FedEx Corporation (FDX) Presents at Citi 2023 Global Industrial Tech and Mobility Conference (Transcript)

FedEx Corporation (NYSE:FDX) Citi 2023 Global Industrial Tech and Mobility Conference February 21, 2023 12:10 PM ET

Company Participants

Raj Subramaniam - President and CEO

Mike Lenz - CFO

Conference Call Participants

Chris Wetherbee - Citi

Chris Wetherbee

All right. We're going to go ahead and get started with our keynote address for our first day of the conference. It's been a great start so far, lots of interesting conversations so far with transportation executives, and this is definitely going to be another one of those.

We are extraordinarily pleased to have FedEx joining us for the keynote address. Joining us from the company is President and CEO, Raj Subramaniam. We also have the Chief Financial Officer, Mike Lenz, who will be up here for Q&A.

The way that we're going to run this is Raj is going to run through some prepared remarks and some slides. We'll leave lots of time for -- there will be an opportunity for audience participation. There's going to be mics running around, so make sure you wait for a mic just to make sure it all gets on to the webcast.

So again, thanks everybody for joining us. Raj, I'm going to bring you up to the stage. Thank you very much.

Raj Subramaniam

Good afternoon, everybody. It's great to see you all. Happy to [indiscernible] for me, so we're been a better mood. And this is the first one of these I have done in my new role, so thank you for forcing us here today for this [indiscernible].

It's a good opportunity for us to provide an update since we did our second quarter update in December. And since that time, we remained steadfast in our focus [indiscernible] commitment to our customer. And we are pleased with the progress that we are making on our [indiscernible] today in the way for tomorrow's strategy that's supported by our DRIVE program.

Most importantly, [indiscernible] incredible sense of urgency to execute. I will cover 3 topics. First, we executed a successful peak season. We achieved pre-pandemic service levels at Ground and saw significant improvements in service levels at Express as we remained laser-focused on operational execution and driving continued improvements in customer experience.

Second, as we announced in December, we accelerated our fiscal year '23 cost actions and increased our target for the year. We continue to make strong progress on this front.

And third, we are executing with urgency on DRIVE, which is our transformational program enabling $4 billion of savings across the enterprise by fiscal year 2025. This is a in addition to the $1 billion program cost savings in fiscal year '23.

So first, let me discuss our performance through the busy peak season, where we achieved pre-pandemic service levels at FedEx Ground. The Ground team delivered 31% of the peak total volume early and improved time in transit by 2 days compared to the prior year. One of the points I want to make here is that our service standards were the best in the industry for peak.

At FedEx Express, service levels improved significantly over fiscal '22 peak, approaching pre-pandemic service levels. Express service levels improved by more than 4 percentage points for U.S. domestic overnight, express and global compared to fiscal 2022.

[indiscernible] the Express team delivered 13.2 million packages [indiscernible]. Team FedEx also delivered service improvements as we also managed [indiscernible] to reduce flight hours by 12% during our peak season. These improvements are a testament to our team's development to delivering excellent service in the midst of our global transformation.

Now turning to our cost reduction progress for fiscal year '23. We continue to build momentum as we move through the quarter, and we're making progress across Express, Ground and services to reduce our cost base versus our fiscal year 2022. This is critical to ensure that we have the right cost to serve to profitably manage in this dynamic market.

Earlier this month, we announced an organizational changes that streamline our reporting structure and reduced the size of our officer and director team by more than 10%. This also includes consolidating certain teams and functions. Decisions like these are not easy, but they are necessary to support our transformation into a more efficient and nimble organization. To that end, we will continue to responsibly manage headcount to align our teams with the network changes underway.

Now let me provide a few highlights on DRIVE, our transformation program supporting long-term profitability and delivering on our FY '25 financial targets. As discussed on our Q2 earnings call, we are targeting 14 domains or focus areas for efficiency improvements. Each is led by an executive sponsor and aligned with company goals. We are measuring success against each Domain's FY '25 permanent cost savings target in addition to using operational metrics to track financial and service progress. Our focus within DRIVE is across 3 main areas: FedEx Express, FedEx Ground and shared and allocated overhead expenses.

