FedEx converts 777 orders due to efficiency plans, lower demand

Washington DC
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FedEx says it decided to convert four Boeing 777-200LRF orders to Boeing 767-300ERF equivalent purchase value because international freight demand has not been as strong as expected since it originally ordered them, and because one of its more imminent priorities is boosting the efficiency of its US domestic network.

"Clearly with that conversion we thought it was more important in the mid-term to focus more dollars on improving our efficiency of our network," the carrier told Flightglobal.

FedEx flies the Boeing 777 on its international networks, connecting Asia to Europe and the US.

The Boeing 767-300s Fedex has ordered serve as replacement aircraft for its current MD-10s and A310-200s, which primarily fly within the US. The Boeing 767-300s provide similar capacity to the MD-10s they are replacing. FedEx is expecting the new 767-300 freighters to yield 30% increased fuel efficiency and offer a 20% reduction in unit operating costs.

FedEx says that as it has introduced more shipping options in the past seven years, customers have been choosing "slower, less costly options for some of their deliveries versus where they were in the past," such as its international economy service and its trade network's freight forwarding services.

"Clearly with this conversion, the size of our international air fleet will not grow as rapidly as we originally planned," says FedEx.

The carrier says that some of the order dates of the 19 new Boeing 767-300s will overlap the delivery dates for the four Boeing 777 freighters it converted. Those dollars go toward purchasing a portion of the total Boeing 767-300 order for 19 aircraft, rather than being tied to specific aircraft purchases.

The 19 Boeing 767-300s that FedEx ordered last week are set to arrive from 2015 to 2019. These orders should come well after the planned first flight in the third quarter of 2014 of the new Boeing 767-2C commercial freighter.

When asked if it has considered purchasing the aircraft, FedEx says that while it has long-term commitments to the Boeing 767, it is too early to comment on whether the fleet plans include the 767-2C.

According to Ascend current market values, FedEx's order for 19 Boeing 767-300 freighters is estimated to be worth US $1.539 billion, and the four Boeing 777 freighters would have an estimated current market value of $640 million. This does not include any discounts on the volume of the order, if FedEx received any.

Two of the carrier's converted Boeing 777 orders had been set to arrive in 2016 and two in 2017. FedEx received the first of its new Boeing 777 freighters in March 2011. According to Flightglobal's Ascend database, a majority of the 777s on its current backlog were ordered in 2010 and 2011. When accounting for the newly-converted orders, FedEx now has 19 Boeing 777 freighters in operation, with 24 more on order.

This newest order follows FedEx's move to purchase 27 new Boeing 767-300 freighters on 15 December, 2011, which are scheduled to be delivered between 2014 and 2018 at a rate of three in the first year, followed by six each year between 2015 and 2018. When added to the most recent order, FedEx has agreed to purchase 46 new Boeing 767s.

Ascend data shows that FedEx is slated to receive its first new Boeing 767-300ERF on 15 June, 2014, following two more in August and October.

FedEx accelerated the retirements of 18 Airbus A310-200 freighters and 26 related engines and six Boeing MD-10-10 cargo aircraft with 17 related engines. A majority of those aircraft were parked.

FedEx Express' average domestic daily package volumes were down 5% in the fourth quarter ending 31 May. International priority (IP) volume was also down, however, overall IP package and freight pounds were up by 2% year-on-year.

In the fourth quarter, FedEx's domestic flight hours declined by 3%, or 2,000h per year, year-over-year.

FedEx will release its latest annual report in mid-July.