Federal Express 2011 Annual Report Download - page 24

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MANAGEMENT’S DISCUSSION AND ANALYSIS
As of May 31, 2011, FedEx Ground has transitioned to the ISP model
in Maryland, New Hampshire, Rhode Island and Vermont, and plans to
complete transition to the ISP model in Connecticut, Delaware, Illinois,
Iowa, Maine, Massachusetts, Minnesota, Mississippi, Missouri,
Montana, North Dakota, South Dakota and Tennessee during 2012.
Based upon the success of this model, FedEx Ground may possibly
transition to it in other states as well.
In addition, because of state–specific legal and regulatory issues,
FedEx Ground only contracts with contractors that (i) are organized
as corporations registered and in good standing under applicable
state law, and (ii) ensure that their personnel who provide services
under an operating agreement with FedEx Ground are treated as their
employees. FedEx Ground also has an ongoing nationwide program to
incentivize contractors who choose to grow their businesses by add-
ing routes. During May 2011, approximately 80% of FedEx Ground’s
package volume was delivered by multiple route owner–operators or
independent service providers.
FedEx Ground Segment Outlook
In 2012, we expect the FedEx Ground segment revenue growth will be
led by continued improvement in commercial, FedEx Home Delivery
and FedEx SmartPost volumes, resulting in additional market share
gains. FedEx SmartPost is expected to continue to strengthen its
market position by continuing to leverage the FedEx Ground network
to enter the optimal USPS entry point. Yields for FedEx Ground are
expected to improve in 2012 as a result of yield management initia-
tives and growth in our higher yielding FedEx Home Delivery service.
We expect the FedEx Ground segment to provide strong operating
income growth in 2012 due to efficiency improvements such as an
automated operational planning system and improved transit time
across numerous shipping lanes. However, we expect to incur higher
purchased transportation costs due to higher rates paid to our indepen-
dent contractors and higher variable incentive compensation in 2012.
We are committed to investing in the FedEx Ground network because
of the anticipated growth opportunities within this market. Capital
spending is expected to increase in 2012, with the majority of our
spending resulting from our continued network expansion and produc-
tivity–enhancing technologies.
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–opera-
tors are properly classified as independent contractors, 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 profitably grow our FedEx Ground
business.
FEDEX FREIGHT SEGMENT
The following tables compare revenues, operating expenses, operating
expenses as a percent of revenue, operating loss and operating margin
(dollars in millions) and selected statistics for the years ended May 31:
Percent Change
2011 2010 2009
(3)
2011
2010
/ 2010
2009
/
Revenues $ 4,911 $ 4,321 $ 4,415 14 (2)
Operating expenses:
Salaries and employee
benefits 2,303 2,128 2,247 8(5)
Purchased transportation 779 690 540 13 28
Rentals 122 116 139 5(17)
Depreciation and
amortization 205 198 224 4(12)
Fuel 585 445 520 31 (14)
Maintenance and repairs 182 148 153 23 (3)
Impairment and other
charges(1) 89 18 100 394 (82)
Intercompany charges(2) 427 351 109 22 222
Other 394 380 427 4(11)
Total operating expenses 5,086 4,474 4,459 14 –
Operating loss $ (175) $ (153) $ (44) (14) (248)
Operating margin (3.6)% (3.5)% (1.0)% (10)bp (250)bp
Average daily LTL shipments
(in thousands) 86.0 82.3 74.4 411
Weight per LTL shipment (lbs) 1,144 1,134 1,126 11
LTL yield (revenue per
hundredweight) $ 18.24 $ 17.07 $ 19.07 7(10)
(1) Includes severance, impairment and other charges associated with the combination of our
FedEx Freight and FedEx National LTL operations, effective January 30, 2011. In 2010 and
2009, this charge represents impairment charges associated with goodwill related to the
FedEx National LTL acquisition. The charge in 2009 also includes other charges primarily
associated with employee severance.
(2) Certain functions were transferred from the FedEx Freight segment to FedEx Services and
FedEx TechConnect effective August 1, 2009. For 2011 and 2010, the costs associated with
these functions, previously a direct charge, were allocated to the FedEx Freight segment
through intercompany allocations.
(3) Includes Caribbean Transportation Services, which was merged into FedEx Express effective
June 1, 2009.
Percent of Revenue
2011 2010 2009
Operating expenses:
Salaries and employee benefits 46.9% 49.2% 50.9%
Purchased transportation 15.9 16.0 12.2
Rentals 2.5 2.7 3.1
Depreciation and amortization 4.2 4.6 5.0
Fuel 11.9 10.3 11.8
Maintenance and repairs 3.7 3.4 3.5
Impairment and other charges(1) 1.8 0.4 2.3
Intercompany charges(2) 8.7 8.1 2.5
Other 8.0 8.8 9.7
Total operating expenses 103.6 103.5 101.0
Operating margin (3.6)% (3.5)% (1.0)%
(1) Includes severance, impairment and other charges associated with the combination of our
FedEx Freight and FedEx National LTL operations, effective January 30, 2011. In 2010 and
2009, this charge represents impairment charges associated with goodwill related to the
FedEx National LTL acquisition. The charge in 2009 also includes other charges primarily
associated with employee severance.
(2) Certain functions were transferred from the FedEx Freight segment to FedEx Services and
FedEx TechConnect effective August 1, 2009. For 2011 and 2010, the costs
associated with these functions, previously a direct charge, were allocated to the FedEx
Freight segment through intercompany allocations.