Federal Express 2009 Annual Report Download - page 22

FEDEX CORPORATION
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Fuel costs decreased 13% in 2009 due to decreases in fuel
consumption and the average price per gallon of fuel. Fuel sur-
charges were suffi cient to offset fuel costs for 2009, based on
a static analysis of the impact to operating income of the year-
over-year changes in fuel prices compared to changes in fuel
surcharges. This analysis considers the estimated benefits
of the reduction in fuel surcharges included in the base rates
charged for FedEx Express services. However, this analysis does
not consider the negative effects that the signifi cantly higher
fuel surcharge levels have on our business, including reduced
demand and shifts to lower-yielding services. Maintenance and
repairs expense decreased 11% primarily due to a volume-related
reduction in flight hours and the permanent and temporary
grounding of certain aircraft due to excess capacity in the
current economic environment.
Operating results for 2008 were negatively impacted by record
high fuel prices, the continued weak U.S. economy and our
continued investment in domestic express services in China.
However, revenue growth in IP services, reduced retirement plan
costs, the favorable impact of foreign currency exchange rates
and lower variable incentive compensation partially offset the
impact of these factors on operating income during 2008.
Fuel costs increased in 2008 due to an increase in the average
price per gallon of fuel. The volatility in fuel prices and fuel sur-
charges resulted in a net benefi t to income in 2008, based on a
static analysis of the year-over-year changes in fuel prices com-
pared to changes in fuel surcharges. This analysis considers the
estimated benefi ts of the reduction in fuel surcharges included in
the base rates charged for FedEx Express services.
Other operating expenses increased during 2008 principally
due to the inclusion of our 2007 business acquisitions, including
the full consolidation of the results of our China joint venture.
Purchased transportation costs increased in 2008 primarily due
to the inclusion of our 2007 business acquisitions, the impact
of higher fuel costs and IP volume growth, which requires a
higher utilization of contract pickup and delivery services. These
increases in purchased transportation costs were partially offset
by the elimination of payments by us for pickup and delivery ser-
vices provided by our former China joint venture partner, as we
acquired this business in the second half of 2007. The increase in
depreciation expense during 2008 was principally due to aircraft
purchases and our 2007 business acquisitions. Intercompany
charges increased during 2008 primarily due to increased net
operating costs at FedEx Offi ce associated with declines in copy
revenues, as well as higher expenses associated with store
expansion, advertising and promotions, and service improvement
activities. This increase was partially offset by lower allocated
fees from FedEx Services due to cost-containment activities.
FedEx Express Segment Outlook
We expect revenues to decline at FedEx Express in 2010 as a
result of signifi cantly lower fuel surcharges and the ongoing
global recession. U.S. domestic and IP package volumes are
expected to be fl at, and yields are expected to be negatively
impacted by a competitive pricing environment and the ongoing
global recession.
FedEx Express segment operating income and operating margin
are expected to increase slightly in 2010. We expect the full year
impact of actions taken in 2009 to lower our cost structure, com-
bined with additional cost-containment initiatives in 2010, will be
mostly offset by a signifi cant decline in revenues.
Capital expenditures at FedEx Express are expected to increase
in 2010 driven by incremental investments for the new B777F
aircraft, the fi rst of which is expected to enter revenue service
in 2010. These aircraft capital expenditures are necessary to
achieve signifi cant long-term operating savings and to support
projected long-term international volume growth.
FEDEX GROUND SEGMENT
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
2009/ 2008/
2009 2008 2007 2008 2007
Revenues $ 7,047 $ 6,751 $ 6,043 4 12
Operating expenses:
Salaries and
employee benefi ts
1,102 1,073 1,006 3 7
Purchased
transportation (1) 2,918 2,878 2,430 1 18
Rentals 222 189 166 17 14
Depreciation and
amortization 337 305 268 10 14
Fuel (1) 9 14 13 (36) 8
Maintenance
and repairs
147 145 134 1 8
Intercompany charges 710 658 569 8 16
Other 795 753 635 6 19
Total operating
expenses 6,240 6,015 5,221 4 15
Operating income $ 807 $ 736 $ 822 10 (10)
Operating margin 11.5% 10.9% 13.6% 60bp
Average daily package volume:
FedEx Ground 3,404 3,365 3,126 1 8
FedEx SmartPost 827 618 599 34 3
Revenue per package (yield):
FedEx Ground $ 7.70 $ 7.48 $ 7.21 3 4
FedEx SmartPost $ 1.81 $ 2.09 $ 1.88 (13) 11
(1) We reclassifi ed certain fuel supplement costs related to our independent contractors
from fuel expense to purchased transportation expense to conform to the current period
presentation.
(270)bp