FedEx Corp. (FDX), already in the midst of a $1.7 billion restructuring, will accelerate plans to park 86 fuel-guzzling older aircraft to further reduce operating costs as economic expansion falls short of its forecasts.
The company recorded a $100 million impairment charge in the quarter ended in May for the first of the aircraft and 308 engines it will take out of service, FedEx said in a statement yesterday. Ten planes are being retired immediately and the shipping company will expedite the parking of others.
The changes build on the overhaul announced in October that is primarily aimed at slimming FedEx Express, the world’s largest cargo airline and the company’s biggest unit. FedEx began the restructuring after seeing customers switch to less-expensive shipping methods, a move it says is permanent.
“There’s a point where you have to do a trade-off on whether the economics of that aircraft is good enough,” Michel Merluzeau, a consultant at G2 Solutions in Kirkland, Washington, said in an interview. “It’s a logical progression. It’s not going to happen overnight.”
The Memphis, Tennessee-based company is seen as an economic bellwether because of the variety of goods it moves around the world. In March, it forecast the U.S. economy would expand by 2 percent this year and that global GDP would rise 2.3 percent.
The new fleet changes will reduce FedEx’s jet count by as much as 7.9 percent at the end of fiscal 2014, compared to a previous plan for a 3.3 percent decline, Justin Yagerman, a Deutsche Bank AG analyst in New York, estimated in a note today. He recommends buying the company’s shares.
The aircraft retirements are in addition to 24 planes FedEx Express said it would ground a year ago. The acceleration of groundings will result in a depreciation cost of $74 million in the fiscal year ending next May.
FedEx Express also is parking about 5,000 older vehicles, replacing them with newer, more fuel-efficient models.
“With the planned acquisition of new aircraft and projected slower economic growth than previously forecast, FedEx Express is lowering maintenance costs by aggressively parking and retiring aircraft,” David Bronczek, chief executive officer of FedEx Express, said in the statement.
FedEx in March said it would cut some cargo flights to Asia after posting a fiscal third-quarter profit that missed analysts’ estimates and lowering its full-year forecast. The shipper plans to report fiscal fourth-quarter results June 19.
FedEx’s restructuring also includes voluntary employee buyouts at a cost of as much as $550 million. The company hasn’t disclosed how many workers accepted offers to leave.
“It’s a good time to do it,” Merluzeau said of the aircraft retirements. “The cargo market has been crossing a desert the past few years so here’s a time to shed some of those assets and take a charge.”
FedEx is adding new aircraft that have similar or larger payload capacity and burn less fuel, including Boeing Co. (BA) 767s that are 30 percent more fuel efficient than the Chicago-based planemaker’s MD10 jets they will replace, the company said. FedEx spent $3.8 billion on jet fuel in the four quarters ended Feb. 28.
The cargo airline has orders for 70 Boeing 777s and 767s. It agreed in March to buy 14 used 757 passenger jets from United Continental Holdings Inc., with options to purchase another 16. Those planes will be converted to freighters.
FedEx is pulling from its fleet two Airbus SAS A310-200s, three A310-300s and five MD10-10s, plus 21 related engines, the company said. It will accelerate by “several years” the retirements of another 76 planes, comprising 47 MD10-10s, 13 MD10-30s and 16 A310-200s, along with 287 more engines, the company said.
FedEx’s fleet totaled 660 aircraft as of Feb. 28. It will retire its last Boeing 727-200 as of July 1.
FedEx yesterday also raised its quarterly cash dividend by 1 cent a share to 15 cents. The dividend is payable on July 1 to shareholders of record at the close of business on June 17.
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