FedEx rolls out plans to reduce aircraft fleet

FedEx said in an 8-K filing with the Securities and Exchange Commission it is taking steps to reduce its aircraft fleet.

The company said it has permanently retired the following assets from service:
-18 Airbus A310-200 aircraft and 26 related engines; and
-6 Boeing MD-10 aircraft and 17 related engines.

Company officials said that the majority of these aircraft are currently parked and not in revenue service, adding that it will take a non-cash impairment charge of $134 million, which is $84 million net of tax and recorded in the fiscal fourth quarter of 2012.

What’s more, FedEx said that the decision to permanently retire these aircraft will better align the U.S. domestic air network capacity of FedEx Express to match current and anticipated shipment volumes. And it added that these permanent aircraft retirements follow previous aircraft retirements from the fourth quarter of fiscal 2012, which included five Boeing 727-200 aircraft and the planned fiscal 2013 retirement of 21 B727 aircraft, which is said will be fully depreciated.

“Along with the decisions to retire these 50 aircraft, we are also developing detailed operating and cost structure plans to further improve our efficiency,” said David J. Bronczek, FedEx Express president and chief executive officer, in a statement. “We expect to provide additional information on these plans in the fall.”

FedEx also explained that FedEx Express is shortening the depreciable lives of the following aircraft and related engines: 31 additional Boeing MD10-10s, 18 additional Airbus A310s, four B727s and one Boeing MD10-30. This effort, it said, will accelerate the retirement of these aircraft to align with the delivery schedule for replacement Boeing 767-300 and Boeing 757-200 aircraft, with the accelerated depreciation on these aircraft expected to total $196 million over the next three fiscal years with a partial offset from the avoidance of depreciation related to the retirements.

FedEx Express’s fleet totaled 688 aircraft, including 397 jet aircraft, as of February 29, 2012, the company said, noting that in fiscal 2011 FedEx Express spent $3.2 billion on 1.2 billion gallons of jet fuel.

In terms of improvements that the new aircraft will provide, FedEx said that the B757 is significantly more fuel efficient per pound of payload and has 20 percent additional payload capacity than the B727 it replaces. And it said the B767 will provide similar capacity as the MD10s, with improved reliability, an approximate 30 percent increase in fuel efficiency and a minimum of a 20 percent reduction in unit operating costs.

An air cargo source told LM that the decision to park these aircraft makes sense as they have been on FedEx’ financial records for a long time even though they have been parked and are adding far more efficient planes. He added that with the economy showing renewed signs of weakness that this decision represents an indictment of the forward look of FedEx’ package count going forward, with the possibility of a global economic softening possible.

The decision to reduce the fleet size is a result of lackluster shipment volume trends,” wrote Credit Suisse Chris Ceraso in a research note. “On an annual basis, total Domestic Express volumes have declined four out of the last six years and we are calling for a near 4 percent decline in FY12 (so declines in five out of the last seven years).  According to our forecast, FY12 Domestic Express volumes will likely be down about 8 percent compared to FY06 levels. This is an encouraging step in the evolution of FDX’s emerging sense of capital discipline.  But it also suggests that the domestic Express business is still struggling with lackluster demand and overcapacity.”