In Order to Save Gas, FedEx Corporation (FDX) Steps on the Gas

This is a relatively small cost to bear in light of the significant savings FedEx will achieve going forward. Just last quarter, the FedEx Express segment incurred fuel costs of more than $1 billion, along with maintenance expense of $262 million. FedEx has stated that the Boeing 767 planes that it is buying offer a 20% cost improvement over the MD-10 aircraft they are replacing. Moreover, the company probably got a very good price from The Boeing Company (NYSE:BA) for the 50 767s it has ordered, as FedEx Corporation (NYSE:FDX) is singlehandedly keeping the 767 production line going.

Furthermore, the previously announced capacity reductions at FedEx Express made some of the retiring aircraft superfluous. By permanently grounding them, FedEx can avoid costly maintenance work, while maximizing utilization of the most cost-efficient airplanes in its fleet.

Realism is good for shareholders
In a perfect world, shareholders would like to see robust cargo demand growth that would prevent FedEx Corporation (NYSE:FDX) from retiring older aircraft ahead of schedule. However, for too many years, FedEx has focused on growing its network, in order to meet expected demand growth that did not always materialize. This resulted in an unsustainably high cost structure at the company’s FedEx Express subsidiary.

Today, FedEx management has adopted a more realistic viewpoint: Global demand growth will be slow for the foreseeable future. This newfound realism will be good for FedEx Corporation (NYSE:FDX) shareholders. FedEx’s top-line growth may be modest, but management is turning this into an opportunity to reduce the company’s cost structure by at least $1.7 billion. This should drive significant profit growth over the next two years, leading to a revival of FedEx’s fortunes.

The article In Order to Save Gas, FedEx Steps on the Gas originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx Corporation (NYSE:FDX).

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