FedEx Corp. retired 24 jets to cut capacity in the U.S. domestic Express division as a slowing economy saps shipping volumes for the operator of the world’s largest cargo airline.
Taking the Airbus SAS and Boeing Co. freighters out of service added to five jets grounded last quarter and planned retirements of 21 more in FedEx’s 2013 fiscal year. FedEx is seeking to reduce costs in the U.S. part of the Express unit, which includes moving packages by air.
“The domestic Express market is the most challenged from a volume standpoint in the FedEx portfolio,” said David Ross, a Stifel Nicolaus & Co. analyst in Baltimore. FedEx needs to shrink “the domestic Express network to kind of match what we see as kind of lower long-term volumes.”
The move resulted in a non-cash impairment charge of 26 cents a share in the quarter that ended May 31, Memphis, Tennessee-based FedEx said yesterday in a statement.
“Along with the decisions to retire these 50 aircraft, we are also developing detailed operating and cost structure plans to further improve our efficiency,” Express Chief Executive Officer David Bronczek said in the statement. “We expect to provide additional information on these plans in the fall.”
FedEx said in the same statement that it was raising its quarterly dividend 7.7 percent to 14 cents a share, payable July 2 to shareholders of record as of June 18.
Average daily package volume in FedEx’s domestic Express business dropped 4 percent in the fiscal third quarter. Operating margins in the Express unit have failed to recover to pre-recession levels even as revenue in the last fiscal year reached the highest in at least a decade.
Ross, who rates FedEx shares a buy, said he doesn’t expect growth in domestic volumes for “the next several years.”
Orders to U.S. factories unexpectedly fell in April for a second month, pointing to a deceleration in manufacturing, the Commerce Department said yesterday. That followed the May 31 report that U.S. gross domestic product grew at a 1.9 percent annual rate in the first quarter, down from a prior 2.2 percent estimate.
The Express division is FedEx’s largest. The company’s other businesses include a ground package-delivery unit and FedEx Freight, a so-called less-than-truckload carrier that moves goods from more than one customer in each trailer.
FedEx fell 0.1 percent to $85.20 at the close in New York, before the company’s announcement about the freighters and the dividend increase. The shares rose 2 percent this year through yesterday.
The planes affected by the retirement are 18 Airbus 310-200 jets and six Boeing MD-10-10 freighters. The Airbus planes have two engines and the Boeings have three. Both models are out of production, and FedEx said most “are currently parked and not in revenue service.”
The move includes 43 jet engines, FedEx said. The $134 million cost for the retirements was recorded in the quarter that ended May 31, according to FedEx, which typically reports results from the fourth quarter of its fiscal year in June.
“It’s certainly a positive sign, in our opinion, that they’re addressing it and that they are kind of lowering the fleet size,” Ross said in a telephone interview.
FedEx had 688 aircraft as of Feb. 29, including 397 jets, according to the company’s statement.