Today, I will focus on FedEx Express. We do plan to provide more detail on DRIVE, including all focus areas, during our DRIVE update on April 5 in New York City.

FedEx Express team is focused on creating a network that's more [indiscernible]

Unidentified Company Representative

How about that one?

[Technical Difficulty]

Raj Subramaniam

[Technical Difficulty] at express. The impact of these actions take more time at express as it is our largest operating company and requires more time to drive structural transformation. We are moving quickly to drive structural improvements in the business, and we remain committed to our fiscal year '23 outlook and cost-savings targets.

Longer term, when these changes are implemented, there is significant value potential from our Express business. In addition, we are making major strides in all parts of our portfolio, including our FedEx Ground, FedEx Freight. And with Network 2.0, we will create a more optimized network and eliminate redundancy. Underpinning all this is our technology platform, which will be an enabler, a differentiator and a value creator. We will share more details on all this on April 5.

Finally, shifting to our capital priorities. Our commitment to efficient and responsible allocation of capital has not wavered. We're lowering our capital intensity and increasing our return on invested capital. We are entering an era of lower capital intensity at FedEx. We were at 7.2% of revenue last year, down from historical levels of 8%. By fiscal '25, our goal is 6.5% or lower.

As mentioned in December, we reduced our fiscal year '23 capital spend forecast by an incremental $400 million to $5.9 billion, representing an approximately $900 million reduction from initial plans for the year to account for the lower-demand environment. We are prudently differing and lowering the pace of projects, growing our capacity utilization, moderating aircraft fleet investment to drive ROIC improvements.

And at the end of calendar year 2022, we successfully completed a $1.5 billion accelerated share repurchase program. Our commitment to creating value for our stockholders remains, and we are still targeting $2.7 billion of capital return in fiscal year 2023.

In closing, given the progress underway highlighted today, we are affirming our fiscal 2023 outlook that we initiated in December.

With that, let me turn it back to you, Chris, so Mike and I can take a few questions.

Question-and-Answer Session

Q - Chris Wetherbee

Great. Thank you very much, Raj. Really appreciate the details in the presentation. Maybe just so I could keep track, because you're running through some interesting step up there on the Express slide in the near term. Just want to make sure that I have some of those numbers down there. So I think you talked about $400 million. Was that from the flight capacity reduction for this fiscal year?

Raj Subramaniam

Yes.

Chris Wetherbee

Okay. And the $300 million was for the new network design.

Raj Subramaniam

Well, we are -- yes. That's -- we are fundamentally changing our U.S. Ground I mean, FedEx Ground distribution for the U.S. and express network because the -- as the volumes have softened from the pre-pandemic -- from the pandemic levels, that we have an opportunity to streamline. That is underway as we speak. So we will see the benefits of that in full in the next fiscal year, on its full extent.

Chris Wetherbee

And the remaining of the $1 billion is largely coming out of Europe. Is that the right way to think about it?

Raj Subramaniam

Europe is a big part of the opportunity, why 1/3 of it, so yes. And then -- but as we rationalize our express and the air network and ground network, that could be additional opportunity.

Chris Wetherbee

It's part of it. Okay. Okay. Got it. All right. That's very helpful. I appreciate that incremental color.

So I think maybe just thinking big picture about the business and what investors perceive is either happening or not happening, I was hoping that maybe you could give us some color about sort of the urgency that you see and sort of the seriousness of which you're taking some of these cost actions.

So obviously, the events of earlier this fiscal year were challenging from an earnings perspective, it seems like there's the need for change. Can you give us some help or some confidence about what's going on internally and how sort of focused you are on this?

Raj Subramaniam

Well, I think there are a couple of things that's very important in this regard, is we have spent 50 years of this company building networks. And we were coming from a disadvantaged position in terms of market position. And we have essentially closed the gap in many ways.

So those are -- this year, fiscal '23 was a pivot point in the history of FedEx, anyway. The macro environment that was -- has been challenged, as you can see now across the board. That basically gives us an additional impetus and urgency to act. So that's why, starting in September, we were fully on the mode of making sure that that's -- let's not -- let's use this opportunity to come out of it stronger than we went in and make sure we have the right cost base to go forward.

