FedEx announced plans to spin off its FedEx Freight division into an independent publicly listed company in an effort to simplify its business operations. But will this move allow FedEx to better address various challenges, including declining parcel demand, recapturing lost business, and stepping up competition to return to strong growth?

1. Spinning off the Freight Division into an Independent Public Company

Global logistics giant FedEx revealed in its fiscal year 2025 Q2 earnings report that after reviewing the role of its FedEx Freight subsidiary within its portfolio, the company’s board has decided to fully spin off the division into a new publicly traded entity.

After the spin-off, FedEx Freight will become the largest player in the industry, handling freight from multiple clients using single trucks. FedEx expects to complete the separation within the next 18 months through a so-called FedEx shareholder tax-efficient strategy.

FedEx Freight was founded in 2001 when FedEx acquired and merged assets from American Freightways, Viking Freight, and Watkins Motor Lines, becoming the largest carrier in the transportation sector.

According to SJ Consulting, FedEx Freight’s revenue in 2022 was $10.18 billion, an 18.5% increase from the previous year. However, in 2023, revenue dropped by 10.6% to $9.01 billion. Bloomberg Intelligence estimates the division’s enterprise value to exceed $30 billion.

In fiscal year 2024, FedEx Freight’s revenue was $9.4 billion. Raj Subramaniam, CEO of FedEx, stated in a conference call with analysts that the move will allow both companies to “benefit from enhanced focus and competitiveness.” The separation will enable FedEx to concentrate on its core business issues, while FedEx Freight can capitalize on the growing valuation of independent truck companies to enhance FedEx’s stock performance.

FedEx emphasized several strategic reasons for the spin-off:

Enhanced operational focus and strategic execution: By allowing deeper operational focus, accountability, and flexibility, both companies can better meet customer demands and capture profitable growth opportunities.

Attractive investment profile: Independent publicly traded stocks with different shareholder bases will enhance the value proposition for both companies.

Strong balance sheets and capital allocation options: Each company will have ample capital to invest in profitable growth and return capital to shareholders.

Maintaining commercial, operational, and technological synergies: Existing FedEx and FedEx Freight relationships will continue through business agreements to optimize operational continuity and service levels. Ongoing cooperation aims to speed up operations, improve coverage, and reduce service costs, thereby enhancing both companies' value propositions.

Shared brand values: The FedEx brand, symbolizing speed, reliability, and trust, will extend to both companies. FedEx Freight will continue to operate under the FedEx Freight name, and both entities will maintain business agreements and continue collaborating.

FedEx had already signaled in June that it was evaluating its freight business, sparking market speculation that the division might be sold or spun off. According to Scooter Sayers, head of LTL Consulting, the separation is good news for FedEx Freight, as it allows the division to pursue its path without the constraints of the parent company. While FedEx Freight may be the largest LTL (less-than-truckload) carrier in the U.S., it is still a relatively small entity compared to the express division.

However, as an independent entity, FedEx Freight will need to establish its own sales team, administrative functions (such as HR), and executive management, leading to significant increases in operational costs. Previously, it benefited from shared cost structures under FedEx, but as an independent company, its operating cost ratio (OR) may rise by 2-3 percentage points.

As of Thursday (Dec 19), FedEx stock has risen just 9% this year, far below the S&P 500’s 23% increase. Following the announcement, the stock surged by as much as 13% in after-hours trading, as investors were optimistic about the potential of the newly independent company, which could rival freight companies like Old Dominion Freight Line and XPO Inc. Analysts from Daiwa Securities predicted that the spin-off could increase the per-share value by $79.

2. Ongoing Struggles with Weak Demand

Alongside this major announcement, FedEx also lowered its full-year profit forecast in its Q2 fiscal year 2025 earnings report, highlighting the continued weakness in its core business, especially in the U.S. parcel sector.

In a separate statement, FedEx revised its adjusted earnings per share forecast for FY2025 to $19 to $20, down from the previous prediction of $20 to $21. The midpoint of this new range is in line with analysts’ consensus of $19.48.

The report showed that for Q2 FY2025, FedEx posted adjusted earnings of $4.05 per share, with net income of $740 million, or $3.03 per share, compared to $900 million in the previous year. Total revenue decreased by 1% to $22 billion from $22.2 billion in FY2024.

FedEx Express reported operating income of $1.05 billion, with a margin of 5.6%, compared to $1.03 billion and a margin of 5.5% in the previous year. The business optimization costs for this division surged from $77 million to $206 million, a 167% increase.

FedEx CEO Raj Subramaniam noted that the Q2 results showed positive signs of the company’s operational transformation efforts, despite some challenges, including continued weak domestic demand in the U.S. and the expiration of FedEx’s contract with the U.S. Postal Service, which led to a loss of business.

Besides parcel services, the trucking sector is still recovering from the long-term freight downturn caused by over-expansion during the pandemic, when consumer demand surged and freight rates spiked.

FedEx is working to streamline its core operations by integrating its air express services with its ground delivery network to better handle the ongoing demand weakness. Additionally, it is trying to recover business lost due to the expiration of its contract with the U.S. Postal Service, which has shifted air cargo business to competitor UPS. This loss will continue to affect FedEx’s business in the coming quarters, as it has reduced daytime flight hours by 60%.

FedEx CFO John Dietrich stated that weak industrial sector demand is also impacting sales of the company’s most profitable services.

The ongoing weak demand highlights the ongoing struggles of FedEx’s core business. As customers, constrained by tight budgets, prefer slower, cheaper delivery options instead of more profitable faster services, global demand in the parcel sector continues to suffer.

FedEx faces numerous challenges: it must internally restructure its core business to address the decline in parcel demand, recapture lost business, and deal with heightened competition. As the global logistics industry undergoes significant changes, it remains to be seen whether these moves will help FedEx break out of its current slump and regain a healthy growth trajectory.

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Public account: Cross-border E-commerce Logistics Baixiaosheng