FedEx Opens Freight Station in Chicago
FedEx Corp. (FDX) announced last week the opening of a container freight station in Chicago to facilitate shipments to Puerto Rico. The freight station constitutes part of the company’s entire North American network which involves over 360 freight service centers. We expect this station to enhance network fluidity and service efficiency and eventually attract more customers.
The news was well received by the market as the FedEx stock price moved up 56 cents on Monday closing.
We believe the opening of the service center is part of the company’s efforts for network realignment to match the current demand level and performance level improvement. In Jun 2013, the company announced the retirement of 86 aircraft and 308 related engines to modernize its fleet and improve the global network of FedEx Express.
Of these aircraft, the company completed the final retirement of The Boeing Company (BA) B727-200 fleet in Jul 2013. FedEx is also keen on deploying fuel-efficient aircraft such as the new Boeing 767.
In Mar 2013, FedEx confirmed the purchase of 30 Boeing 757 passenger airplanes from United Continental Holdings Inc. (UAL) to convert them into fleet for cargo. With deliveries through 2015, these twin-engine based airliners would transport 20% extra freight than the three-engine Boeing 727s and would enhance fuel efficiency.
In Sep 2013, the company received its first 767 aircraft from Boeing. In concurrence with the company’s fleet improvement plan, the Brazilian unit of FedEx added its first electric vehicles fleet to its transportation system in Oct 2013.
However, we expect the European debt crisis and tardy Asian growth to remain detrimental to the company’s demand function despite significant investments going forward. As a result, FedEx will likely witness a demand shift from premium services to deferred services within FedEx Express as customer preferences drift toward lower-yielding international services, lower rate per pound and weight per shipment. This will ultimately have a negative impact on operating margins.
The company expects subdued revenue performance in the Freight segment in fiscal 2014 due to poor demand in Less-Than-Truckload services. Depreciation expenses are also expected to increase due to accelerated retirement of old aircraft, which would cost around $74 million in fiscal 2014.
FedEx, which competes with United Parcel Service, Inc. (UPS), currently carries a Zacks Rank #3 (Hold).
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