FedEx Sees $100 Million Cost to Park Jets as Economy Slows

By Mary Schlangenstein
June 03, 2013

FedEx Corp., operator of the world’s largest cargo airline, will “aggressively” park older, less fuel-efficient planes to cut spending as the economy grows more slowly than forecast.

The moves will mean a $100 million impairment charge in the quarter ended May 31 as the first of 86 aircraft and 308 engines are taken out of service, FedEx said in a statement today. Ten planes are being retired immediately, while Memphis, Tennessee-based FedEx speeds plans to permanently ground others.

FedEx’s aircraft retirements follow a $1.7 billion restructuring announced last year as customers shift to less-expensive shipping methods, and are in addition to 24 planes grounded a year ago. FedEx is seen as an economic bellwether because of the variety of goods it moves around the world.

“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,” David Bronczek, chief executive officer of FedEx Express, said in the statement.

FedEx in March said it would cut some cargo flights to Asia after posting fiscal third-quarter profit that missed analysts’ estimates and lowering its forecast for full-year earnings.

Employee Buyouts

The company is retiring jets and parking older vehicles as part of the cost-cutting initiative outlined last October. The program also includes voluntary employee buyouts at a cost of as much as $550 million. FedEx hasn’t disclosed how many workers accepted offers to leave.

“It’s a good time to do it,” Michel Merluzeau, a consultant at G2 Solutions, said in an interview, referring to the jet groundings. “The cargo market has been crossing a desert the past few years so here’s a time to shed some of those assets and take a charge,”

FedEx is adding new aircraft that have similar or larger payload capacity and burn less fuel, including Boeing Co. (BA) 767s that are 30 percent more fuel efficient than the Chicago-based company’s MD10 jets they will replace, the company said. FedEx spent $3.8 billion on jet fuel in the four quarters ended Feb. 28.

FedEx is pulling from its fleet two Airbus SAS A310-200s, three A310-300s and five MD10-10s, plus 21 related engines, the company said. It will accelerate by “several years” the retirements of another 76 planes, comprising 47 MD10-10s, 13 MD10-30s and 16 A310-200s, along with 287 more engines, the company said.

‘Really Problematic’

“These aircraft have served FedEx extremely well, but they are 20- to 25-plus-year-old aircraft and in terms of maintenance, parts replacement, avionics, it becomes really problematic to source those things,” said Merluzeau, who is based in Kirkland, Washington.

FedEx’s fleet totaled 660 aircraft as of Feb. 28. It will retire its last Boeing 727-200 as of July 1.

The company also raised its quarterly cash dividend by 1 cent a share to 15 cents. The dividend is payable on July 1 to shareholders of record at the close of business on June 17.

Shares of FedEx rose 1.4 percent to $97.70 at the close in New York today, before the company’s announcement. The stock has gained 6.5 percent this year, compared with the Standard & Poor’s 500 index which has advanced 15 percent. 

Source:  http://www.businessweek.com