2024 and FedEx executives have said there will need to be significant changes in contractual terms for FedEx to consider renewing it.

Express revenue fell 6% year over year. That, along with a 4% revenue decline at FedEx Freight, are microcosms of the stagnant macro climate the company finds itself in. For the quarter, revenue of $22.2 billion was down $600 million from the year-earlier period.

The company upped its full-year guidance for diluted earnings per share, now saying it will come in at a range of $15.35 to $16.85 per diluted share from $15.10 to $16.60 per diluted share.

Adjusted operating income rose 17% due to efficiency improvements and a more profitable revenue mix. Adjusted net income came in at $1.01 billion from $820 million.

The news at FedEx Express was not received well by the financial markets. Three hours into after-hours trading, FedEx shares were down nearly 10% from the day’s closing levels.

(An earlier version incorrectly stated that one of the colors in the FedEx Express air network was yellow. It is orange.)

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