So that's a deep sense of urgency within this company. It is very different than what we have done in the past. These -- we're talking about structural cost reductions, not just volume-driven costs. And the teams are organized around that in a way that we haven't done before, and there's -- we're making quite rapid progress and quite thrilled with how -- what the team has done literally in the last 3, 4 months.

Chris Wetherbee

Okay. And when you look at the cost savings, and I think the way that you've laid it out is $1 billion in fiscal '23; $2 billion per year, fiscal '24 and '25. And I think Network 2.0 comes after that. So as you think about sort of building that up from the ground up, that would close a considerable amount of the margin gap between yourself and UPS.

So can you tell -- walk us through a little bit of how you constructed those expense savings? I think we're trying to get an idea of how much top-down versus bottom-up sort of work you've done as you've begun to think about these numbers.

Raj Subramaniam

Yes. Well, I'm going to start, and then I'm going to have Mike dive into the numbers in a minute here. But the way we -- to your point, was how we were constructed. So at a high level, our strategy is threefold. We're going to be achieving our financial goals of operating margin, our ROIC goals, capital efficiency and returns to shareholders

[Technical Difficulty] as we reduce our structural costs over time here. At some point, the macro environment will be supportive, but we're not counting on it. We stay focused on the things we can control. And there's good leverage in the business that we have.

I don't know, Mike, you want to add to this.

Mike Lenz

Yes. To connect some of the dots further for you, Chris, to the question. So as Raj said, we went through the first quarter, significant shift in the environment and relative to where we were coming into the year. So we aggressively launched a number of initiatives to reduce cost relative to what we were planning for the year. We're at $3.7 billion and counting relative to where we started the year.

Now of that, we identified $1 billion as permanent, and that's largely Express, which reflects it has been a very unique and different operating environment for the last 2-plus years of the pandemic. So under any sort of normalized demand scenario that you might consider, that, that level of cost, principally airlift and that, we wouldn't see that coming back. So that was just reflective of the circumstances at hand.

But just to emphasize Raj's point about permanent structural cost reductions, the $4 billion is where that is targeted. And so that is at play across any normalized range of demand scenarios that you could envision.

So operate the company more efficiently across the board, and that's what the $4 billion is. And then beyond that, the $2 billion that we identify for Network 2.0 is, as we continue to see great traction in the shift that is really only about 1.5 years ago from the operate independently paradigm, which served us well for many years in building the capabilities that Raj highlighted we have today, to operate collaboratively, that's where that comes together, and we'll get traction on that. And we've positioned that as beyond '25, but we are looking to bring in elements of that sooner rather than later as we have learnings along the way.

Chris Wetherbee

So structurally, you're talking about leveraging more collaboration between your segments. That kind of gets to that Network 2.0 point that you were just making. Will it ever make sense to realign the business a little bit differently? Maybe you focus on a geography, weighting geographic versus maybe service line? Is that an easier way to potentially get costs out?

Raj Subramaniam

Well, Chris, it's an excellent question. Firstly, I want to -- let me give a little bit of context about what -- where and why we are, and then what's changing.

So first, we're in a B2B environment, and the market was growing. At the turn of the century, we had about 10% market share in the ground parcel business. And our competition at 80%. 70 points of market share gap. Well, we metronomically gained share every quarter for 20 years. And that's because of the network that we built and we serve this purpose on B2B, where one was the time-definite service, Express; the other one is day-definite service, Ground.

But what's changed since 2016 is the emergence of e-commerce. And 70% of the stops are now residential packages where both networks are now serving day-definite, and that brings us opportunity to optimize. And so we will look -- we are looking now, obviously, to optimize those networks, especially on residential delivery, rural and deferred. And we have created several programs in certain geographies that we're learning a lot in this process.

So everything is on the table. We will consider all possibilities as we design the future. I'm not going to tell you exactly today. But we are aiming to make sure that we serve our customers the best possible way at the most efficient cost structure that we have.

Chris Wetherbee

And so when you think about some of the pieces where maybe there are opportunities. I think -- and if we go back to the profit improvement plan that was announced in Express several years ago, headcount was a significant piece of that program. And I think presumably, there's an opportunity on heads here.

