Why FedEx's 1,700 Layoffs are a Good Sign

There's much worry over the news that economic-belwether company FedEx (FDX) plans to lay off 1,700 workers despite posting strong earnings. But these layoffs don't have much to do with the economy, and are a smart move for FedEx to make now.

Here's why:

Consolidation. While the juxtaposition of the earnings announcement and the layoff announcement gave the impression that FedEx is somehow down on the economic outlook -- and even a heartless Scrooge to its work force -- a close reading of their release shows the two pieces of news aren't all that related.

The layoffs are happening because FedEx has finally figured out what to do with a 2006 acquisition, Watkins Motor Lines. Watkins was a less-than-truckload shipper. FedEx has an LTL business it's integrated with Watkins' facilities.

FedEx had taken some time to size up that business, and figure out how to use it with fewer people. That's what companies are supposed to do after they make acquisitions. While people are moaning about the layoffs happening now, the real question to ask is why they didn't happen a year or two back -- seems like this integration took an awful long time to pull together.

Cutting overhead. The part of the cutback downplayed in most reportage on FedEx's announcement is the best part -- it's closing 100 transfer stations and warehouses as part of the layoff move. Wow, that's a lot of overhead cut loose! Whether they lease or own these facilities, either way they're improving their fixed-expense line, and that should pay off for FedEx long-term.

Better flexibility. This isn't a situation where FedEx is cutting facilities and that will make it more inconvenient for customers. Instead, its combining its own FedEx National LTL and FedEx Freight operations to work out of the same warehouses. To quote the company, the move "will provide customers a choice of priority or economy less-than-truckload (LTL) freight services across all length of haul from one integrated company." Which sounds like a big win for customers, and it's expected to substantially improve FedEx Freight's profitability. Think we call that a win-win.

While the layoffs are unfortunate, they're needed. They're also not enormous -- less than one percent of FedEx's global work force. This isn't some terrifying harbinger of double-dip recession or a return to the scary, five-digit, big-corporate layoffs we saw in '08. It's merely a sign that FedEx is optimizing the business to serve customers better and be more profitable.

Photo via Flickr user Dano