Federal Express 2006 Annual Report Download - page 48

Salaries and benefits were higher during 2005 due to higher
incentive compensation, increased medical benefit costs, and
wage rate increases, partially offset by savings from the busi-
ness realignment initiatives. During 2005, fuel costs were higher
due to a 47% increase in the average price per gallon of aircraft
fuel, while gallons consumed increased slightly. In 2005, pur-
chased transportation costs increased at a greater rate than
total revenues, led by IP volume growth requirements and higher
utilization of contract pickup and delivery services.
FedEx Express Segment Outlook
We expect comparatively slower overall revenue growth at FedEx
Express during 2007, due in part to more comparable fuel sur-
charge levels during the year. Revenue increases will be led by
IP, where we expect volume and yield growth, particularly in Asia
and U.S. outbound as a result of continued strong demand for our
services. We expect improved U.S. domestic revenue growth at
FedEx Express, driven by expected increases in U.S. domestic
yields and improved overnight and deferred volumes.
As described above, in January 2006 FedEx Express entered into
an agreement with DTW Group to acquire its 50% share of the
FedEx-DTW International Priority express joint venture and its
domestic express network in China. The acquisition is expected to
be completed in the first half of 2007.
For 2007, we expect operating margin will continue to improve.
We expect improved utilization of the capacity added by the
eastbound and westbound around-the-world flights, partially
offset by costs associated with capacity additions in China
and with the integration of the DTW Group business into the
FedEx Express network. The mix of services on our worldwide
network will change as we sell higher yielding traffic into the net-
work. FedEx Express will continue to focus on cost savings and
productivity enhancement opportunities. Capital expenditures at
FedEx Express are expected to be higher in 2007 due to contin-
ued investment in aircraft and sorting capacity associated with
package growth, as well as continued investments in China. In
March 2006, we broke ground on a new $150 million Asia-Pacific
hub in the southern China city of Guangzhou. This hub is planned
to be operational in 2009. We believe these investments will
enhance our growth prospects for these profitable services in
emerging markets.
FEDEX GROUND SEGM ENT
The following table compares revenues, operating expenses,
operating income and operating margin (dollars in millions) and
selected package statistics (in thousands, except yield amounts)
for the years ended May 31: Percent Change
2006/ 2005/
2006 2005 2004 2005 2004
Revenues $5,306 $4,680 $3,910 13 20
Operating expenses:
Salaries and
employee benefits 929 845 740 10 14
Purchased
transportation 2,019 1,791 1,465 13 22
Rentals 133 122 98 9 24
Depreciation and
amortization 224 176 154 27 14
Fuel 93 48 16 94 200
Maintenance
and repairs 118 110 95 7 16
Intercompany charges 526 482 432 9 12
Other 559 502 388 11 29
Total operating
expenses 4,601 4,076 3,388 13 20
Operating income $ 705 $ 604 $ 522 17 16
Operating margin 13.3% 12.9% 13.4% 40bp (50)bp
Average daily
package volume(1) 2,815 2,609 2,285 8 14
Revenue per
package (yield)(1) $ 7.02 $ 6.68 $ 6.48 5 3
(1) Package statistics include only the operations of FedEx Ground.
FedEx Ground Segment Revenues
Revenues increased during 2006 due to volume increases and
yield improvement, with accelerating volume growth in the
second half of 2006. Average daily volumes increased across
all of our services, led by the continued growth of our FedEx
Home Delivery service. Yield improvement during 2006 was
primarily due to increased fuel surcharges, higher extra service
revenue (primarily on our residential, declared value and over-
size services) and the impact of general rate increases. These
increases were partially offset by higher customer discounts
and a lower average weight per package. In January 2006, we
implemented standard list rate increases averaging 3.9% and
changes to various surcharges.
FEDEX CORPORATION
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