Federal Express 2011 Annual Report Download - page 37

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MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK FACTORS
Our financial and operating results are subject to many risks and uncer-
tainties, as described below.
We are directly affected by the state of the economy. While
macro–economic risks apply to most companies, we are particularly
vulnerable. The transportation industry is highly cyclical and especially
susceptible to trends in economic activity, such as the recent global
recession. Our primary business is to transport goods, so our business
levels are directly tied to the purchase and production of goods — key
macro–economic measurements. When individuals and companies
purchase and produce fewer goods, we transport fewer goods. In
addition, we have a relatively high fixed–cost structure, which is diffi-
cult to quickly adjust to match shifting volume levels. Moreover, as we
grow our international business, we are increasingly affected by the
health of the global economy. As a result, the recent global recession
had a disproportionately negative impact on us and our recent financial
results.
Our businesses depend on our strong reputation and the value
of the FedEx brand. The FedEx brand name symbolizes high–
quality service, reliability and speed. FedEx is one of the most widely
recognized, trusted and respected brands in the world, and the FedEx
brand is one of our most important and valuable assets. In addi-
tion, we have a strong reputation among customers and the general
public for high standards of social and environmental responsibility
and corporate governance and ethics. The FedEx brand name and
our corporate reputation are powerful sales and marketing tools, and
we devote significant resources to promoting and protecting them.
Adverse publicity (whether or not justified) relating to activities by
our employees, contractors or agents, such as noncompliance with
anti–corruption laws, could tarnish our reputation and reduce the value
of our brand. Damage to our reputation and loss of brand equity could
reduce demand for our services and thus have an adverse effect on
our financial condition, liquidity and results of operations, as well as
require additional resources to rebuild our reputation and restore the
value of our brand.
We rely heavily on information and technology to operate our
transportation and business networks, and any disruption to
our technology infrastructure or the Internet could harm our
operations and our reputation among customers. Our ability to
attract and retain customers and to compete effectively depends in
part upon the sophistication and reliability of our technology network,
including our ability to provide features of service that are important to
our customers. External and internal risks, such as malware, insecure
coding, “Acts of God,” attempts to penetrate our networks, data leak-
age and human error, pose a direct threat to our products, services and
data. Any disruption to the Internet or our complex, global technology
infrastructure, including those impacting our computer systems and
customer Web sites, could adversely impact our customer service,
volumes, and revenues and result in increased costs. These types
of adverse impacts could also occur in the event the confidentiality,
integrity, or availability of company and customer information was
compromised due to a data loss by FedEx or a trusted third party.
While we have invested and continue to invest in technology security
initiatives, information technology risk management and disaster
recovery plans, these measures cannot fully insulate us from technol-
ogy disruptions or data loss and the resulting adverse effect on our
operations and financial results.
Our transportation businesses may be impacted by the price
and availability of fuel. We must purchase large quantities of fuel
to operate our aircraft and vehicles, and the price and availability of
fuel can be unpredictable and beyond our control. To date, we have
been mostly successful in mitigating over time the expense impact of
higher fuel costs through our indexed fuel surcharges, as the amount
of the surcharges is closely linked to the market prices for fuel. If we
are unable to maintain or increase our fuel surcharges because of
competitive pricing pressures or some other reason, fuel costs could
adversely impact our operating results. Even if we are able to offset
the cost of fuel with our surcharges, high fuel surcharges could move
our customers, especially in the U.S. domestic market, away from our
higher–yielding express services to our lower–yielding ground services
or even reduce customer demand for our services altogether. In addi-
tion, disruptions in the supply of fuel could have a negative impact on
our ability to operate our transportation networks.
Our businesses are capital intensive, and we must make
capital expenditures based upon projected volume levels. We
make significant investments in aircraft, vehicles, technology, package
handling facilities, sort equipment, copy equipment and other assets to
support our transportation and business networks. We also make sig-
nificant investments to rebrand, integrate and grow the companies that
we acquire. The amount and timing of capital investments depend on
various factors, including our anticipated volume growth. For example,
we must make commitments to purchase or modify aircraft years
before the aircraft are actually needed. We must predict volume levels
and fleet requirements and make commitments for aircraft based on
those projections. Missing our projections could result in too much or
too little capacity relative to our shipping volumes. Overcapacity could
lead to asset dispositions or write–downs and undercapacity could
negatively impact service levels.
We face intense competition. The transportation and business
services markets are both highly competitive and sensitive to price and
service, especially in periods of little or no macro–economic growth.
Some of our competitors have more financial resources than we do,
or they are controlled or subsidized by foreign governments, which
enables them to raise capital more easily. We believe we compete
effectively with these companies — for example, by providing more
reliable service at compensatory prices. However, an irrational pricing
environment can limit our ability not only to maintain or increase our
prices (including our fuel surcharges in response to rising fuel costs),
but also to maintain or grow our market share. In addition, maintain-
ing 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 services, it could impede our
ability to maintain or grow our market share.
Labor organizations attempt to organize groups of our
employees from time to time, and potential changes in labor
laws could make it easier for them to do so. If we are unable