FedEx Corp. is propping up the value of used Boeing Co. 757 jets by buying the twin-engine planes to replace some of its oldest, least-efficient freighters.
The operator of the world’s largest cargo airline will add 18 more 757s by May 2012 to the 48 it has now. FedEx probably pays about $10 million each, a couple of million dollars more than an owner might get in a sale to a passenger carrier, said Douglas Runte, managing director at Piper Jaffray & Co.
“It’s providing a floor underneath the value of 757s,” said Runte, who is based in New York. He estimates that FedEx spends about $5 million each to refit the planes to carry cargo.
Acquiring secondhand jets gives Memphis, Tennessee-based FedEx a class of planes that can carry 20 percent more freight while burning a third less fuel than the company’s three-engine Boeing 727s. A comparable new medium-range aircraft from Boeing would cost as much as five times more.
“With the 727s, you practically carry more fuel than packages,” said Kevin Sterling, an analyst at BB&T Capital Markets in Richmond, Virginia. “That’s not good. The 757 is a great way to refresh their fleet.”
Sellers include International Consolidated Airlines Group SA’s British Airways, Saudi Arabian Airlines and U.K. charter carrier Thomson Airways Ltd., according to Ascend Online Fleets. By purchasing 757s with engines either from Rolls-Royce Group Plc or United Technologies Corp.’s Pratt & Whitney, FedEx buoys the values of all models of the jet, Piper Jaffray’s Runte said.
Some carriers are agreeing on sales to FedEx three years before they intend to hand over their 757s, locking in prices with a buyer they view as more reliable than many of the smaller airlines that usually purchase secondhand aircraft, Runte said.
Jess Bunn, a spokesman, declined to discuss FedEx’s fleet plans, citing the approach of the company’s fiscal third-quarter report on March 17. FedEx’s 684 planes range from single-engine Cessnas to wide-body Boeing 777 freighters that list for $269.1 million and can fly nonstop between the U.S. and China.
FedEx began bringing in the 757s in 2007 to phase out its 727s, echoing a shift already under way at United Parcel Service Inc., which got rid of the last of its 727s by the end of 2008, according to regulatory filings. UPS has 75 of the 757s, a total that has been unchanged since at least 2000, filings show.
FedEx has 77 of the 727s, which average 32 years of age and need a three-member crew -- pilot, co-pilot and flight engineer -- instead of the two people on more-modern jets. Adding urgency to the fleet transition is a doubling in the price of jet fuel in the past two years, to $3.26 a gallon today.
The trade-off in adding 757s is a jump in FedEx’s spending to configure them for cargo, which helped push up maintenance and repair expenses by 22 percent to $990 million for the six months ended Nov. 30. That pulled profit lower than analysts projected for the quarter through November.
“We expect revenue growth to be partially offset by cost increases associated with higher aircraft maintenance” and bigger pension outlays in the fiscal year ending in May, Chief Financial Officer Alan Graf told investors on a Dec. 16 call.
FedEx shares have climbed 4.2 percent in the past 12 months, trailing the 24 percent increase for Atlanta-based UPS, the world’s largest package-delivery company, and the 19 percent gain in the Standard & Poor’s 500 Index.
“Near-term maintenance is spiking, but they’re going to have a maintenance holiday soon,” said BB&T’s Sterling, who recommends buying the shares. “It’s the right strategy.”
Secondhand sales of narrow-body jets totaled 931 last year, according to data from Ascend. Based on average market values, the total was $5.64 billion, according to the data.
The planes FedEx is buying are about 20 years old on average, a typical retirement age for a passenger jet because that’s when interiors wear out and heavy maintenance checks are needed. They have a maximum operational revenue payload of 45,800 pounds (20,775 kilograms), compared with 38,200 pounds for a 727, according to a FedEx regulatory filing.
FedEx operates its 757s chiefly on U.S. routes, taking advantage of demand for shipments of pharmaceuticals, electronics and financial documents as the economy recovers.
Boeing stopped making 757s in 2005. With the 727 out of production since 1984, the planemaker’s only new narrow-body model is the smaller 737, which lists for as much as $85.9 million.
“The 757 model is especially popular due to its large payload capacity and conversely lower effective operating cost,” said Lim Serh Ghee, chief operating officer of Singapore Technologies Aerospace Ltd., which has a contract valued at $470 million to modify 87 jets for FedEx through 2014.
A freighter conversion takes about 100 days, with any heavy maintenance or engine overhauls done at the same time, according to Singapore Technologies, also known as ST Aerospace.
The makeovers include ripping out seats, overhead luggage bins, lavatories and galleys, then installing a larger door, reinforcing the shell and floors, and adding rollers to assist with the handling of cargo containers, Lim said in an e-mail.
ST Aerospace, Asia’s biggest plane-maintenance specialist, has delivered 32 converted 757s to FedEx, with eight more in the works, Lim said. The list price for such work is $4.8 million to $5.5 million, Lim said.
“We are of the view that there is sustained potential in the 757 market,” Lim said.