FedEx targets $1.7 billion in cost improvements by FY16

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FedEx is targeting $1.7 billion in annual profit improvements by Fiscal 2016, says the company at its annual shareholder meeting 9 and 10 October in Memphis today.

Nearly all of the cost improvement--$1.6 billion--will come from the FedEx Express unit. The shipping giant is targeting $1.2 billion in cost improvements through a combination of fleet modernization efforts, improving its international profits and targeting growth.

Modernizing the air fleet will account for about $300 million of the cost savings by FY2015. FedEx is expecting a reduction in flight hours, maintenance spending and parts and material sourcing as the fleet is renewed.

The shipping company hopes to achieve several long-term financial goals, including at least a 10% operating margin and improved earnings per share of 10-15% per year.

FedEx executives have alluded to the cost savings programme for months, yet the details were announced a month after the shipper saw revenues fall below its expectations for the first quarter of FY2013.

It attributed the disappointing results to global economic weaknesses, which is in turn driving its customers to choose deferred shipments instead of priority services. The company says that the cost savings are based on adjustments it can make internally and not dependent on a rebound in the economy.

Part of the plan includes moving deferred economy traffic of its new Boeing 777 freighters and into other modes of transportation when demand for high-yield, international priority shipments is strong. FedEx also estimates it will be able to save $50 million per year by combining certain routes in Europe and Asia.

FedEx says that there is a possibility that it could accelerate aircraft retirements if it sees a need to scale down capacity. The company announced in June that it would permanently retire 18 Airbus A310-200 aircraft and six Boeing MD-10-10s.

FedEx has invested $474 million in aircraft and related equipment in the first quarter of FY2013 and expects to spend an additional $823 million throughout the year on those expenses, the company has said in regulatory filings.

In December 2011, FedEx ordered 27 new Boeing 767s for delivery between FY2014 and 2018. It then agreed to purchase an additional 19 Boeing 767-300s for delivery from 2015 to 2019 to replace its MD-10-10 and A310-200 aircraft. Since then, it has converted four 777s for delivery in FY2016 and 2017 to 767 equivalent purchase value due to less than expected trade volumes.

It will purchase 24 more 777 freighters and has 46 Boeing 767 aircraft under contract.