Last month, FedEx (NYSE:FDX) doubled down on the Boeing (NYSE:BA) 767 as its cargo airplane of the future, placing a firm order for another 50 of the type, with 50 options beyond that. This was in line with early reports and higher than some later estimates that FedEx would only order 25 more 767s.
FedEx's new orders for the Boeing 767 run through the 2023 fiscal year. If FedEx exercises its options, the delivery schedule could stretch far beyond then. Why is the package delivery giant so interested in a plane design that will be 40 years old by 2022?
Replacing the MD-10
Even before this recent order, FedEx had commitments to grow its 767 fleet to 58 aircraft by the end of the 2019 fiscal year, up from 21 as of May.
The main purpose of these orders is to replace older planes in FedEx's fleet that are significantly more costly to fly: particularly the MD-10. FedEx claims that the Boeing 767 is approximately 30% more fuel efficient and has 20% lower unit operating costs than its MD-10s. The 767 is also much more reliable, which means that FedEx doesn't need to keep as many spare planes around.
As of the end of its most recent fiscal year in May, FedEx operated 49 MD-10s, down from 61 a year earlier. FedEx's current fleet plan calls for retiring more than half of the remaining fleet within three years, and exiting the fleet by the end of the 2021 fiscal year.
The 37 Boeing 767s that FedEx had on order as of the end of May were already enough to replace most of the MD-10 fleet. The additional orders imply that FedEx plans to replace other aircraft types with the 767, as well.
The most likely candidate by far is the Airbus A300. While the A300 is a smaller plane, with a maximum payload of 106,600 pounds compared to 127,100 pounds for the 767, they are close enough for the 767 to be a good replacement. Upgrading an A300 to a 767 should allow FedEx to carry more freight at the same or lower cost, thus providing low-cost growth potential.
FedEx currently has 68 A300s in its fleet, and they are expected to start retiring in 2018, with retirements accelerating in the following years. If FedEx ultimately decides to use the 767 as its A300 replacement, it could end up exercising most of the 50 options it holds.
Why the 767?
The 767 has a few things going for it as FedEx looks to update its aircraft fleet over the next decade. First, it's a very reliable plane with a more than 30-year history of operations. The type's maturity should help keep FedEx's maintenance costs down.
Second, FedEx will gain efficiency benefits from moving to a more streamlined fleet. In addition to the more than 100 767s that FedEx will operate after receiving the last of the planes from its new order, FedEx already has 119 Boeing 757s in its fleet.
The 757 and 767 are close cousins, having been developed by Boeing at the same time. This creates maintenance synergies. Most importantly, they have the same "type rating," meaning that the same pilots can fly either model. This should enable staffing efficiencies.
Third, since Boeing has to keep the 767 line running for the foreseeable future to produce the KC-767 military tanker, FedEx is getting a good price on its 767 purchases. This will allow it to earn a good return on invested capital from this fleet overhaul.
In short, the Boeing 767 may not be a sexy new airplane, but it's a reliable workhorse that's significantly more efficient than the planes it is replacing for the mainly domestic missions it will be flying. It is also part of a broader drive by FedEx to reduce the number of aircraft types in its fleet. Therefore the growth of the 767 fleet should provide a long-term earnings tailwind for FedEx.
Adam Levine-Weinberg owns shares of The Boeing Company. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.