Federal Express 2006 Annual Report Download - page 50

Download and view the complete annual report

Please find page 50 of the 2006 Federal Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

FEDEX FREIGHT SEGM ENT
The following table shows revenues, operating expenses, oper-
ating income and operating margin (dollars in millions) and
selected statistics for the years ended May 31: Percent Change
2006/ 2005/
2006 2005 2004 2005 2004
Revenues $3,645 $3,217 $2,689 13 20
Operating expenses:
Salaries and
employee benefits 1,801 1,650 1,427 9 16
Purchased
transportation 298 315 254 (5) 24
Rentals and landing fees 94 99 100 (5) (1)
Depreciation
and amortization 120 102 92 18 11
Fuel 377 257 172 47 49
Maintenance
and repairs 120 128 116 (6) 10
Intercompany charges 37 26 21 42 24
Other 313 286 263 9 9
Total operating
expenses 3,160 2,863 2,445 10 17
Operating income $ 485 $ 354 $ 244 37 45
Operating margin 13.3% 11.0% 9.1% 230bp 190bp
Average daily LTL
shipments (in thousands) 67 63 58 6 9
Weight per
LTL shipment (lbs) 1,143 1,132 1,127 1 –
LTL yield (revenue
per hundredweight) $16.84 $15.48 $14.23 9 9
FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 13% in 2006 due to 9%
growth in LTL yield and 6% growth in average daily LTL shipments.
LTL yield grew during 2006, reflecting incremental fuel surcharges
resulting from higher fuel prices and higher rates. Average daily
LTL shipment growth was driven in part by features such as our
no-fee money-back guarantee and our advance notice service,
which continue to differentiate us in the LTL market.
FedEx Freight segment revenues increased 20% in 2005 due to
year-over-year growth in average daily LTL shipments and yield.
Market share gains, driven in part by brand awareness along
with a stronger economy, contributed to the significant increase
in average daily LTL shipments. LTL yield grew during 2005,
reflecting incremental fuel surcharges due to higher fuel prices,
higher rates, growth in our interregional freight service and a sta-
ble pricing environment.
The indexed LTL fuel surcharge is based on the average of the
national U.S. on-highway average prices for a gallon of diesel
fuel, as published by the Department of Energy. The indexed LTL
fuel surcharge ranged as follows for the years ended May 31:
2006 2005 2004
Low 12.5% 7.6% 3.2%
High 20.1 14.0 8.4
Weighted-average 16.3 10.8 5.4
FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 37% in 2006
primarily due to LTL revenue growth, as well as our ability to con-
trol costs in line with volume growth. Increased LTL yield and
productivity gains contributed to improved margins in 2006 despite
higher salaries and employee benefits, depreciation and fuel
costs. While fuel costs increased substantially in 2006, fuel sur-
charges more than offset the effect of higher fuel costs. Increased
staffing to support volume growth and higher incentive compen-
sation expense increased salaries and employee benefits in 2006.
Depreciation costs increased primarily due to investments in
operating equipment, which in some cases replaced leased
equipment. Maintenance and repairs decreased due to the pres-
ence of rebranding costs in 2005, as well as the recent increase in
the purchase of new fleet vehicles. Purchased transportation
costs decreased, due to increased utilization of company equip-
ment in our interregional freight services.
FedEx Freight segment operating income increased 45% in 2005
primarily due to LTL yield and shipment growth, as well as our
ability to manage costs during a period of substantial growth.
Higher fuel surcharges and productivity gains contributed to
improved operating margin in 2005 despite higher salaries and
employee benefits, purchased transportation and fuel costs.
Purchased transportation costs increased due to growth in our
interregional freight service, efforts to supplement our linehaul
operations and higher fuel surcharges from contract carriers.
FedEx Freight Segment Outlook
As described above, we have entered into an agreement to
acquire the LTL operations of Watkins and certain affiliates for
approximately $780 million in cash. The financial results of
Watkins will be included in the FedEx Freight segment from the
date of acquisition, which is expected to occur during the first
half of 2007.
We expect revenue growth in 2007, due to both LTL yield improve-
ment and LTL shipment growth and as a result of our pending
acquisition of Watkins. The general LTL rate increase of 5.95%
(implemented in April 2006) and a stable industry-pricing envi-
ronment are expected to contribute to LTL yield improvement.
We will continue to focus on yield management at FedEx Freight
while growing our regional and interregional services. We also
expect continued consolidation among LTL carriers and sustained
FEDEX CORPORATION
48