(FDX) FedEx Seeks Sustainable Transport

FedEx Corp. (FDX) announced that its has set a goal of making its fleet of vehicles 20% more fuel efficient and reducing aircraft carbon emissions intensity to 30% by 2020. In its recently released fourth annual Global Citizenship Report, FedEx highlighted its efforts to aggressively follow targets in order to provide sustainable freight transportation for its customers.

The Global Citizenship Report presents FedEx’ 16.6% fuel efficiency gain and a 13.8% reduction in aircraft emission in fiscal 2011. The company also maintains its projection of meeting at least 30% of its jet fuel requirements through alternative fuels by 2030.

The company announced that it is taking several steps toward making its fleet more fuel efficient and environmentally friendly.  Among the initiatives, the company has increased the number of its green fleet by 18%, with 364 hybrid-electric vehicles and 118 electric vehicles. FedEx expects that over 35% of its U.S. pick-up and delivery fleet will be equipped with 11,000 such vehicles by the end of 2013.  The company also introduced a no-cost-to-consumers program called Carbon-Neutral Envelope Shipping. The program not only aids in reducing the carbon footprint of FedEx, but also at the consumers’ end.

Going forward, FedEx is seeking operational efficiency through network realignment to match the current demand levels. In June 2012, the company announced plans to purchase 19 more Boeing 767 aircraft. FedEx expects the delivery of these aircraft from 2015 through 2019. These new aircraft are expected to benefit the cost structure by replacing the old fleet of MD-10 and A31-200.

The 767 Boeing will provide similar capacity compared to MD10 with 20% and 30% reductions in operating cost and fuel cost, respectively. Further, the new planes will lead to cost efficiency by exchanging equipment like spare parts, tooling and flight simulators with the existing FedEx’ Boeing 757 Fleet. The purchase of the new aircraft is an addition to the previously announced plans of buying 27 Boeing 767-300 freighter planes to replace the old MD10s.

The first aircraft is expected to arrive in 2014, with six additional planes per year from 2015–2018. Additionally, FedEx delayed the delivery of eleven 777 freighter aircraft that were scheduled to be delivered between 2013 through 2018. We believe the delayed deliveries would help better utilization of its MD-11 fleet on international flights and lower overall cost and investment.

In 2010, Federal Corporate Average Fuel Economy (CAFE) set a fuel economy standard of 34.1 miles per gallon. This indicates the growing importance of eco-friendly transportation. Several companies, especially those involved in transportation and logistic services like FedEx and United Parcel Service, Inc. (UPS), are increasingly realizing the benefits of fuel efficient vehicles. If the Fed policies are implemented, market researchers estimate that an average consumer would save $3,000 in fuel cost over the life of a vehicle.

Consequently, we believe that FedEx’s goal of improved fuel efficiency is a significant step toward exercising cost control, which can be achieved through sustainable transportation.

Currently, FedEx retains a Zacks #3 Rank (short-term Hold rating). We also reiterate our long-term Neutral recommendation on the stock.

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