Federal Express 2005 Annual Report Download - page 58

FEDEX CORPORATION
56
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
While we currently have market risk sensitive instruments related
to interest rates, we have no significant exposure to changing
interest rates on our long-term debt because the interest rates
are fixed on the majority of our long-term debt. We had approxi-
mately $125 million of outstanding floating-rate borrowings at
May 31, 2005. We have not employed interest rate hedging to mit-
igate the risks with respect to these borrowings. A hypothetical
10% increase in the interest rate on our outstanding floating-rate
borrowings would not have a material effect on our results of
operations. As disclosed in Note 7 to the accompanying consoli-
dated financial statements, we had outstanding fixed-rate,
long-term debt (exclusive of capital leases) of $2.3 billion at both
May 31, 2005 and May 31, 2004. Market risk for fixed-rate, long-
term debt is estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in interest rates and
amounts to approximately $44 million as of May 31, 2005 and $49
million as of May 31, 2004. The underlying fair values of our long-
term debt were estimated based on quoted market prices or on the
current rates offered for debt with similar terms and maturities.
While we are a global provider of transportation, e-commerce
and business services, the substantial majority of our transac-
tions are denominated in U.S. dollars. The distribution of our
foreign currency denominated transactions is such that currency
declines in some areas of the world are often offset by currency
gains of equal magnitude in other areas of the world. The princi-
pal foreign currency exchange rate risks to which we are
exposed are in the Japanese yen, Taiwan dollar, Canadian dollar
and euro. During 2005 and 2004, we believe operating income
was positively impacted due to foreign currency fluctuations.
However, favorable foreign currency fluctuations also may have
had an offsetting impact on the price we obtained or the demand
for our services. At May 31, 2005, the result of a uniform 10%
strengthening in the value of the dollar relative to the currencies
in which our transactions are denominated would result in a
decrease in operating income of approximately $116 million for
2006 (the comparable amount in the prior year was approxi-
mately $79 million). This increase is primarily due to the strong
growth of our international operations. This theoretical calcula-
tion assumes that each exchange rate would change in the same
direction relative to the U.S. dollar.
In practice, our experience is that exchange rates in the principal
foreign markets where we have foreign currency denominated
transactions tend to have offsetting fluctuations. Therefore, the
calculation above is not indicative of our actual experience in for-
eign currency transactions. In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of
the resulting reported operating results, changes in exchange
rates also affect the volume of sales or the foreign currency sales
price as competitors’ services become more or less attractive.
The sensitivity analysis of the effects of changes in foreign cur-
rency exchange rates does not factor in a potential change in
sales levels or local currency prices.
We have market risk for changes in the price of jet and diesel
fuel; however, this risk is largely mitigated by revenue from our
fuel surcharges. In 2002, we implemented new indices for calcu-
lating U.S. domestic fuel surcharges, which more closely link the
fuel surcharges to prevailing market prices for fuel. In 2003, we
implemented this methodology for determining a fuel surcharge
on international shipments as well. Effective January 3, 2005, we
reintroduced an indexed fuel surcharge for FedEx Ground ship-
ments. Therefore, a hypothetical 10% change in the price of fuel
would not be expected to materially affect our earnings.
However, our fuel surcharges have a lag that exists before they
are adjusted for changes in fuel prices and fuel prices can
fluctuate within certain ranges before resulting in a change in our
fuel surcharges. Therefore, our operating income may be affected
should the spot price of fuel suddenly change by a significant
amount or change by amounts that do not result in a change in
our fuel surcharges.
We do not purchase or hold any derivative financial instruments
for trading purposes.