FedEx’s decision to retire aircraft early is a poor omen for air freight

FedEx announced it has immediately removed eight aircraft from its fleet including A310 and MD10 model types. It is also accelerating the retirement of 66 further MD10 and A310s; although it has not given a time-line for this process. The cost of doing this will be a higher depreciation charge of $100m and $74m respectively.

Although this represents a substantial proportion of FedEx’s 368 large jet aircraft fleet, the move is, in part, a restructuring of the fleet renewal programme which will see the older aircraft replaced with newer Boeing 757 and 767s. These models are, according to FedEx, either larger or 30% more fuel efficient than the aircraft types they replace.

However, the move does represent a faster shrinking of FedEx’s fleet than previously projected, with some analysts modelling that the total capacity will fall by over 7%. It also follows fairly reliable reports of major reductions in the senior and middle management of FedEx earlier in the year. Therefore, it is reasonable to see this as a heightening of the pessimistic view that FedEx has been taking on the immediate prospects for air freight in particular.

In March, the company announced what is described as an “annual profit improvement program” to be in place by 2016. This is essentially a plan to reduce the cost base for the whole business and thus increase margins.

Bringing forward the retirement of aircraft is a fairly clear statement that FedEx sees the medium term as demanding a focus on improving margins rather than increasing capacity. It claims to be increasing market share in the express sector and views the underlying market for freight as moderately healthy. However, what FedEx implies is a continuing squeeze on general air freight, with the less than 1% growth over the past few years continuing into the medium term.