FedEx Express Adjusts Aircraft Orders To Align Logistics Network With Demand
FedEx (NYSE:FDX) has announced that it will purchase 19 additional B767-300 aircraft, worth more than $3.3 billion, to continue to improve the flexibility and efficiency of its air fleet. The purchase is in addition to a FedEx Express agreement with Boeing announced in December 2011 to purchase 27 new 767s for delivery between fiscal 2014 and 2018 and the delay delivery of a number of 777s.
The restructuring of FedEx’s fleet is meant to align its logistics network with the expectation of more conservative demand trends for express freight, going forward. This is also expected to improve FedEx’s operational efficiency by slimming and modernizing its supply chain network. FedEx Express is the world’s largest express transportation company that competes with UPS (NYSE:UPS).
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Recent Trends
The global shipping demand is closely correlated with overall consumer demand and GDP growth of an economy, and weak macroeconomic conditions have led to a gradual moderation in shipping volumes. This has prompted customers to shift from premium services to cheaper and slower products, diverting demand toward seaborne shipping. FedEx and UPS’s recent results also indicate softening of international growth, particularly in Asia.
As slow economic growth weighs on demand for package shipments and margins, FedEx is cutting costs and adjusting its network capacity for the more conservative demand trends than previously projected, particularly on the long-haul intercontinental lines.
Adjusting The Network For Conservative Demand
FedEx has hence converted its previous order of four Boeing 777s with 19 smaller Boeing 767s, which would allow FedEx greater fleet flexibility. The 19 767s will be delivered from fiscal 2015 to 2019 and replace current MD-10 and A310-200 aircraft. This $3.3 billion purchase adds to FedEx’s December 2011 order of 27 Boeing 767-300 freighter planes (valued at $4.7 billion) to replace the company’s aging MD10 aircraft of the same capacity.
At the same time, it also delayed the delivery of 11 Boeing 777 freighter planes to keep expenses low till demand improves. FedEx currently operates 19 long-range 777 freighters and plans to purchase an additional 24 777s. The purchase is in line with FedEx’s fiscal 2013 capital expenditure plans of $3.9 billion.
This is a significant departure from its previous strategy of purchasing Boeing 777s, expecting much stronger demand growth in international freight. FedEx had previously announced plans to retire 18 Airbus A310-200 aircraft and 26 related engines, as well as six Boeing MD10-10 aircraft and 17 related engines permanently from service to slim down its express network.
767s Bring More Flexibility And Fuel Efficiency To FedEx Fleet
The first 767s that will enter the FedEx fleet, starting fiscal 2014, come with substantially higher fuel efficiency and reliability than the aircraft they will replace. The 767s will provide similar capacity as the MD10s, with an approximate 30% increase in fuel efficiency and a reduction in unit operating costs of more than 20%. The airfreight carrier is expected to provide more details on its cost-cutting initiatives at its investor conference in October.
We have a $106 Trefis price estimate for FedEx.
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