Federal Express 2001 Annual Report Download - page 14

Management’s Discussion and Analysis
12
Because of substantial lead times associated with the manufac-
ture or modification of aircraft, we must generally plan our aircraft
orders or modifications three to eight years in advance. Therefore,
we must make projections regarding our needed airlift capacity
many years before the aircraft is actually needed. Our past projec-
tions included assumptions of volume growth that have not mate-
rialized and, in light of current economic projections, are not
expected to do so in the near future. Therefore, we will continue to
evaluate further reductions in aircraft programs in order to ration-
alize available capacity with current and anticipated business vol-
umes where it is economically practicable to do so.
FEDEX GROUND
The following table compares revenues and operating income (in
millions) and selected package statistics (in thousands, except
dollar amounts) for the years ended May 31:
Percent Change
2001/ 2000/
2001 2000(1) 1999(1) 2000 1999
Revenues $2,237 $2,033 $1,878 +10 +8
Operating expenses:
Salaries and employee
benefits 450
Purchased transportation 881
Rentals and landing fees 67
Depreciation and
amortization 111
Fuel 8
Maintenance and repairs 63
Intercompany charges 215
Other 267
Total operating
expenses 2,062 1,807 1,647 +14 +10
Operating income $175 $226 $ 231 –23 –2
Average daily packages 1,520 1,442 1,385 +5 +4
Revenue per package (yield) $5.79 $5.55 $ 5.36 +4 +4
(1) Operating expense detail for 2000 and 1999 has been omitted, as this data is not
comparable to 2001. See “Reportable Segments” above.
Revenues
FedEx Ground revenues increased 10% in 2001 due to increases in
volume and yield. The year-over-year increase in average daily
packages of 5% represents positive volume growth experienced
in all major sectors served by FedEx Ground, including our FedEx
Home Delivery service. The 4% year-over-year yield increase was
primarily due to the February 2001 list rate increase of 3.1%, the
1.25% fuel surcharge imposed in August 2000 and ongoing yield
management efforts.
Revenues for FedEx Ground increased 8% in 2000, while average
daily packages increased 4% and yields increased 4%. The
increase in yields was due to a 2.3% price increase, which was
effective in February 1999, and a slight increase in the mix of
higher yielding packages.
Operating Income
The 2001 year-over-year decrease in operating income of 23%
was primarily due to incremental FedEx Home Delivery operating
losses and rebranding and reorganization expenses, which
totaled $45 million. Excluding the negative effect of this amount,
operating income decreased 2% from 2000. Facility openings and
expansions, as well as increased investments in information
systems, resulted in increased depreciation, rental and other
property-related expenses.
Operating income for 2000 reflected higher operating costs than
1999, due primarily to increases in capacity and technology, as
well as the effects of FedEx Home Delivery and the rebranding
and reorganization initiatives. Depreciation expense increased
20% in 2000 as new terminal facilities were opened late in 1999
and throughout the first half of 2000. The FedEx Home Delivery
service, dedicated to meeting the needs of business-to-consumer
shippers, was launched in March 2000. An operating loss of
$19 million was incurred by the home delivery service in 2000.
Outlook
FedEx Ground will continue expansion of the FedEx Home Delivery
network to serve an estimated 80% of the U.S. population by
September 2001. Revenues and volumes for this service are
expected to continue to grow as the network is expanded and the
service becomes available in additional markets. In addition to uti-
lizing 2002 capital for expansion, FedEx Ground will also implement
and improve information systems in order to increase productivity.
We expect to incur an operating loss for the home delivery service
in 2002 that is approximately the same as that experienced in
2001, primarily due to continued network expansion costs and
inclusion of a full year for the terminals that opened during 2001.
FedEx Ground will also continue to incur vehicle rebranding costs,
although these expenses are expected to be slightly lower than
the 2001 level.
FEDEX FREIGHT
The FedEx Freight segment, formed in the third quarter of 2001,
includes the financial results of Viking from December 1, 2000, and
the financial results of American Freightways from January 1, 2001
(the date of acquisition for financial reporting purposes).