Federal Express 2009 Annual Report Download - page 23

MANAGEMENT’S DISCUSSION AND ANALYSIS
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FedEx Ground Segment Revenues
FedEx Ground segment revenues increased 4% in 2009 due to
yield improvement at FedEx Ground and volume growth at both
FedEx SmartPost and FedEx Ground. FedEx Ground volume
growth during 2009 resulted from market share gains, including
volumes gained from DHL’s exit from the U.S. market, and con-
tinued growth in the FedEx Home Delivery service. FedEx Ground
volumes also benefi ted from existing FedEx Express customers’
opting for lower-cost FedEx Ground offerings. Yield improvement
at FedEx Ground during 2009 was primarily due to higher base
rates (partially offset by higher customer discounts), increased
extra service revenue and higher fuel surcharges.
FedEx SmartPost picks up shipments from customers and deliv-
ers them to various points within the United States Postal Service
(“ USPS” ) network for fi nal delivery. FedEx SmartPost revenue
and yield represent the amount charged to customers net of post-
age paid to the USPS. FedEx SmartPost volume growth during
2009 resulted from market share gains, including volumes gained
from DHL’s exit from the U.S. market. Yields at FedEx SmartPost
decreased 13% during 2009 due to changes in customer and
service mix.
FedEx Ground segment revenues increased during 2008 due
to volume and yield growth. Volume growth at FedEx Ground
resulted from market share gains and the customer appeal of
our cost-effective alternative to overnight air delivery services.
Average daily volumes at FedEx Ground increased during 2008
due to increased commercial business and the continued growth
of our FedEx Home Delivery service. Yield improvement during
2008 was primarily due to the impact of general rate increases,
higher extra service revenue (primarily through our residential,
additional handling and large package surcharges) and higher
fuel surcharges, partially offset by higher customer discounts
and a lower average weight and zone per package.
In January 2009, we implemented a 5.9% average list price
increase and made various changes to other surcharges on
FedEx Ground shipments. In January 2008, we implemented a
4.9% average list price increase and made various changes to
other surcharges on FedEx Ground shipments. The FedEx Ground
fuel surcharge is based on a rounded average of the national U.S.
on-highway average prices for a gallon of diesel fuel, as pub-
lished by the Department of Energy. Our fuel surcharge ranged
as follows for the years ended May 31:
2009 2008 2007
Low 2.25% 4.50% 3.50%
High 10.50 7.75 5.25
Weighted-Average 6.61 5.47 4.18
FedEx Ground Segment Operating Income
The following table compares operating expenses as a percent
of revenue for the years ended May 31:
Percent of Revenue
2009 2008 2007
Operating expenses:
Salaries and employee benefi ts 15.6% 15.9% 16.7%
Purchased transportation 41.4 42.6 40.2
Rentals 3.1 2.8 2.8
Depreciation and amortization 4.8 4.5 4.4
Fuel 0.1 0.2 0.2
Maintenance and repairs 2.1 2.1 2.2
Intercompany charges 10.1 9.8 9.4
Other 11.3 11.2 10.5
Total operating expenses 88.5 89.1 86.4
Operating margin 11.5% 10.9% 13.6%
FedEx Ground segment operating income and operating margin
increased during 2009 primarily due to the timing impact of fuel
surcharges and yield growth. Rapidly declining fuel costs and
the timing lag between such declines and adjustments to our
fuel surcharges provided a signifi cant benefi t to FedEx Ground
results for 2009.
Rent expense increased 17% and depreciation expense increased
10% during 2009 primarily due to higher spending on material
handling equipment and facilities associated with our multi-
year network expansion plan. Purchased transportation costs
increased slightly in 2009 as a result of higher rates paid to our
independent contractors and costs associated with our indepen-
dent contractor programs (described below), partially offset by
a decrease in fuel costs. The increase in salaries and employee
benefi ts expense during 2009 was partially offset by the base
salary reductions and suspension of 401(k) company-matching
contributions described in the Overview section. Intercompany
charges increased 8% during 2009 primarily due to allocated
telecommunication expenses (formerly a direct charge), higher
general and administrative costs and higher allocated customer
service costs. Other operating expenses increased 6% during
2009 primarily due to higher reserve requirements for liability
insurance. Lower legal costs, including settlements, partially
offset the increase in other operating expenses in 2009.
FedEx Ground segment operating income decreased during 2008,
as revenue growth was more than offset by higher independent
contractor-related costs, the net impact of increased fuel costs,
costs associated with our multi-year network expansion plan,
higher intercompany charges and higher legal costs (including
fees paid to external counsel, settlement costs and loss accruals).
However, lower variable incentive compensation partially offset
the net impact of these factors on operating income during 2008.