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Leading parcel delivery company FedEx Corporation (FDX - Analyst Report) announced its target to achieve $1.7 billion in incremental profit by the end of 2016. Although no broad-based plan has yet been declared, it is expected that the company’s profit enhancement is broadly based on cost improvements.
We believe the current market scenario of lower demand, focusing on cost reduction bodes well for improving profits. Not only will it mean higher margins for the company but also imply service improvement by increasing productivity within its network of operation.
FedEx is continuously registering demand shift from premium services to deferred services impacting margins negatively. The global economic impact triggered by European debt crisis and slump in Asian growth is resulting in poor shipments across the package delivery industry.
Given these factors, FedEx seeks to realign it network that adjusts with the current demand trend. In accordance with its productivity plans made in June 2012, the company announced its intention to purchase 19 more The Boeing Company’s (BA) 767 aircraft. FedEx expects the delivery of these aircraft from 2015 through 2019.
These new aircraft are expected to benefit cost structure by replacing the old fleet of MD-10 and A31-200. The 767 Boeing will provide similar capacity compared to MD10 with 20% and 30% reductions in operating cost and fuel cost, respectively. Further, the new planes will add cost efficiency by exchanging equipment like spare parts, tooling and flight simulators with the existing FedEx’s Boeing 757 Fleet.
Additionally, FedEx delayed the delivery of eleven 777 freighter aircraft that were scheduled to be delivered between 2013 through 2018. We believe the delayed deliveries would help better utilization of MD-11 fleet on international flights and lower overall cost and investment.
Apart from fleet restructuring at FedEx Express, the company also has plans for productivity enhancements in its Ground segment. It aims to add more technology driven operations at ground such as the automation in planning and execution of free load as well as the pickup and delivery processes.
The segment’s trailers are also expected to be equipped with GPS devices to improve fleet management. In the Freight segment, management also plans to invest in technology to upgrade network and equipment and automation planning to enhance service levels in fiscal 2013.
However, we believe these cost improvement plans would incur certain capital expenditures such as deployment of fuel efficient aircraft as well as incorporating new automation technologies. In such an event weak economic conditions coupled with investment in resource enhancement may jeopardize the profitability through adding cost over the near term and can thus back-fire the company’s profitability plan.
As a result, we believe the company needs to maintain a certain parity to adjust cost over revenues without infusing additional investment. How far it succeeds in maximizing it profits is something to look forward to.
We have a long-term Underperform recommendation on FedEx. For the short-term (1-3 months) the stock has a Zacks #5 Rank (Strong Sell).