FedEx announces plan to retire selected aircraft and related assets

In a move geared to modernize its aircraft fleet and improve the global network of its FedEx Express segment, global transportation and parcel bellwether FedEx announced yesterday it has permanently retired or will accelerate the retirement of 86 aircraft and 308 related engines.

FedEx said the aircraft and related engines being permanently retired include: two A310-200 aircraft and four related engines; three A310-300 aircraft and two related engines; and five MD10-10 aircraft and 15 related engines.

FedEx said the impact of retiring these aircraft, engines and parts resulted in an impairment charge of $100 million recorded in May 2013.

The company also said it will accelerate by several years the retirement of: 47 MD10-10 aircraft and 172 related engines; 13 MD10-30 aircraft and 55 related engines; and16 A310-200 aircraft and 60 related engines.

And as of July 1, 2013, FedEx said FedEx Express will complete the final retirement of the B727-200 fleet.

“We are modernizing our aircraft fleet by retiring older, less-efficient, and less-reliable aircraft and replacing them with modern aircraft to build a fleet with higher reliability and better cost efficiency,” said David J. Bronczek, president and chief executive officer of FedEx Express, in a statement. “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.”

The retiring of aircraft and related assets can be viewed as a “piper that has to be paid,” but it hits the earnings prior to the models Wall Street had, which has the potential to drive down the company’s stock price, according to Jerry Hempstead, president of Orlando, Florida-based Hempstead Consulting.

Hempstead explained that Wall Street firms have models with expectations of these types of things and when they should hit a company’s P&L.

“FedEx moved up the write off which means it comes out of the next earnings announcement…with earnings likely to be less than expected after these expenses,” he said. “But when you look out in the future, this old hardware is off the books and helps future earnings, especially when you look at how much more fuel efficient the new planes are.”

As of press time, FedEx stock was up $0.51 to $98.21 per share.

Robert W. Baird & Co. Analyst Ben Hartford wrote in a research note that his firm believes the announcement of incremental retirements reflects FedEx’ capability and willingness to reduce network capacity in an effort to achieve its stated F2016 targets ($300 million in profit improvement from fleet modernization, $350 million in International).

“However, accelerated retirements [are] also likely reflect ongoing international airfreight weakness and resulting excess network capacity,” wrote Hartford.

In its fiscal third quarter earnings announcement at the end of March, FedEx said FedEx Express quarterly revenue was up 2 percent at $6.70 billion, with an operating margin of 1.8 percent, down from last year’s 5.3 percent and an operating income of $118 million for a 66 percent annual decrease.

Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, said on that quarterly earnings call that FedEx Express was going through a challenging time, due to continuing weakness in international airfreight markets, pressure on yields due to overcapacity, and customers selecting less expensive and slower transit international services. He added that FedEx Express will decrease capacity to and from Asia and will aggressively manage traffic flows to place lower-yielding traffic in lower-cost networks. 

What’s more, he said at the time that the company was assessing these actions to see how it may allow FedEx Express to accelerate the retirement of more of its older and less sufficient aircraft as part of its fleet modernization program, which is delivered on with this week’s announcement. He also said that FedEx remains focused on its strategic cost reduction programs, which are ramping up and on target. And he cited the company’s experience in flexing its network to meet network conditions, explaining he is confident the company’s strategic profit improvement program, coupled with additional actions at FedEx Express, will increase margins, improve cash flows, and strengthen its competitiveness over time.