FedEx is trimming fewer U.S. employees than most analysts believed,
while creating more savings than the company previously expected.
A voluntary buyout program attracted 3,600 participants nationwide, same as the last such program in 2004, but is expected to save "well over $600 million" a year going forward, FedEx officials said Wednesday. The buyouts, along with fleet and technology upgrades, are part of a push to boost FedEx Corp. profits by $1.7 billion a year by May 31, 2016.
Analysts had predicted 3,000 to 7,000 employees would take buyouts and exit a 115,000-person U.S. workforce at FedEx Express and FedEx Services.
While the number fell on the low end, the buyout attracted some of the 40-year-old package delivery company's longest- tenured and presumably better-paid employees, including an unknown but substantial number from FedEx's home offices in Greater Memphis.
FedEx wouldn't break down buyouts geographically, but analysts speculated half or more could come from Memphis. About one-fourth of affected divisions' U.S. employees are in Tennessee, including the Memphis headquarters of FedEx Express and FedEx Services. In Greater Memphis, the company ranks as the largest employer with 30,000 full- and part-time workers.
The company said 40 percent, or about 1,440 people, left May 31, and the remainder would be gone by next June 1.
Because of long tenures and generous terms -- up to two years' pay and a $25,000 health care fund -- the buyout appears destined to cost more than the 2004 program, which was part of a $425 million realignment expense. The company said the latest business realignment activities resulted in a $560 million expense in the fiscal year ending last May 31.
Chief financial officer Alan B. Graf Jr. said the reward would be greater than expected, but would take a bit longer to achieve.
"(W)e had told you in October that we thought we would get $500 million (in annual savings). We are well over $600 million. We saw significantly higher tenured people take the package, which is fine, but that also means we are going to get a lot higher returns on that," Graf said during a call with stock analysts.
However, Graf said because most buyout recipients will leave later, the savings won't be immediate.
"We expect to begin realizing a portion of the benefits from the profit improvement program gradually in FY 2014," Graf said, referring to the 2014 fiscal year that began June 1. "However, the majority of the benefits, including those from our voluntary buyout program, will not occur until FY 2015 and 2016."
Assuming a quarter to a half or more of buyout recipients are from Greater Memphis, the early retirements would make a significant dent in the area's wages. But John Gnuschke, director of the Sparks Bureau of Business and Economic Research at the University of Memphis, said FedEx realignment's benefits to the company must be balanced against the reduced wages.
"In general, I think it's good for FedEx. I think it's overall positive for Memphis. I say that recognizing that what's good for FedEx is good for Memphis," he said.
Gnuschke said he thinks many former employees will pick up new careers.
"FedEx has a long history of hiring the best employees they can possibly hire," he said. "These people are highly motivated. They can start other businesses. I don't think they're going to be lost. I think they're going to be a positive addition to both this labor market and to the national labor market."
Analysts expressed satisfaction with the buyout results.
Raymond James financial services analysts said in a research note that the buyout program's implementation appeared slightly behind schedule, which could also delay the cost savings.
Said Avondale Partners LLC analyst Donald Broughton: "They had not given an exact number, but I'm not surprised by it, either. They, just in talking to individuals who I knew were taking advantage of it, gave me the idea that it was going to be fairly sizable number. I don't know if you've looked at the terms of the package, but it's a very generous package."
Too generous, said Satish Jindel, president of SJ Consulting, a Pittsburgh-area transportation consultant.
Jindel expects the company to meet its profit improvement goal, but he suggested it has the potential to ramp up profits even higher by taking more aggressive action on personnel.
"I think, generally, some of the people are wondering why maintaining the morale of those who are leaving is more important than the morale of those who are staying," Jindel said.
Jindel noted the number of buyouts was relatively small compared to predictions. "What that tells you is they still have a lot of people who are not needed to support the business."
Involuntary reductions, like the company's 2009 response to the Great Recession, would be one solution, but, "I don't expect that," Jindel said.
Referring to FedEx's corporate philosophy of "People, Service, Profit," he said, "What is the first P? It's people, not profit. It's been like that since Fred Smith started the company, and that's not going to change."
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