Federal Express 1998 Annual Report Download - page 32

Operating Expenses
Volume growth and expansion of the Company’s opera-
tions resulted in a trend of rising operating expenses.
Presented below are year-over-year percentage
changes in selected operating expenses:
Percent Change
1998/1997 1997/1996
Salaries and employee benefits + 8 +11
Purchased transportation +18 +18
Rentals and landing fees +14 +12
Depreciation and amortization + 4 + 9
Maintenance and repairs +13 +14
Fuel – 1 +20
Other +11 +17
Total operating expenses + 8 +15
Salaries and employee benefits expense rose primarily
due to higher employment levels associated with volume
growth, partially offset in 1998 by a decline at Viking
after its restructuring. Increased provisions under the
Company’s performance-based, incentive compensation
plans in 1998 and 1997, and a $25 million special
appreciation bonus in 1998 for U.S. operations employ-
ees at FedEx for their extra efforts during the UPS strike
also contributed to the increases in salaries and
employee benefits expense.
Increases in purchased transportation were primarily
volume related, with the majority of the increases occur-
ring at RPS in 1998 and at FedEx in 1997.
Rentals and landing fees increased primarily due to addi-
tional aircraft leased by FedEx. As of May 31, 1998, the
Company had 86 wide-bodied aircraft under operating
lease compared with 78 as of May 31,1997, and 74 as of
May 31, 1996. Management expects year-over-year
increases in lease expense to continue as the Company
enters into additional aircraft rental agreements during
1999 and thereafter.
In the past three years, FedEx’s aircraft fleet has
increased resulting in a corresponding rise in mainte-
nance expense. The rise in maintenance and repairs
expense for 1998 was primarily due to higher engine
maintenance expense on B727, DC10 and A310 air-
craft. As discussed above, most of the1998 increase in
an operating reserve for the disposition of B747 air-
craft was recorded as maintenance and repairs
expense. In 1997, FedEx experienced higher engine
maintenance expense on MD11 and A310 aircraft.
FedEx expects a predictable pattern of aircraft mainte-
nance and repairs expense. However, unanticipated
maintenance events will occasionally disrupt this pat-
tern, resulting in periodic fluctuations in maintenance
and repairs expense. Given FedEx’s increasing fleet size,
aging fleet and variety of aircraft types, management
believes that maintenance and repairs expense will con-
tinue a trend of year-over-year increases for the fore-
seeable future.
Fuel expense decreased in1998 due to a 10% decline in
average jet fuel price per gallon and a decrease in vehicle
fuel consumption at Viking, partially offset by a 13%
increase in jet fuel gallons consumed. Fuel expense
increased in 1997due to a 12% and 8% rise in average
jet fuel price per gallon and gallons consumed, respec-
tively. In 1997, the increase in average price per gallon of
jet fuel was due to higher jet fuel prices and a 4.3 cents
per gallon excise tax on aviation fuel, used domestically,
which became effective October 1, 1995. For the past
three years, fuel expense included amounts received and
paid by FedEx under contracts which are designed to
limit FedEx’s exposure to fluctuations in jet fuel prices.
In order to mitigate the impact of the increase in jet fuel
prices experienced in 1997, FedEx implemented fuel sur-
charges on airfreight shipments, effective December 1,
1996, for shipments out of Europe and selected Asian
countries. Additionally, the Company implemented fuel sur-
charges, effective December 15, 1996, for airfreight ship-
ments originating in the United States, Latin America and
the remaining parts of Asia, except those to the People’s
Republic of China and Hong Kong. These surcharges were
discontinued effective April 15 or June 1, 1997, depending
on the origin country. FedEx also implemented a tempo-
rary 2% fuel surcharge, effective February 3, 1997, on
U.S. domestic shipments except FedEx Same Day service
and including Puerto Rico. This surcharge also applied to
all U.S. export IP shipments, except those to the People’s
Republic of China and Hong Kong. This surcharge was
lifted on August1, 1997.
Increases in other operating expenses for1998 and 1997
were primarily due to expenses related to volume growth
and, in 1998, expenses necessitated by additional volume
during the UPS strike, including temporary manpower and
uniforms and supplies. The cost of sales of engine noise
reduction kits also increased in1998 and 1997.
The Company’s work on the Year 2000 (“Y2K”) com-
puter compliance issue began in 1996. The Company’s
Y2K compliance program consists of five parts: inven-
tory, assessment, renovation, testing and implementa-
tion. The Company has conducted an inventory and
assessment of remediation required for business-
critical information technology applications. Project
plans have been created, and progress is being moni-
tored on an ongoing basis. Upon completion, validation
of these efforts will be performed by an internal, inde-
pendent process. The Company’s goal is to have the
majority of these business-critical information technol-
ogy applications Y2K compliant by December 31,
1998. The Company is also in the process of complet-
ing Company-wide inventory, assessment and remedia-
tion project plans for business-critical personal
computers and software, user applications and embedded-
chip systems. The Company’s goal is to have the major-
ity of these business-critical components Y2K
compliant by May 31, 1999.
The Company is investigating the Y2K compliance sta-
tus of its vendors, suppliers and affiliates via the Com-
pany’s own internal vendor compliance effort. The
P30 FDX CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS