Federal Express 2009 Annual Report Download - page 24

FEDEX CORPORATION
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Purchased transportation costs increased during 2008 as a result
of higher rates paid to our independent contractors (including
the impact of higher fuel costs) and costs associated with our
independent contractor programs (described below). Fuel sur-
charges were not suffi cient to offset the effect of fuel costs on
our year-over-year operating results for 2008, due to the timing
lag that exists between when we purchase fuel and when our
indexed fuel surcharges automatically adjust.
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 asso-
ciated with store expansion, advertising and promotions, and
service improvement activities. In addition, higher allocated sales
and marketing and customer service costs from FedEx Services
contributed to the increase in intercompany charges for 2008.
Other operating expenses increased during 2008, primarily due
to higher legal, consulting and insurance costs. Depreciation
expense and rent expense increased in 2008 primarily due to
higher spending on material handling equipment and facilities
associated with our multi-year capacity expansion plan.
Independent Contractor Matters
FedEx Ground faces increased regulatory and legal uncertainty
with respect to its independent contractors. As part of its opera-
tions, FedEx Ground has made changes to its relationships with
contractors that, among other things, provide incentives for
improved service and enhanced regulatory and other compli-
ance by our contractors. During the second quarter of 2008,
FedEx Ground announced an ongoing nationwide program,
which provides greater incentives to certain of its contractors
who choose to grow their businesses by adding routes. Also,
during the second quarter of 2008, FedEx Ground offered special
incentives to encourage California-based single route contrac-
tors to transform their operations into multiple-route businesses
or sell their routes to others.
During 2009, because of state-specific legal and regulatory
issues, FedEx Ground offered special incentives to encourage
each New Hampshire-based and Maryland-based single-route
pickup-and-delivery contractor to assume responsibility for the
pickup-and-delivery operations of an entire geographic service
area that includes multiple routes. These programs were well
received, and the aggregate amount of these incentives was
immaterial.
As of May 31, 2009, approximately 60% of all service areas
nationwide are supported by multiple-route contractors, which
comprise approximately 35% of all FedEx Ground pickup-and-
delivery contractors.
FedEx Ground is involved in numerous purported or certifi ed
class-action lawsuits, state tax and other administrative pro-
ceedings and Internal Revenue Service audits that claim or are
examining whether the company’s owner-operators should be
treated as employees, rather than independent contractors. For a
description of these proceedings, see Note 17 of the accompany-
ing consolidated fi nancial statements.
FedEx Ground Segment Outlook
We expect the FedEx Ground segment to have continued revenue
growth in 2010, led by increases in commercial and FedEx Home
Delivery average daily volumes due to market share gains. FedEx
SmartPost volumes are also expected to grow due to market
share gains and the introduction of new services. Yield improve-
ment at FedEx Ground is expected to be limited in 2010 as a result
of a competitive pricing environment and decreases in fuel sur-
charges. Yields at FedEx SmartPost are expected to decline due
to service mix changes.
FedEx Ground segment operating income in 2010 is expected to
increase slightly, as revenue growth will be mostly offset by costs
associated with network expansion and ongoing enhancements
to our independent contractor model.
Capital spending is expected to decline slightly in 2010 with the
majority of our spending resulting from our continued network
expansion and productivity-enhancing technologies. We are com-
mitted to investing in the FedEx Ground network because of the
long-term benefi ts we will experience from these investments.
We will continue to vigorously defend various attacks against
our independent contractor model and incur ongoing legal costs
as a part of this process. While we believe that FedEx Ground’s
owner-operators are properly classifi ed as independent contrac-
tors, it is reasonably possible that we could incur a material loss
in connection with one or more of these matters or be required
to make material changes to our contractor model. However, we
do not believe that any such changes will impair our ability to
operate and profi tably grow our FedEx Ground business.