FedEx Corporation (FDX), the world’s second-largest package delivery company, is mulling to buy freighters from The Boeing Co. (BA) and Airbus to make its fleet more fuel efficient.
The company intends to replace its older and less-efficient aircraft. This move will reduce transit time and lead to fuel and operational efficiencies, providing FedEx a competitive edge over its peers, particularly United Parcel Service Inc. (UPS).
FedEx is in talks to purchase about 50 Boeing 767 and Airbus A330 freighters. The company expects to invest 23.5% more in fiscal 2012 compared with the prior fiscal year. About 60% of the investments are allocated toward growth projects, including the expansion of FedEx Express’ Asian and European networks, FedEx Ground’s network, and replacement of vehicles and equipment at FedEx Freight.
As of May, FedEx had 688 planes in its fleet, out of which 276 were Boeing aircraft and 124 Airbus aircraft. The rest were smaller aircraft such as Cessna 208B and ATR turboprops.
The investment will generate significant long-term savings, support international business growth as well as drive higher earnings, margins and returns. FedEx is on track with its long-term goals of more than 10.0% revenue growth and operating margin, cash flow improvement and increasing returns on invested capital.
However, the purchase might slow down due to the weak economic outlook and the risk of losing postal service business. FedEx is the largest contractor for postal service.
Hence, we are maintaining our long-term Neutral rating on FedEx. For the short term (1–3 months), the stock retains a Hold rating with a Zacks #3 Rank.