While we don't always like to talk about reductions in force, but how do you think about staffing levels for the business going forward? Are you appropriately staffed? Or how much opportunity is there to gain operating leverage on the existing force or maybe being a bit more streamlined?

Raj Subramaniam

So we're not publicly releasing numbers on what that -- those are how you can think about it. But the idea here, of course, is that we want to be -- make sure that we have the right amount of staffing for the volume that we have. And we have been very diligent about that. You saw announcements earlier this month. We saw the number on my slide, 12,000 versus where we were in June.

We have created a labor insights platform. We have learned this lesson in a hard way because, especially during the pandemic, where the availability of labor was difficult. So we have created this labor insights platform that actually is a very detailed way, at a geography and service level, to figure out what we need when and ahead of time. And we are managing much more diligently, and you will see that already happening across all our networks and especially in FedEx Ground.

And so it's something that's very important to us to make sure we have the right amount of staffing and the right amount of sectoral cost, and we work hard at it.

Chris Wetherbee

Okay. So Express has historically been the segment that added a lot of volatility to this business. We saw that in fiscal '20, we saw it again here in fiscal 2023. What are you doing through this process to reduce that volatility in that segment?

Raj Subramaniam

Yes. No, it's an excellent question, excellent point. I think the Express company is the one that's got the highest amount of fixed cost structure. And typically, the volatility is a supply chain bullwhip effect.

And they've -- historically, to be honest with you, they have moderated, except this time. The pandemic, this is one of the largest bullwhip effects we have seen in recent memory. And so we -- volumes increasing significantly to now down double digits, as we showed you in the second quarter. So yes, we're doing our level best to, first of all, cut out flight hours to adjust to the volume conditions. That's been an ongoing situation here. And I think it's the slowest, just at Express obviously, as you said.

But I think going forward, structurally, what we're thinking about is quite different. I think what we see going forward is that there is a -- as we look at the demand profile, there's going to be an increasing demand for deferred traffic. And so when we structure our network, we will focus on agility, flexibility and technology-dependent to be able to move only those priority traffic on purple airplanes. And then give us the ability to flex, using the alternate lift on -- to move some of the slower traffic. And then using technology to optimize and maximize it.

We're trying to build a lot more agility and flexibility to optimize that network. It's not easy. I'm not going to sit there [and say it's easy]. But that's a journey we are going on and it's a huge leverage for FedEx Express as we go forward.

Mike Lenz

Yes. The 2 principles that, as we're going against all the initiatives and opportunities is, one, to the extent that you can realize this, make the cost structure more variable at Express. Recognizing that to have a worldwide network, 220 countries priority service, premium service, that has a fixed component to that. But there are opportunities, like flexing with, as Raj highlighted, the partner lift in that. But also shorten that horizon of which, call it, the planning horizon or the reaction horizon, whatever you want to call it. And that's where we kind of can get at, all right, be able to react and adapt faster to changed circumstances.

So try and heighten the amount that's variable and reduce that horizon there where you adjust. And as you've seen, if you look at the different aspects of the portfolio, freight, the decline there came along a little later. But in that business, we're adjusted very rapidly. Ground, we're seeing great traction relative to the disruptions and inefficiencies we had last year. So we're fully focused on driving that at Express as well.

Raj Subramaniam

Can I add one other point on Express, please, because that's also important.

What this also does, when we turn the clock a little bit and for deferred traffic, the ability to build -- for us to then build denser positions on our existing airplane itself. So then the utilization of our aircraft also goes up. So that's an automatic -- I was -- I just came back from Europe over the last couple of weeks, and we went to visit all these facilities that we have right now in place. And the ability for us to build up these positions and have higher -- denser positions on our airplanes is also an opportunity to improve efficiency and profitability.

Chris Wetherbee

What's prevented those actions from taking hold before now? I recall back with the profit improvement plan and post that period, there was discussion of using more third-party aircraft. So what's different about this time around versus what we've seen and heard before that would suggest that this plan has the potential to be more successful than maybe it had been before?

Raj Subramaniam

Yes. I think -- well, a couple of things. Firstly, during the pandemic, literally, there was no deferred traffic to speak of. In fact, everything was IP. And literally, we haven't even opened IP, yes, it's coming in international economy service, yes, so to any great degree. So yes, I think the traffic profile has changed significantly during the pandemic.

