Federal Express 2009 Annual Report Download - page 39

37
FEDEX CORPORATION
irrational, it could limit our ability to maintain or increase our
prices (including our fuel surcharges in response to rising fuel
costs) or to maintain or grow our market share. In addition, main-
taining a broad portfolio of services is important to keeping and
attracting customers. While we believe we compete effectively
through our current service offerings, if our competitors offer a
broader range of services or more effectively bundle their ser-
vices, it could impede our ability to maintain or grow our market
share.
If we do not effectively operate, integrate, leverage and grow
acquired businesses, our fi nancial results and reputation may
suffer. Our strategy for long-term growth, productivity and profi t-
ability depends in part on our ability to make prudent strategic
acquisitions and to realize the benefi ts we expect when we make
those acquisitions. In furtherance of this strategy, during 2007
we acquired the LTL freight operations of Watkins Motor Lines
(renamed FedEx National LTL) and made strategic acquisitions in
China, the United Kingdom and India. During 2004, we acquired
Kinko’s, Inc. (now known as FedEx Offi ce). While we expect our
past and future acquisitions to enhance our value proposition
to customers and improve our long-term profi tability, there can
be no assurance that we will realize our expectations within the
time frame we have established, if at all, or that we can continue
to support the value we allocate to these acquired businesses,
including their goodwill or other intangible assets. As an exam-
ple, during 2008 and 2009, we recorded aggregate charges of
$1.8 billion for impairment of the value of the Kinko’s trade name
and portions of the goodwill recorded as a result of the Kinko’s
and Watkins Motor Lines acquisitions. These charges were nec-
essary, among other reasons, because the recent and forecasted
fi nancial performance of those companies did not meet our origi-
nal expectations as a result of weak economic conditions.
FedEx Ground relies on owner-operators to conduct its line-
haul and pickup-and-delivery operations, and the status of
these owner-operators as independent contractors, rather than
employees, is being challenged. FedEx Ground’s use of inde-
pendent contractors is well suited to the needs of the ground
delivery business and its customers, as evidenced by the strong
growth of this business segment. We are involved in numerous
class-action lawsuits (including many that have been certifi ed
as class actions), several individual lawsuits and numerous tax
and other administrative proceedings that claim that the com-
pany’s owner-operators or their drivers should be treated as our
employees, rather than independent contractors. We expect to
incur certain costs, including legal fees, in defending the status
of FedEx Ground’s owner-operators as independent contractors.
We believe that FedEx Ground’s owner-operators are properly
classifi ed as independent contractors and that FedEx Ground
is not an employer of the drivers of the company’s independent
contractors. However, adverse determinations in these matters
could, among other things, entitle certain of our contractors and
their drivers to the reimbursement of certain expenses and to
the benefi t of wage-and-hour laws and result in employment
and withholding tax and benefi t liability for FedEx Ground, and
could result in changes to the independent contractor status of
FedEx Ground’s owner-operators. If FedEx Ground is compelled
to convert its independent contractors to employees, labor
organizations could more easily organize these individuals, our
operating costs could increase materially and we could incur
signifi cant capital outlays.
Increased security requirements could impose substantial costs
on us, especially at FedEx Express. As a result of concerns about
global terrorism and homeland security, governments around the
world are adopting or are considering adopting stricter security
requirements that will increase operating costs for businesses,
including those in the transportation industry. For example, in July
2007, the U.S. Transportation Security Administration issued to us
a Full All-Cargo Aircraft Operator Standard Security Plan, which
contained many new and enhanced security requirements. These
requirements are not static, but will change periodically as the
result of regulatory and legislative requirements, and to respond
to evolving threats. Until these requirements are adopted, we
cannot determine the effect that these new rules will have on our
cost structure or our operating results. It is reasonably possible,
however, that these rules or other future security requirements
could impose material costs on us.
The regulatory environment for global aviation rights may impact
our air operations. Our extensive air network is critical to our suc-
cess. 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 gov-
ernments. In addition, we must obtain the permission of foreign
governments to provide specifi c fl ights 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 may be affected by global climate change or by legal, regula-
tory or market responses to such change. Concern over climate
change, including the impact of global warming, has led to sig-
nifi cant U.S. and international legislative and regulatory efforts
to limit greenhouse gas (“ GHG”) emissions. For example, dur-
ing 2009, the European Commission approved the extension of
the European Union Emissions Trading Scheme (“ ETS” ) for GHG
emissions, to the airline industry. We believe this decision vio-
lates international treaties and air services agreements and is
likely to be challenged by the U.S. Government. If the decision
stands, however, then all FedEx Express fl ights to and from any
airport in any member state of the European Union would be
covered by the ETS requirements beginning in 2012, and each
year we would be required to submit emission allowances in an
amount equal to the carbon dioxide emissions from such fl ights.
In addition, the U.S. House of Representatives has passed and
the Senate is currently considering a bill that would regulate GHG
emissions, and some form of federal climate change legislation
is possible in the relatively near future. Increased regulation
regarding GHG emissions, especially aircraft or diesel engine
emissions, could impose substantial costs on us, especially at
FedEx Express. These costs include an increase in the cost of
the fuel and other energy we purchase and capital costs associ-
ated with updating or replacing our aircraft or trucks prematurely.
Until the timing, scope and extent of such regulation becomes
known, we cannot predict its effect on our cost structure or
our operating results. It is reasonably possible, however, that it
could impose material costs on us. Moreover, even without such
regulation, increased awareness and any adverse publicity in the
global marketplace about the GHGs emitted by companies in the