Federal Express 2006 Annual Report Download - page 63

MANAGEM ENT’S DISCUSSION AND ANALYSIS
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The regulatory environment for global aviation rights may impact
our air operations.
Our extensive air network is critical to our
success. Our right to serve foreign points is subject to the
approval of the Department of Transportation and generally
requires a bilateral agreement between the United States and
foreign governments. In addition, we must obtain the permission
of foreign governments to provide specific flights and services.
Regulatory actions affecting global aviation rights or a failure to
obtain or maintain aviation rights in important international
markets could impair our ability to operate our air network.
We are negotiating a new collective bargaining agreement with
the union that represents the pilots of FedEx Express.
FedEx
Express pilots are employed under a collective bargaining agree-
ment 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. These
negotiations are ongoing and are being mediated through the
National Mediation Board. We cannot predict the outcome of
these negotiations. The terms of any new collective bargaining
agreement could increase our operating costs and adversely
affect our ability to compete with other providers of express
delivery services. On the other hand, if we are unable to reach
agreement on a new collective bargaining agreement, we may
be subject to a strike, work stoppages or slowdowns by our
pilots, subject to the requirements of the Railway Labor Act.
These actions could have a negative impact on our ability to
operate our express transportation network and ultimately cause
us to lose customers.
We are also subject to risks and uncertainties that affect many
other businesses, including:
• economic conditions in the global markets in which we operate;
• the impact of any international conflicts or terrorist activities on
the United States and global economies in general, the trans-
portation industry or us in particular, and what effects these
events will have on our costs or the demand for our services;
• any impacts on our businesses resulting from new domestic or
international government regulation, including tax, accounting,
labor or environmental rules;
• our ability to manage our cost structure for capital expenditures
and operating expenses and match them to shifting customer
volume levels;
• changes in foreign currency exchange rates, especially in the
Japanese yen, Taiwan dollar, Canadian dollar and euro, which
can affect our sales levels and foreign currency sales prices;
• our ability to maintain good relationships with our employees
and prevent attempts by labor organizations to organize groups
of our employees, which could significantly increase our oper-
ating costs;
• a shortage of qualified labor and our ability to mitigate this
shortage through recruiting and retention efforts and productiv-
ity gains;
• increasing costs for employee benefits, especially pension and
healthcare benefits;
• significant changes in the volumes of shipments transported
through our networks, customer demand for our various ser-
vices or the prices we obtain for our services;
• market acceptance of our new service and growth initiatives;
• any liability resulting from and the costs of defending against
class-action litigation, such as wage-and-hour and race dis-
crimination claims, and any other legal proceedings;
• the impact of technology developments on our operations and
on demand for our services (for example, the impact that low-
cost home copiers and printers are having on demand for FedEx
Kinko’s copy services);
• adverse weather conditions or natural disasters, such as earth-
quakes and hurricanes, which can damage our property, disrupt
our operations, increase fuel costs and adversely affect ship-
ment levels;
• widespread outbreak of an illness, such as avian influenza (bird
flu), severe acute respiratory syndrome (SARS) or any other
communicable disease, or any other public health crisis; and
• availability of financing on terms acceptable to us and our abil-
ity to maintain our current credit ratings, especially given the
capital intensity of our operations.
We are directly affected by the state of the economy. While the
global, or macro-economic, risks listed above apply to most
companies, we are particularly vulnerable. The transportation
industry is highly cyclical and especially susceptible to trends in
economic activity. Our primary business is to transport goods, so
our business levels are directly tied to the purchase and produc-
tion of goods — key macro-economic measurements. When
individuals and companies purchase and produce fewer goods,
we transport fewer goods. In addition, we have a relatively high
fixed-cost structure, which is difficult to adjust to match shifting
volume levels. Moreover, as we grow our international business,
we are increasingly affected by the health of the global economy.