The second is, I think the ability for us to use our technology platforms to be able to optimize across these networks in a way differently than we have done before. And thirdly, now we have road network in Europe that we didn't have before. And so you're able to interface one to the other in a very different way.

So I think part of its ambition. Part of it is the weather profile is changing and part of this technology, and then the portfolio that we have around the world.

Chris Wetherbee

I have one more question, then I'll open it up to the audience. I have plenty more questions, but in case the audience wants to get involved here as well.

So I guess I wanted to understand a little bit more the new Express U.S. network design. So when you talk about that, can you give us a little bit more color on what that is specifically?

Raj Subramaniam

Well, I think starting points on the ground network, and I'll come back to air in a second with U.S. domestic. It's the same principle that, if you look at our network, and it's been designed primarily with the overnight priority, the premium express traffic. The traffic profile is shifting in the United States the same way it's shifting globally. So we have the opportunity to now reorient that system to figure out what is a more efficient way to move this traffic.

The second thing is, during the pandemic, we had all this volume, and we had all these second wave of courier deliveries and so on. We're collapsing all that now. And so there is a significant efficiency in our ground delivery system as well. That's happening as we speak. Literally this month, this -- February? Yes. This month is when we started that. And so we will see that benefit roll out -- roll on into the fourth quarter and beyond.

Chris Wetherbee

Okay. I want to see if there's anybody who has a question in the audience. Just raise your hand, we'll get a mic over to you if you do. Looks like we have one over here. Hang on 1 second. We'll get a mic over to you. If you could just keep your hand up so he knows where he's going. There you go.

I can't hear you. I can't hear you.

Unidentified Analyst

[Technical Difficulty] [utilization] rates are going to improve, why doesn't the CapEx number come down more? And how does the nature of your CapEx shift over time?

Raj Subramaniam

Good. So let me address it high level, and then Mike may want to jump in here.

I think we are -- our capital intense -- clearly, our goal is to reduce our capital intensity. We are -- as I said earlier, we were at 8%, and we are targeting 6.5% of revenue. We have clear goals to improve our return on invested capital. We are in the last phase of our aircraft modernization program, and that will give us -- free us CapEx going forward.

The profile of CapEx will shift from those kind of assets into more of technology and building the tech platforms to help us and enable optimization of operations, but also creating value for the end customer. But that -- so the profile will shift in that direction.

But I think the next immediate thing over the next 12 months is that we will see that the airline CapEx comes down quite significantly. And essentially, we will then improve our ROIC and our CapEx efficiency.

Mike?

Mike Lenz

Yes. So you gave the context of 8% has been our historical CapEx-to-revenue. And that reflected investment in expansion as well as some renewal initiatives principally focused at Express. Well, as we highlighted, we're past that expansion phase, not initiating new facility projects. At Ground, we have a few that were already in flight that will finish out here. So you're modulating down on that.

On the renewal front, we do not have any firm aircraft orders beyond FY '25. So there's a line of sight there that says going lower than that beyond FY '25. The other key renewal elements are the 2 major air hubs for Express of Indianapolis and Memphis where we are modernizing and investing there. And in the context of the labor environment, reliability, efficiency and that's -- there's certainty around the return on that investment. But those ramp out in the next few years as well.

So that's the tangible aspects of, okay, how do you get there from where you are today?

Chris Wetherbee

While we're waiting to see if anybody has any other questions, I do want to ask about what we can expect to hear at the DRIVE Day? So you have $2 billion in each of the next 2 fiscal years. Is it reasonable for us to assume that you will break down that $2 billion into sort of smaller buckets that are identified directly to specific cost savings so we can kind of get in a sense and sort of probability-weight the likelihood of success on those? I mean, what level of detail are we going to get?

Mike Lenz

One clarification. It's $4 billion that -- we will have...

Chris Wetherbee

In each year, yes.

Mike Lenz

We will have $4 billion achieved by FY '25. We parsed it as the $2 billion and $2 billion, it's barely $4 billion.

Raj Subramaniam

So we call it out right there. But yes. what we have, again, unlike any time in the past really is a level of -- a lot of detail about some of the initiatives that we're driving towards these structural cost savings.

