FedEx Express, a unit of FedEx Corporation (FDX”>FDX), is expected to lose about $400 million when a new federal mail-flying contract is negotiated in 2013.
FedEx Express, the world’s largest express company, offers timely delivery within one to three business days and serves markets that comprise over 90% of the world’s gross domestic product. FedEx Express signed a contract with the U.S. Postal Service (USPS) for airport-to-airport delivery of priority mail, express mail and first-class mail within the United States. The contract is set to expire in 2013.
After making a loss of $5.1 billion in 2011, the U.S. Postal Service is again expected to post a record loss of $14.1 billion in 2012. Mail volumes declined more than 20% since 2006 due to increased reliability on electronic communication.
With the drop in mail volumes and an amended contract, FedEx revenue from postal service is expected to shrink to less than a billion annually. To endure falling volumes, FedEx Express raised its shipping rates by a net 3.9% for U.S. domestic, export and import services from January 2, 2012.
We believe the future of FedEx, a strong competitor of United Parcel Service Inc. (UPS), largely hinges on its Express segment, which is also affected by weak Asian demand. The company is realigning its network capacity to match weak international volumes due to the drop in the Asian demand. FedEx Express is taking several initiatives including reducing flights and frequencies as well as redeploying equipment in other networks to reduce costs.
FedEx will buy 27 The Boeing Company (BA) 767-300 freighter planes to replace the old MD10s over the next few years. The first aircraft is expected to arrive in 2014, with six additional planes per year from 2015–2018. The new freighter planes are 30% more fuel efficient than the older ones and would save 20% in operating costs.
Further, FedEx delayed delivery of eleven 777 freighter aircraft that were slated to arrive from 2013 through 2018. We believe the delayed deliveries would help FedEx to better utilize the MD-11 fleet on international flights and lower overall costs and investments in the short and long term. Additionally, the network restructuring would provide significant fleet efficiency gains and would benefit the Express division over the long term.
We are currently reiterating our long-term Neutral rating on FedEx. The stock retains a Zacks #2 (Buy) Rank for the short term.
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