Federal Express 1998 Annual Report Download - page 34

P32 FDX CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
Outlook
Management is committed to achieving long-term earn-
ings growth by providing transportation, high value-
added logistics and related information services through
focused operating companies. This frequently involves a
significant front-end investment in assets, technology
and personnel that may reduce near-term profitability.
As discussed in Revenues above, a key reason for the
increase in FedEx’s U.S. domestic yield was the contin-
ued yield-management actions of implementing price
increases on low-yielding accounts, discontinuing
unprofitable accounts, increasing average weight per
package and implementing a 3% to 4% rate increase in
February 1998. Management believes yields will con-
tinue to benefit from these actions in 1999, while pack-
age volumes will grow at a lower rate in 1999 than in
the past several years. FedEx will continue to manage
yields with the goal of ensuring an appropriate balance
between revenues generated and the cost of providing
express services. Actual results, however, may vary
depending primarily on the impact of competitive pricing
changes, customer responses to yield-management ini-
tiatives, changing customer demand patterns and
domestic economic conditions.
FedEx’s operating income from the sales of engine noise
reduction kits peaked in1998 and is expected to decline
$45 million year-over-year in 1999 and to become
insignificant by 2001. Actual results may differ depend-
ing primarily on the impact of actions by FedEx’s com-
petitors and regulatory conditions.
While FedEx’s long-term strategy for international opera-
tions is to improve global connectivity for its customers
by strategically expanding its worldwide network, inter-
national economic developments, including the current
Asian economic difficulties, may limit short-term growth
of FedEx’s international services and profits. Manage-
ment expects, however, strategic expansion to allow for
continued, long-term growth of these services.
Management expects IP average daily volume to con-
tinue its strong growth in 1999, and IP yields to remain
relatively constant. With respect to airfreight, manage-
ment believes volumes and yields will decline year-over-
year in 1999. Actual results for IP or airfreight,
however, will depend on international economic condi-
tions, actions by FedEx’s competitors and regulatory
conditions for international aviation rights.
To boost customer confidence and RPS’s competitive
position, RPS introduced a guaranteed ground offering
in July 1998 for business-to-business shipments. Manage-
ment expects RPS’s package volume to continue to grow,
as projected facility expansions begin to address cur-
rent capacity constraints. Yields will likely remain stable
or increase slightly. Actual results, however, will depend
primarily on the impact of competitive pricing changes,
actions by RPS’s competitors, changing customer demand
patterns and domestic economic conditions.
Viking’s strategy for 1999 is to maintain its market leader-
ship in the western United States, improve yields and invest
in updated information systems and other technologies.
The Company will continue to invest in technologies that
improve the efficiency of package pick-up, sorting, track-
ing and delivery and that improve customer access and
connectivity. The Company will also continue projects
designed to enhance productivity and strengthen the
Company’s infrastructure. Assuming effective implemen-
tation, these investments are expected to reduce trans-
portation cost per package.
Effective June 1, 1998, the Company adopted a new
accounting standard which provides guidance on
accounting for the costs of software developed or
obtained for internal use. This standard requires that
certain of these costs be capitalized, and the Company
estimates the pre-tax benefit of the adoption to be
approximately $30 million for 1999.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $230 million at
May 31, 1998, an increase of $69 million during 1998
compared with an increase of $33 million in 1997 and a
decrease of $244 million in 1996. Cash provided from
operations during 1998 was $1.7 billion compared with
$1.1billion and $1.2 billion in1997 and 1996, respectively.
The Company currently has available a $1.0 billion revolv-
ing bank credit facility that is generally used to finance tem-
porary operating cash requirements and to provide
support for the issuance of commercial paper. Manage-
ment believes that cash flow from operations, its commer-
cial paper program and the revolving bank credit facility will
adequately meet its working capital needs for the fore-
seeable future.
Capital Resources
The Company’s operations are capital intensive, charac-
terized by significant investments in aircraft, vehicles,
computer and telecommunication equipment, package
handling facilities and sort equipment. The amount and
timing of capital additions are dependent on various fac-
tors including volume growth, domestic and interna-
tional economic conditions, new or enhanced services,
geographical expansion of services, competition and
availability of satisfactory financing.
Capital expenditures for 1998 totaled $1.9 billion and
included three MD11 aircraft (which were subsequently
sold and leased back), four Airbus A310 aircraft, air-
craft modifications, customer automation and computer
equipment, facilities and vehicles and ground support
equipment. In comparison, prior year expenditures
totaled $1.8 billion and included ten Airbus A310
aircraft, two MD11 aircraft (which were subsequently
sold and leased back, one in 1997 and one in 1998),
customer automation and computer equipment and