So yes, you can expect to hear specific actions that progresses forward on our structural cost initiatives, on our customer experience initiatives. And you can expect to hear some of the metrics that we will be tracking at a more detailed level for us to make sure we're ensuring progress.

And so at the end of the day, more detail is the right way to think about it. We'll have more color on all the things that we'll be working on. You'll get a very granular of feel about what we're doing and then what we're measuring as we make progress.

I mean, I wish I could show you all the details we have, but we'll have to summarize it at some level. But the point here is that we are -- we got these several hundred initiatives, all with line of sight, reversing the hockey stick in terms of getting the benefits earlier than later, very different way of working than we've done in the past.

Mike Lenz

And also besides the initiatives themselves, it's about the way of working and how we prosecute and go against these initiatives to ensure accountability, clarity of outcomes, the metrics Raj mentioned. So really a lot of rigor behind all that.

Raj Subramaniam

That's right.

Chris Wetherbee

Great. A question over here. [Vargas]?

Unidentified Analyst

The $4 billion from DRIVE and the $1 billion of structural cost savings that you've talked about, like in EPS terms, those are very big numbers relative to this year's earnings. Are there other offsets that we should think about over the next 3 years? Like assuming macro is where it is today. But anything -- like just adding that up gives you massive earnings over the next 3 years. But curious...

Mike Lenz

Well, look, there's always any number of moving parts within the operating environment and the cost structure in that. So I think it's fair to say we all understand and appreciate that you see all the labor market reports on that, there's going to be labor cost increases going forward. So that's just an element of ongoing.

And that's why we're being very specific and deliberate about ensuring that we're realizing direct structural reductions and that you can measure that against saying, "Oh. Well, if you had this amount of volume and it cost us as much to fly that a year ago, we're targeting to be able to fly that same amount of volume for that much less."

So it's really getting at the underlying aspect of that in order to have, like I said, that flows through regardless of the demand environment that you would be operating in.

Chris Wetherbee

So I want to jump in and ask a question about Ground because you did touch on improvements that you're making there. I think we spent a lot of time thinking about Express and the opportunities there. Should we be thinking about Ground improvement in the context of historical margins? Or how would you suggest we think about what you have the potential to do with the Ground business?

Raj Subramaniam

Well, I think we've -- on the ground side of the equation, again, we've been through this huge demand spike, and now the demand settling down to what the market would bear right now, especially with the e-commerce reset.

But the work that we've done in FedEx Ground under John Smith's leadership is just spectacular. And so we are moving on a lot of different areas. First of all, the revenue quality work that our commercial team has done is really, really well done. We have -- we're leading the market in terms of revenue quality.

The -- but there's a lot of blocking and tackling kind of things that is happening on, whether it's line haul, whether it's dock productivity, whether it's safety, whether -- and again, we'll highlight these things in more detail when we see you in April, on April 5. And they're already starting to bear fruit.

And the CapEx, as Mike said earlier, we are basically finishing up our current projects, but that's kind of it. And so there is -- we believe that there's upside opportunity. Now think what's different today versus what it was 5 years ago with significantly more residential stops. So that profile is different. However, we are best placed to provide the right service at the right cost structure and improve our margins as we go forward. I'm really confident of what we're doing in Ground.

Mike Lenz

Yes. And just to reinforce the -- both the progress and the opportunity there. Last quarter, Ground volumes were down. I think the number is 8%. The margins were up roughly 150 basis points. So that's while we also had all of this incremental capacity coming online in terms of, you've got the infrastructure costs associated with that. So the focus on productivity, efficiency, utilizing that network, leveraging those assets going forward, absolutely confident in the trajectory we have there and continue to see improvement going forward.

Chris Wetherbee

We have a question here.

Unidentified Analyst

You mentioned earlier, focus on profitable growth and efficiencies. What does it mean in terms of pricing dynamics, customer segmentations? And if you can sort of overlay sort of the industry structure, Amazon, how it fits into this picture.

Raj Subramaniam

Yes. So that's multiple sets of issues there. So let me take it one at a time. On the -- first of all, on the revenue quality, let me just call it that, we are -- we have had best-in-class practices on revenue quality for a long time, and we just continue to get better. So we can just look at the results that we have seen from over the last, I don't know, pick any period of time, you'll see that we have an advantage in those regards. And we will continue to make sure that we are the best tools, best alignment, best collaboration and make the right decisions to make that happen.

From a market perspective, we are focused on getting the most profitable customer segments into us, so that's whether it's small, medium customers, whether it's health care, whether it is high-value verticals and even profitably growing some of the e-commerce segments, we are very, very focused on that.

And I think we take -- some of the differences versus sort of competition would be, they go after platforms. We want to go out for the individual customers. So we want a relationship with that individual customer versus platform, directly. So we're working through those different angles, right?

As far as Amazon is concerned, they -- we've -- really, our market space that we are -- that's in our sphere is FedEx, UPS, DHL. And in the United States, we have the Post Office for the parcel. Amazon is delivering their products for the most part. And the fact that they have -- they don't have fulfillment centers and DSP model allows us -- them to do that. But trying to compete directly in our sphere is going to be very, very difficult.

Chris Wetherbee

I just wanted to ask you a detail question because it was on my list of things that I was interested in, and it relates to the officer and directors headcount reduction. Have you -- or are you okay putting a number around what that means from a cost perspective?

Raj Subramaniam

No, we have not released that number, Chris. So we'll -- all I'll say is that we will manage our headcounts, and we're very efficient. And that's all we would say at this point.

Chris Wetherbee

Okay. We have another question over here.

Unidentified Analyst

Two unrelated questions. The first relates to the use of belly space for Express. How have you used it in the past? How are you likely to use it in the future?

And then the second question, the challengers in Europe, can you talk a little bit about that and how you'll address it?

Raj Subramaniam

Sure. So the first question was what I was referring to when I spoke earlier, especially with the profile of the traffic, there is more increasing one of deferred traffic that allows us the ability to then use either the FedEx system in a different way, in a different timing, so to speak; or use the commercial capacity and belly capacity in effort to move to deferred traffic.

So as that traffic -- percentage of that traffic and the demand profile changes, we can use that. We have used -- obviously, we used that in the past. But I think as we look forward, we will use, again, very sophisticated tools in terms of optimizing the flows so that we are able to meet demand and service for our customers. So yes, that's going to be an increasing thing.

Again, the whole point here is to improve the agility and flexibility of the Express network so that we are able to flex better going forward, which is -- obviously, that's the one we're struggling with right now, where the fixed cost structure of Express is very high.

The other question was on Europe. Yes, Europe is a big area of opportunity for us. Again, the -- we've been through a very difficult integration time frame here. And -- but what we have now is a physically integrated network with the ability to move parcels and pallets in the European theater that's unlike anybody -- what anybody else has got.

I was just there, spent a lot of time visiting our facilities. We had -- in the middle of all this, we had an unfortunate roof collapse in our largest ground facility in Amsterdam. Well, that's now fixed, it's back online. And we also opened up a new Ground facility in Novara in Italy. So it's starting to come back. The service levels in domestics are now very competitive and market-beating. Intra-European service levels are getting better every single day. So it's coming back.

And the macro will be what the macro is, we'll deal with that. But I think we are now in a position to -- we -- one more thing. We are also rationalizing our flying within Europe to, again, adjust to the demand structure.

So with all those things, with a more efficient air operations, with the ability now to actually move things on the ground, with the ability to move parcels and freight. And then -- and now we are also reducing the -- we announced it a year ago, about the structural cost reduction in Europe, which now we will see in FY '24, the full benefit of that. All those things are starting to come into play. Europe is a big part of the future for Express. There's no question about it.

Chris Wetherbee

Got it. Well, we have unfortunately run out of time. I think we could probably stay here all afternoon and running through some questions. But Raj and Mike, I greatly appreciate you attending. It's not lost on me that it's been a long time since the FedEx CEO has been at one of these conferences. So thank you so much for joining us. I really appreciate it.

Raj Subramaniam

Thank you. Thanks. Thank you for hosting us, and it's great to be here. Thank you very much.

Chris Wetherbee

Thank you.

Raj Subramaniam

Thank you. Thank you. Thank you very much.