FedEx to drop small gas guzzlers for fewer but larger, less costly planes

EXPRESS delivery giant FedEx Corp plans to increase profitability by dropping smaller gas-guzzling aircraft and replace them with fewer, larger planes that cost less to fly and carry more, according to analysts surveyed by Bloomberg.

Fuel prices are 60 per cent higher than the low set in 2010 after hitting a US$3.01 a gallon high this year. FedEx spent $3.9 billion on jet fuel in fiscal 2012, compared with $3.2 billion the year before, and $2.3 billion in 2010. Separately, Singapore Airlines said its fuel bill was 40 per cent of total costs.

More than 15 per cent of FedEx's 660 aircraft are models last built in the 1980s, and CEO Fred Smith said upgrading is a "very big part of achieving double-digit margins."

Old 727s cost up to US$3,500 more per hour to fly than larger 757s, and full maintenance every two of years costs several million dollars per jet, said New York-based Sanford C Bernstein & Coanaly analyst David Vernon.

These aircraft also require a three-man crew, a pilot, co-pilot and flight engineer, instead of the two needed on modern jets. They also have no resale value, said Virginia-based BB&T Capital Markets analyst Kevin Sterling.

"Fuel efficiency alone will probably save 17 to 20 per cent for the newer planes versus the older planes," Mr Sterling said. "It's a balancing act. They have to make sure they don't disrupt service."

Analysts agreed on risks because having fewer bigger aircraft may well require collapsing regional hubs, restructuring routes, reassigning planes, adding and subtracting trucks as well as consolidating package stations, said Mr Vernon.

"The biggest risk is not to drop the ball and lose any customer efficiency," said Mr Sterling. "If they are doing this restructuring and take out too many planes too fast and cut back service levels, customers will go to UPS and DHL."

FedEx retired 24 planes last month to cut capacity in its domestic Express business. Taking them out of service added to five jets grounded last quarter and planned retirements of 21 more in the company's 2013 fiscal year.