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FedEx Corporation (FDX - Analyst Report), one of the leading package delivery companies has set a new target of 30% improvement in fuel efficiency of its fleet by 2020. The company raised the fuel efficiency standard by approximately 50% from the previous 20% target set in 2008 that it has already accomplished.
We believe the company’s efforts will not only translate into sustainable transportation solutions for its customers but will also improve the company’s cost structure in the long run.
Previously in 2012, the company released its fourth annual Global Citizenship Report, in which it highlighted its activities towards achieving a sustainable freight transportation system. The report highlighted that FedEx targets reducing aircraft carbon emissions to 30% by 2020 besides meeting at least 30% of its jet fuel requirements through alternative fuels by 2030.
We believe that the growing environmental awareness among corporate houses like FedEx stems from the stringent actions taken by the regulatory authorities to restrain environmental pollution.
The U.S. government as well as regulatory bodies like the U.S. Department of Transportation (DOT) and National Highway Traffic Safety Administration (NHTSA), as well as the U.S. Environmental Protection Agency (EPA) have taken several measures to curb global warming. One of these key measures remains the establishment of the National Program in 2009 – an agreement between the federal government, state regulators and the auto industry.
The national program, also a two-phased program constituted standards for establishing fuel efficiency improvements in a 30 years span, involving the first-ever global warming pollution standards for light-duty vehicles.
The key highlights of the first phase (2012-2016) are setting the global warming pollution standards of 250 grams per mile, on average, for model year 2016 vehicles. In addition, NHTSA requires fuel efficiency standards of an average of 34.1 miles per gallon in a new vehicle. Cumulatively, these measures are expected to translate in 23% improvement in new vehicle pollution standards, representing an average annual improvement of 5% by 2016.
Going forward, the phase II (2017–2025) of the National Program covers standards on light vehicles,finalized by the EPA and DOT in Aug 2012. These standards require reduction in green house gas emission by cars and light trucks to 163 grams per mile in 2025 that would lead to fuel efficiency of 54.5 miles per gallon.
Consequently, we believe that FedEx’s goal of improved fuel efficiency is a significant step toward exercising these standards. This will not only result in a cleaner environment but also lower average consumer expenses on fuel, accounting for $140 billion in 2030 as per research data.
Moreover, FedEx is also in an attempt to improve its performance level by concentrating on network realignment to match the current demand level. In Jun 2012, the company announced plans to purchase 19 more Boeing (BA - Analyst Report) 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 as well as by exchanging equipment like spare parts, tooling and flight simulators with the existing FedEx’ Boeing 757 Fleet. Additionally, FedEx delayed the delivery of 11 777-freight aircraft that were scheduled to be delivered between 2013 and 2018. We believe the delayed deliveries would help in better utilization of the MD-11 fleet on international flights and lower overall cost and investment.
FedEx, which operates with another big player, United Parcel Service, Inc. (UPS - Analyst Report), has a Zacks Rank #3 (Hold).
Another related stock worth considering in this sector is Deutsche Post AG (DPSGY). The company currently retains a Zacks Rank #1, implying a Strong Buy rating.