“A billion here, a billion there…”

FedEx A300 loading feature“A billion here, a billion there…” So starts the famous quote attributed to former US senator Everett Dirksen. In FedEx’s case, as when Dirksen first said it, it ends with “and pretty soon you’re talking about real money.”

When FedEx last week reported its fourth-quarter results for the 2015 fiscal year, the gap between reported and adjusted net income was well over $1.5 billion. So you can take your pick: FedEx reported a net loss in the quarter of $895 million, down from a net profit of $780 million in 4QFY14, or FedEx reported adjusted net income of $753 million, effectively the same as a year ago.

But regardless of the financial impact of  four one-time charges that hit the company’s reported fourth-quarter results, FedEx’s operational results, particularly in its Express segment, were very good. In fact, FedEx said adjusted corporate operating income improved 5% in the quarter, “due to base yield growth in all three transportation segments.” We will look at the Express segment in more detail below, but first, the charges:

  • A change in segment reporting created a one-time pe-tax benefit of $67 million
  • FedEx put aside a legal reserve with a negative pre-tax impact of $197 million
  • FedEx permanently retired 15 aircraft and 21 related engines, and adjusted the retirement schedule of an additional 23 aircraft and 57 engines, resulting in a negative pre-tax impact on the Express segment of $276 million
  • A change in pension accounting to mark-to-market values had a negative pre-tax impact of $2.190 billion.

FedEx 4QFY15In total, the above one-off events had a negative pre-tax impact of $2.596 billion, and a negative bottom line impact of $1.648 billion. However, each of the company’s three reporting segments saw good operating results, and, adjusting for the impact of the one-time events, FedEx said net income was flat with the fourth quarter of FY2014 at $753 million, as total revenue rose 2.3% to $12.11 billion. Adjusted operating income for the quarter was up 4.9% to $1.28 billion.

For the full fiscal year (ended 31 May) Adjusted net income was up 17.4% to $2.57 billion, revenue was up 4.1% to 47.5 billion, and adjusted operating income was up 18.7% to $4.26 billion. The chart at right provides full details of the fourth-quarter and full-year reported financial and operating results, but below we offer a few further comments on the Express segment, particularly regarding changes to the company’s aircraft fleet plans.

In Express, total average daily package volumes increased 2.4%. Lower fuel surcharges and unfavorable currency exchange rates hit revenue, which, despite the volume increase, was down 4.3% y-o-y to $6.70 billion. However, adjusted operating income for the Express segment rose 12% to $598 million, “due to higher base yield and US domestic volume growth.”

Regarding the aircraft retirements:  at the beginning of June, FedEx Corp announced the permanent retirement of fifteen freighter aircraft, along with twenty-one related engines. The company said it made the move as it “continues to rationalize capacity and modernize its aircraft fleet.” The permanent retirements include:

  • Seven MD11 airframes and 12 related engines
  • Three A300 airframes and three related engines
  • Four A310-300 airframes and three related engines

Most of these aircraft have been parked for some time, so the announcement does not mean that FedEx’s operating fleet decreased by fifteen units on 30 May, but rather that the aircraft have been removed from the company’s balance sheet (with a concomitant $276 million impairment charge for the 2015 fiscal year).

FedEx also said it had “adjusted the retirement schedule” of an additional twenty-three airframes and fifty-seven engines, which we take to mean that the aircraft and engines in question will be retired earlier than planned. Among them many MD-10-10Fs and MD-10-30Fs which FedEx is replacing with 767-300Fs.

What does this mean for the future of the FedEx freighter aircraft fleet? Before the retirements at the end of the quarter, The FedEx jet freighter fleet was made up of 372 units of eight types. The company now says that in six years, i.e. at the end of FY2021, all of its forty-nine MD10-10Fs and MD10-30Fs will be gone, and the total jet freighter fleet will be down to just 307 units of six types. Thirty-four 777Fs, forty MD-11Fs, fifty-eight 767-300Fs, fifty-four A300-600Fs, ten A310-200/-300Fs, and one hundred and nineteen 757-200Fs

To learn more about freighter fleet dynamics, click here.

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