Last year, FedEx Corporation (NYSE:FDX) unveiled a plan to boost profitability by better aligning its cost structure with global demand, which has remained subdued ever since the Great Recession. The restructuring entailed three main programs: rationalizing the FedEx Express network by eliminating unprofitable capacity; reducing staffing costs through a voluntary buyout program; and replacing outdated aircraft with newer, more efficient models.
Removing old aircraft from the FedEx Express fleet offers the prospect of significant long-term cost savings for the company. Like most cargo companies, FedEx Corporation (NYSE:FDX) uses planes that are older (on average) than a typical passenger airline’s fleet. However, that means it still operates many outdated, gas-guzzling aircraft like the Airbus A300, Airbus A310, The Boeing Company (NYSE:BA) 727, and MD-10. These aircraft also have higher maintenance costs than their modern equivalents, due to their age.
This week, FedEx Corporation (NYSE:FDX) decided that in order to save fuel, it needed to step on the gas by accelerating its fleet restructuring program. FedEx recently retired 10 older aircraft (A310s and MD-10s) earlier than scheduled, and the company will move up the retirement dates for 76 more planes of those two types. By removing these older aircraft from the fleet earlier than scheduled, FedEx will save hundreds of millions of dollars in fuel and maintenance costs. This is a big positive for shareholders.
Aggressive restructuring bodes well for profit
In its most recent quarterly report, FedEx reported that global air freight demand remained sluggish. The company therefore announced capacity cuts in its FedEx Express Asian network. At the time, FedEx Corporation (NYSE:FDX) founder and CEO Fred Smith stated that — based on the newly implemented capacity reductions — the company was looking into the possibility of accelerating the retirement of older aircraft.
This week’s announcement demonstrates that FedEx’s management team was able to meet that goal. In order to accelerate its aircraft retirements, FedEx Corporation (NYSE:FDX) will take a $100 million charge for the recently ended quarter. The retirements will also lead to an additional $74 million of accelerated depreciation in the next year.