Raj Subramaniam
President, Chief Executive Officer and Director at FedEx
Thank you, Steve, and good afternoon, everyone. Let me begin by thanking the FedEx team for their commitment to delivering yet another strong holiday season. This peak, FedEx has the best service offerings in the industry. This includes the most expansive global network and the fastest US ground service with the broadest weekend residential coverage. Strong service and speed are also come in with a more aggressive peak transit compared to this time last year, with the ground time and transit in the US at 1.94 days. I'm incredibly proud of the team's ability to sustain superior service levels while we continue to transform our global network.
Our second-quarter performance reflects clear signs of progress in our transformation in what remains a difficult demand environment. We are moving with speed and agility to deliver on DRIVE, which is supporting improved profitability and enabling us to maintain our earnings outlook for the year, even as our revenue expectations have moderated further. As you can see in our results, in Slide 6, our transformation is driving improved profitability. At the enterprise level, we delivered a 17% improvement in adjusted operating income and adjusted margin improvement of 110 basis points compared to the prior year even as the total revenue declined 3%. These results reflect benefits from DRIVE, a continued focus on revenue quality, and meaningful differentiation across our products and services as we build the world's smartest logistics network. Our focused execution enabled us to retain a majority of the high-quality volume we won over the summer from UPS and as a result of the Yellow shutdown.
At the segment level, Ground continued to deliver outstanding results with adjusting operating income up 57% and adjusted margin expansion of 370 basis points. This was driven in part by revenue growth due to higher yield and volume combined with solid operational performance. Freight delivered strong performance as well, driving double-digit profit improvement, and margin expansion of over 270 basis points compared to the prior year.
Express total revenue declined due to both volume and yield pressures. These headwinds more than offset continued benefits from DRIVE and led to a margin decline compared to the prior year. There's more work to do at Express, where we are structurally re-designing our network for speed and density. We continue to make progress at Express to unlock the value that exists across this business.
Turning to Slide 7. DRIVE continues to fundamentally change the way we work. The impact of DRIVE is clear, as our lower cost structure enables improved profitability. Just look at the powerful chart on the left-hand side of this slide. If you look across market cycles over the last 15 years, we have now delivered two consecutive quarters of operating income growth against declining revenues. When you step back and review how our business has performed in environments with suppressed demand, we are delivering much better profitability today than we have historically.
In the quarter, we reduced costs by approximately $200 million in our Surface Network, including our US Express operations. This was driven by shifting to a single daily courier dispatch, applying dock productivity initiatives, consolidating underutilized sorts, and maximizing the use of rail. Across our air network and international operations, our DRIVE initiatives are helping offset pressures with about $115 million in total cost reductions in Q2, primarily driven by structural flight takedowns.
And in G&A, we're making significant changes to how we approach procurement and functional excellence. In the second quarter, we realized over $100 million in savings driven by reducing the use of temporary labor, leveraging the scale of the Enterprise to negotiate favorable surface transportation rates, optimizing certain benefit programs, and lowering headcount. Given our progress, we are highly confident that we'll deliver on our goal of $1.8 billion in cost reduction benefits from DRIVE this fiscal year.
Turning to Slide 8. Despite progress on DRIVE, profitability at FedEx Express was pressured by an ongoing volume mix-shift and related yield headwinds. Our ability to drive margin improvement in the near term has been constrained by transitory factors including the year-over-year decline in the US Postal Service volume, combined with minimum required service obligations associated with our current USPS contract and also, the timing of the structural redesign of our air network.
Historically, our unmatched global air network was primarily built on a hub-and-spoke system to support speed and global connectivity. With the rapid growth of e-commerce and as volume mix continues to shift to deferred, we recognize the need to reconfigure our network to focus on both speed and density. This fundamental network redesign, which we call Tricolor design, is momentus in our history, and includes several key elements.
First, we will deploy what we call our Purple Tail fleet, which is our FedEx-owned assets timed for delivering high-priority high-margin volumes using the existing hub-and-spoke model. This is our Purple Network, which will be the backbone of our International Priority parcel business.
Second, we will re-time a portion of our Purple Tail flights for what we call our Orange Network which will operate off-cycle. This change will give us time to build density, decongest our hubs during the precious night sort, and feed into our Surface Networks, including our International Road Network, as well as FedEx Ground and FedEx Freight in the US. This provides us a differentiated capability to drive profitable, less capital-intensive growth in the sizable global deferred parcel and airfreight markets.
And third, we will continue to leverage our Global Partner Network as an adaptive capacity layer, particularly on imbalanced trade lanes. This is our White Network. These changes will improve the utilization of our assets, increase margins, and enhance ROIC. The air network redesign is a critical piece of our DRIVE execution at Express and will support the realization of our targeted $4 billion of total DRIVE savings in fiscal year 2025. We are approaching this network transformation in a deliberately measured manner to ensure we continue to provide our customers with the best service levels in the industry. Simultaneously, as you know, we are executing Network 2.0. Taken together, these efforts will improve our ability to protect profitability and returns through various market environments.
Big picture, we are making clear progress on our transformation and DRIVE is having a real impact. Additionally, our team is advancing efforts to combine the strength of our physical transportation network with our digital and data-driven solutions. We are leveraging our world-class engineering skill base to deliver cost-effective cutting-edge capabilities globally.
Earlier this month, we opened our first Advanced Capability Community or ACC in Hyderabad, India, which will serve as a hub for our technological and digital innovation. I'm truly excited about the opening of the ACC and the vast opportunity to use digital to run our business better, enhance our customer experience, and generate new profitable revenue streams. Overall, I'm confident we have the right strategy and the right team in place to create significant stockholder value.
In these last few months and weeks, our team's dedication to the Purple Promise has been tremendous and I would like to express my sincere thanks to our colleagues. This performance has put FedEx in good position as we enter the final structural peak and deliver the best service offerings in the industry.
With that, let me turn the call over to Brie.
