Federal Express 2011 Annual Report Download - page 23

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MANAGEMENT’S DISCUSSION AND ANALYSIS
FedEx Ground Segment Revenues
FedEx Ground segment revenues increased 14% during 2011 due
to volume and yield increases at both FedEx Ground and FedEx
SmartPost.
FedEx Ground average daily package volume increased 6% during 2011
due to continued growth in our commercial business and our FedEx
Home Delivery service. The 6% yield improvement at FedEx Ground
during 2011 was primarily due to rate increases, higher fuel surcharges
and higher extra service revenue, particularly in residential surcharges.
FedEx SmartPost average daily volume grew 17% during 2011 primar-
ily as a result of growth in e–commerce business, gains in market
share and the introduction of new service offerings. Yields increased
10% during 2011 primarily due to growth in higher yielding services,
improved fuel surcharges and lower postage costs as a result of
increased deliveries to United States Postal Service (“USPS”) final
destination facilities.
FedEx Ground segment revenues increased 6% during 2010 due to
volume growth at both FedEx Ground and FedEx SmartPost, partially
offset by declines in yield at FedEx SmartPost. FedEx Ground average
daily package volume increased 3% during 2010 due to growth in our
commercial business and our FedEx Home Delivery service. The slight
yield improvement at FedEx Ground during 2010 was primarily due to
higher base rates and increased extra service revenue, but was mostly
offset by higher customer discounts and lower fuel surcharges. FedEx
SmartPost volumes grew 48% during 2010 primarily as a result of
market share gains, while yields decreased 14% during 2010 due to
changes in customer and service mix.
The FedEx Ground fuel surcharge is based on a rounded average of the
national U.S. on–highway average price for a gallon of diesel fuel, as
published by the Department of Energy. Our fuel surcharge ranged as
follows for the years ended May 31:
In January 2011, we implemented a 4.9% list price increase for FedEx
Ground and FedEx Home Delivery services. The full average rate
increase of 5.9% was partially offset by adjusting the fuel price thresh-
old at which the fuel surcharge begins, reducing the fuel surcharge by
one percentage point. Additional changes were made to other FedEx
Ground surcharges and FedEx SmartPost rates. In January 2010, we
implemented a 4.9% average list price increase and made various
changes to other surcharges, including modifying the fuel surcharge
table, on FedEx Ground shipments.
FedEx Ground Segment Operating Income
During 2011, FedEx Ground segment operating income increased 29%
and operating margin increased 180 basis points due to improved
yield and higher volume resulting from market share growth. We have
realized a higher retention of our annual rate increase this year as
more customers recognize the competitive advantage that we maintain
across many shipping lanes in the U.S. We have also improved our
customers’ experience by dramatically reducing our package loss
and damage claims while maintaining exceptional service levels.
Purchased transportation costs increased 16% in 2011 primarily due to
volume growth, higher fuel costs and higher rates paid to our indepen-
dent contractors. Salaries and employee benefits expense increased
11% in 2011 due primarily to increased staffing at FedEx Ground and
FedEx SmartPost to support volume growth and higher pension and
medical costs. Intercompany charges increased in 2011 primarily due
to higher allocated information technology costs.
FedEx Ground segment operating income and operating margin
increased during 2010 due to higher package volume, lower self–insur-
ance expenses and improved productivity. Improved performance
at FedEx SmartPost also contributed to the operating income and
operating margin increase. The increase in salaries and employee
benefits expense during 2010 was primarily due to accruals for our
variable incentive compensation programs, increased staffing at FedEx
SmartPost to support volume growth and increased healthcare costs.
Purchased transportation costs increased 2% during 2010 primarily
as a result of higher package volume. Rent expense increased during
2010 primarily due to higher spending on facilities associated with our
multi–year network expansion plan. Intercompany charges increased
12% in 2010 primarily due to higher allocated information technology
costs (formerly direct charges). Other operating expense decreased
during 2010 due to higher self–insurance reserve requirements
in 2009.
Evolution of Independent Contractor Model
Although FedEx Ground is involved in numerous lawsuits and other
proceedings (such as state tax audits or other administrative chal-
lenges) where the classification of its independent contractors is at
issue, a number of recent judicial decisions support our classification
and we believe our relationship with the contractors is generally excel-
lent. For a description of these proceedings, see “Risk Factors” and
Note 17 of the accompanying consolidated financial statements.
FedEx Ground has made changes to its relationships with contrac-
tors that, among other things, provide incentives for improved service
and enhanced regulatory and other compliance by the contractors.
For example, FedEx Ground has implemented or is implementing its
Independent Service Provider (“ISP”) model in a number of states. The
ISP model requires pickup–and–delivery contractors based in those
states to, among other things: (i) assume responsibility for the pickup–
and–delivery operations of an entire geographic service area that
includes multiple routes, and (ii) negotiate independent agreements
with FedEx Ground, rather than agree to a standard contract.
2011 2010 2009
Low 5.50% 2.75% 2.25 %
High 8.50 5.50 10.50
Weighted–average 6.20 4.23 6.61