Federal Express 2005 Annual Report Download - page 42

who were age 50 or older. Voluntary cash severance incentives
were also offered to eligible employees at FedEx Express. These
programs were limited to eligible U.S. salaried staff employees
and managers. Approximately 3,600 employees accepted offers
under these programs. Costs were also incurred for the elimina-
tion of certain management positions, primarily at FedEx Express
and FedEx Services, based on the staff reductions from the vol-
untary programs and other cost reduction initiatives. Costs for the
benefits provided under the voluntary programs were recognized
in the period that eligible employees accepted the offer. Other
costs associated with business realignment activities were
recognized in the period incurred.
We recognized $435 million of business realignment costs during
2004. No material costs for these programs were incurred in 2005.
At May 31, 2004, we had remaining business realignment related
accruals of $28 million. The remaining accruals relate to man-
agement severance agreements, which are payable over future
periods. At May 31, 2005, these accruals had decreased to $7
million due predominantly to cash payments made in 2005.
Over the past few years, we have taken many steps to bring our
expense growth in line with revenue growth, particularly at FedEx
Express, while maintaining our industry-leading service levels.
The business realignment programs were another step in this
ongoing process of reducing our cost structure to increase our
competitiveness, meet the future needs of our employees and
provide the expected financial returns for our shareholders.
Airline Stabilization Act Charge
During the second quarter of 2005, the United States Department
of Transportation (“DOT”) issued a final order in its administrative
review of the FedEx Express claim for compensation under the Air
Transportation Safety and System Stabilization Act (“Act”). Under
its interpretation of the Act, the DOT determined that FedEx
Express was entitled to $72 million of compensation, an increase
of $3 million from its initial determination. Because we had previ-
ously received $101 million under the Act, the DOT demanded
repayment of $29 million, which was made in December 2004.
Because we could no longer conclude that collection of the
entire $119 million of such compensation recorded in 2002 was
probable, we recorded a charge of $48 million in the second
quarter of 2005 ($31 million net of tax, or $0.10 per diluted share),
representing the DOT’s repayment demand of $29 million and the
write-off of a $19 million receivable. We are vigorously contesting
this determination judicially and will continue to aggressively pur-
sue our compensation claim. Should any additional amounts
ultimately be recovered by FedEx Express on this matter, they will
be recognized in the period that they are realized.
Outlook
Our outlook for 2006 is based on the expectation of continued,
albeit slower, growth in the U.S. economy. While comparisons
will be more difficult against a very strong 2005, we expect con-
tinued revenue and earnings growth across all FedEx operating
companies. We also expect a stable global economy in 2006,
supported by stable worldwide monetary policy and continued
growth in corporate profitability in the U.S. and Asia.
Volatility in fuel costs may pressure quarterly earnings growth as
the trailing impact of adjustments to the FedEx Express fuel sur-
charge can significantly affect earnings in the short term.
Incremental costs associated with the new westbound around-
the-world flight at FedEx Express will be significant in 2006, and a
competitive pricing environment may limit base U.S. domestic
yield growth, particularly in our package businesses. U.S. domes-
tic pension costs are expected to increase by more than $60
million in 2006 based on a declining discount rate.
Our management teams continue to examine additional cost
reduction and operational productivity opportunities as we focus
on optimizing our networks, improving our service offerings and
enhancing the customer experience. These opportunities include
initiatives to improve pickup and delivery efficiency, increase
cross-operating company collaboration, and manage the growth
of employee salaries and benefits. During 2006, we expect con-
tinued strong growth of international volumes and yields at FedEx
Express. We expect modest growth in U.S. domestic revenue at
FedEx Express. We anticipate improved volumes and yields at
FedEx Ground and FedEx Freight, as FedEx Ground continues its
multi-year capacity expansion plan and FedEx Freight continues
to grow its regional and interregional business and enhance its
portfolio of services. We expect that FedEx Kinko’s will generate
revenue growth from the transition of FedEx World Service
Centers to FedEx Kinko’s Ship Centers, the growth of current lines
of business and expansion of our retail network.
Investments in our highest margin service lines will accelerate
in 2006 as we add incremental international routes, deploy new
productivity-enhancing technologies and broaden the size of our
aircraft fleet and sortation capacity to meet future growth. While
these investments will increase costs, we still expect improve-
ment in operating margin and cash flows in 2006.
The pilots of FedEx Express, which represent a small number of
FedEx Express total employees, are employed under a collective
bargaining agreement that became amendable on May 31, 2004.
In accordance with applicable labor law, we will continue to
operate under our current agreement while we negotiate with
our pilots. Contract negotiations with the pilots’ union began in
March 2004 and are ongoing. We cannot estimate the financial
impact, if any, the results of these negotiations may have on our
future results of operations.
Increased security requirements for air cargo carriers have not
had a material impact on our operating results for the peri-
ods presented. In November 2004, the Transportation Security
Administration (“TSA”) proposed new rules enhancing many of the
security requirements for air cargo on both passenger and all-
cargo aircraft. Because the TSA’s proposed rules are subject to
comment, any final rules may differ significantly from the proposed
rules. Accordingly, it is not yet possible to estimate the impact, if
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