Parcel experts address FedEx Network 2.0 plans

With its long planned-out focus on consolidating its operating companies into a single organization, the heavy lifting is now under way for Memphis-based global freight transportation and logistics services provider FedEx.

As previously reported by LM, FedEx has described this consolidation as a phased transition that will subsequently bring nearly all of its operating companies—FedEx Express, FedEx Ground, FedEx Services, as well as other FedEx operating companies—into Federal Express Corporation, and transition into what it called a single company operating a unified, fully integrated air-ground network. And it also noted that its less-than-truckload subsidiary, FedEx Freight, will remain as a standalone operation within Federal Express Corporation.  

What’s more, FedEx said that this consolidation will play a key role in facilitating the company’s DRIVE initiative, which includes Network 2.0, a years-long effort focusing on the operational efficiency, in which the company picks up, transports, and delivers packages in the U.S. and Canada. Another benefit of the consolidation, it cited, is to “bring distinct focus on the air network and international volume, as well as a more holistic approach to operations on the ground utilizing both FedEx employees and contracted service providers.”

“We run our business to better align with market demand and operate more efficiently,” explained FedEx CEO Raj Subramanian at an investor conference earlier this year. “And this is the reason why in April 2023, just over a year ago, we announced a multiyear strategy to unify our businesses and create the world's most flexible and efficient and intelligent network. And one important pillar of that transformation is what we call Network 2.0. It is the network of the future, where we are combining our Express and Ground networks in U.S. and Canada. And the best way to think of Network 2.0 is one truck, one label. We’ve spent the past several years updating our technology and facilities to prepare, and we are now in the execution phase. We have already implemented Network 2.0 in over 50 locations with dozens more to follow this calendar year. And as we have stated previously, we're targeting a $2 billion in cost savings in FY '27.”

Industry stakeholders offered up their respective takes on this initiative to LM, providing insights from strategic, operational, and financial perspectives.

Matt Bohn, Senior Consultant for San Diego-based Shipware, an audit and parcel consulting services company, as well as a former FedEx revenue management advisor, observed that perhaps the biggest immediate noticeable change from a customer perspective will be the move from separate ground and express pickups to a single pickup. 

“UPS has held a competitive advantage with its unified model from this perspective, so shippers who strongly prefer a single pickup for both ground and express will have another carrier that is viable,” he said. This is especially important to some SMB shippers, so the Network 2.0 could bring additional opportunities to FedEx.”

John Haber, chief strategy officer for transportation and logistics services provider Transportation Insight, said that this transition makes sense for FedEx, especially given the current parcel environment, in which top-line revenue growth has been challenging, after the Covid boom. And that starts with taking out costs, he noted.

And he added that operating in an integrated network will also allow FedEx to more easily pivot resources during times of demand or weather-related issues, which should result in more on-time deliveries—also enable additional focus on growing business segments like e-commerce.

“FedEx needs to take costs out,” he said. “At the same time, it also has—just from an overall efficiency and combined network standpoint—been behind UPS certainly for a long time. UPS, by comparison has benefitted from having an integrated network, with same driver, same truck picking up ground, air, and international packages. How this plays out in the long run on the labor side is something that we are tracking closely. But I think it makes sense for FedEx, and I think they are making progress. They have consolidated 50 or 60 facilities by now. it's actually a good sign for them to be doing the consolidation when the volumes are not at capacity, because you have a little more room to do that.”

Addressing FedEx 2.0 from a pricing perspective, Shipware’s Bohn said that FedEx is estimating a 2025 cost savings of $4 billion with $2 billion in related expenses for the network upgrades. 

Theoretically, Bohn said this could lead to a lower general rate increase (GRI) in 2025. 

“Prior to COVID, FedEx GRI's were typically 3.9%-4.9%. In 2022 and 2024, GRI was 5.9% and in 2023 it was 6.9%,” he said. “With lower costs and increased efficiency, FedEx could be positioned to move back to lower GRI's of the past.  At a minimum, it should allow FedEx to be more aggressive when negotiating custom pricing to compete with UPS. 

Additionally, FedEx's current operating company segmentation can present its own internal issues when pricing an account.  Each operating company had its own set of goals, revenue targets, etc. so when an account is presented to each group for review, there can exist instances where one operating company might be very interested and willing to compete on price, while the other might be pressured to approve pricing with a negative margin to win the account.  If that opco is unwilling to move, the entirety of the account could be lost.  With Network 2.0, FedEx should be able to price accounts based on their overall profitability more so than they were able to in the past.”

When one of the world’s largest logistics players makes a move like this, industry stakeholders certainly take notice. This initiative will require a watchful eye, to be sure, especially at a time when demand remains down and the economy continues to present mixed signals.