FedEx Scales Down Operations: Retires One-Fifth of Boeing 757 Freighters

As part of a downsizing effort to better align the air fleet with slowing package demand, FedEx Corp. has permanently retired 22 Boeing 757-200 cargo aircraft. The company also reported fourth-quarter earnings that beat analysts' estimates on Tuesday.

The integrated logistics company reported that the permanent deactivation of the 757 cargo planes and their seven engines resulted in an impairment charge of $157 million. A $70 million write-off for the retirement of 18 old MD-11 freighters and 34 related engines was included in the fourth-quarter results of the previous year. In the fourth quarter, FedEx permanently deactivated nine MD-11s, bringing the total number of aircraft removed from the fleet to 31. Since the older 757s use more fuel than other aircraft that FedEx operates—92 of which are still narrowbody freighters—they were deemed disposable.

FedEx will no longer be the principal air cargo provider for the United States Postal Service by the end of September, following UPS's recent five-year contract win. Management expects volumes to remain near the contract minimum until then as the business transfers to UPS, but will subsequently reap considerable cost savings in the U.S. domestic network as it modifies operations to meet decreased aircraft requirements. The closure of the Postal Service division will also reduce operating income by $500 million in the current fiscal year.

The airline's mainline fleet has fallen from 417 aircraft in fiscal year 2022 to 389, as more aircraft are retired than added. According to the company's most recent statistics, it expects to get two factory-built 777 freighters from Boeing in the next 12 months and 14 B767-300s over the next two years.

For the quarter ended May 31, FedEx (NYSE: FDX) reported adjusted operating income up 5.6% to $1.9 billion, with a 1% increase in sales to $22.1 billion. This highlights the company's effectiveness in controlling costs despite soft market circumstances. FedEx had year-over-year revenue growth for the first time after six consecutive quarters of decline. The adjusted diluted earnings per share were $5.41. Adjusted operating profit for the year grew by 16%.

Last year, the firm realized $1.8 billion in structural savings and expects to save another $2.2 billion through its transformation initiative in fiscal year 2025. FedEx revealed plans earlier this month to reduce the size of its European back-office and commercial workforce by 1,700 to 2,000 people, resulting in annual savings of $125 million to $175 million by fiscal year 2027.

Management is also considering the role of FedEx Freight in the company's portfolio structure and ways to increase shareholder value. According to the statement, the corporation may consider spinning off its less-than-truckload division, among other options.

FedEx Express' adjusted operating income fell $92 million, with the margin falling nearly 1%, owing to flat revenue, lower international yields, and higher transportation costs as a result of the launch of the "Tricolor" initiative for reorganizing air operations, partially offset by the success of the Drive cost initiative and higher U.S. domestic package yields. Increased capacity in the global air cargo industry has impacted international yields.

FedEx Ground and FedEx Freight, the less-than-truckload unit, also saw improved operating performance thanks to the restructuring measures. Ground revenue increased by 2%, driven by a 1% increase in yield and volume. FedEx Freight, which had previously announced plans to eliminate seven terminals, increased revenue by 2% due to a higher average price.

In a press release, CEO Raj Subramaniam stated, "We made significant progress in fiscal 2024 and ended the year strong, delivering four consecutive quarters of expanding operating income and margin in a challenging revenue environment." "These outcomes, which are unparalleled in the present climate, demonstrate our commitment to transforming FedEx while we continue to carry out our Drive initiatives and provide exceptional customer service." We anticipate that this momentum will continue in the upcoming fiscal year of 2025 as we endeavor to build the most adaptable, intelligent, and efficient network in the entire globe.

The company reports that while international export package volume climbed 8% in the quarter due to shipments from the international economy, the decreases in U.S. domestic package volume continued to reduce. This gain was similar to the trend from the previous quarter.

A year ahead of schedule, FedEx reported that capital spending as a percentage of sales was 5.9%, exceeding the 2025 objective of less than 6.5%.

"The self-help approach seems to be effective, and the business has used its capital more wisely. Given the ongoing weakness in demand, cost reduction will probably be the primary factor in bringing profitability back to levels seen during the epidemic, according to comments made public by Anthony DeRuijter, an analyst at Third Bridge, a worldwide research organization. "In the interim, FedEx is effectively managing the current macro environment, but the industry's excess capacity remains a major issue facing the company and will need to be absorbed to drive results to the next level."

For the fourth quarter, the Wall Street expectation was for diluted profits per share of roughly $5.30.

FedEx expects low-to-mid-single-digit percentage revenue increase in fiscal year 2025, helped by gains in domestic package and LTL volumes year over year. Adjusted profits per share are expected to be $20 to $22, up 12% to 25% from the previous year.

FedEx's stock price surged 14% to about $293 per share in aftermarket trading on the back of better-than-expected profit and revenue growth projections.