聯邦快遞 (FDX) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation fourth-quarter earnings conference call.

Today's call is being recorded.

At this time I'll turn the call over to Mr.

Mickey Foster.

Please go ahead, sir.

Good morning and welcome to the FedEx Corporation fourth quarter earnings conference call.

I'm Mickey Foster, Vice President Investor Relations at FedEx Corporation.

The earnings release and the 26 page stat book are on our website at FedEx.com.

This call is being broadcast from our website and the replay and the podcast download will be available for approximately one year.

Joining us on the call today are members of the media.

During our question-and-answer session callers will be limited to one question and a follow-up so we can accommodate all those who would like to participate.

We are planning an investor meeting in October at the Hilton in New York, so please save the afternoon of Thursday, October 2, 2008 on your calendar.

Fred Smith and our top management team will be on hand to give you updates on our business.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

Certain statements in this conference call may be considered forward-looking statements within the meaning of the Act.

Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

For additional information on these factors please refer to the press releases and filings with the SEC.

In our earnings release we include certain non-GAAP financial measures which we may discuss on this call.

Please refer to the release available on our website for a further discussion of these measures and a reconciliation of them to the most directly comparable GAAP measures.

To the extent we discuss any other non-GAAP financial measures on this call, please refer to the investor relations portion of our website at FX.com for a reconciliation of such measures to the most directly comparable GAAP measures.

Joining us on the call today are Fred Smith, Chairman, President and CEO; Alan Graf, Executive Vice President and CFO; Mike Glenn, Executive Vice President Market Development and Corporate Communications; Chris Richards, Executive Vice President, General Counsel and Secretary; Rob Carter, Executive Vice President FedEx Information Services and CIO; Dave Bronczek, President and CEO of FedEx Express; Dave Rebholz, President and CEO of FedEx Ground; and Doug Duncan, President and CEO of FedEx Freight.

And now our Chairman, Fred Smith, will share his views on the quarter followed by Alan Graf.

After Alan we will have some Q&A.

Thank you.

Thank you, Mickey, and good morning, ladies and gentlemen.

Thank you for joining our earnings conference call for the fourth quarter of fiscal year 2008.

Earlier this past quarter on April 17th FedEx commemorated an historic date, our 35th anniversary of commencing operations.

I would like to take a minute to say thank you to the hundreds of thousands of current and former team members around the world to whom we owe the success of our company.

Together we face many challenges and have celebrated many more successes.

Because of our outstanding team we look forward with confidence and hope to the future.

Now of course financial results in FY '08 were pressured by serious economic difficulties.

Record high fuel prices and the weak U.S.

economy, particularly in housing and automotive and financial services, dampened volume growth and substantially affected our bottom line.

As Yogi Berra, the famous Yankee catcher, purportedly once said "It's deja vu all over again" for FedEx.

This is the fourth oil crisis FedEx has weathered.

The first was in 1973 when the Arab oil embargo almost killed a nascent FedEx in the cradle.

1979 and 1990 and '91 we saw run ups in prices due to restricted oil supplies.

And now over the last couple of years we have seen oil prices double, particularly in the last 12 months, because of increased demand from emerging markets, particularly China and India.

We remain positive, however, about prospects for long-term global economic growth and believe FedEx will be well-positioned for profitable growth when economic conditions improve.

In 2008 growth in shipments at FedEx Ground, FedEx International Priority and International Domestic Express helped to mitigate some of the negative effects from the U.S.

economy.

Increased demand in Asia, U.S.

outbound and Europe drove IP volume growth during 2008 proving the value of the strategic investments we've made over the years.

The economic headwinds of FY '08 are now continuing into our FY '09 which began on June 1st.

We will continue to reduce expenses across all segments in FY '09.

In today's release, for example, we announced that FedEx Freight will close its office in San Jose California to streamline its operations.

At the newly rebranded FedEx Office the Company's senior management team has been reduced and restructured to better support execution of the Company's strategy and to control costs.

We also reduced capital commitments in that sector by slowing the rate of expansion of our retail network.

When we talked to you a year ago at this time we forecasted our FY '08 capital expenditure budget of about $3.5 billion.

Through cost saving measures we were able to cut capital expenditures from that budget by 17% to about $2.9 billion for the fiscal year just ended.

In addition, on the expense side variable incentive compensation was lower by $221 million in FY '08.

We are closely managing our capital spending and expenses based on current and anticipated volume and revenue levels.

We will defer or limit capital additions where necessary.

Now while the current oil crisis is different from the past due to the increased demand from the emerging markets, as I mentioned, it's also very different because automotive and battery technologies on the horizon will permit electric power to displace a great deal of oil demand in the coming years.

Plug-in hybrid electric vehicles, nuclear power and clean coal are also part of the equation.

FedEx has been and is continuously seeking energy-saving alternatives in our operations that cut costs and lessen our environmental impact.

We are upgrading our FedEx Express air fleet by replacing narrowbody aircraft with Boeing 757's that reduce fuel consumption up to 36% while providing 20% more capacity.

FedEx Express will also acquire Boeing 777 aircraft that provide greater payload capacity and use 18% less planes than our current long-range international fleet.

FedEx, over a number of years working with the Eaton Corporation and the Environmental Defense Fund, put the first practical hybrid electric pickup and delivery vehicles into operation and we recently reached a measured milestone with these vehicles having driven them more than 2 million miles in revenue service.

You can expect to see additional hybrids joining our fleet in the years to come.

Now we plan to continue to execute the business strategy that has made FedEx one of the most admired companies in the world and a great place to work and has added significant value for our customers and shareholders.

It's my opinion that great companies always improve there competitive positions in economic downturns and we intend to do just that.

FY '08 and FY '09, we believe, will be anomalies due to the extraordinary difficulties in the financial, housing and automotive sectors and the rapid run-up in fuel prices.

We believe, however, there are clearly major significant and significant competitive opportunities available to us in part precisely because of these economic conditions.

The expense in CapEx reduction initiatives I mentioned and the various strategic programs, like our fuel-efficient equipment and facilities investments, will hopefully set the stage in FY '10 to resume the upward trajectory of our financial performance that we saw when we achieved record earnings in fiscal year '07.

We're proud that once again in FY '08 Fortune magazine ranked FedEx among the top 10 companies most admired in the United States and in the world.

For the 10th time in the last 11 years Fortune named FedEx as one of the 100 best companies to work for.

Last quarter the respected University of Michigan's American Customer Satisfaction Index rated FedEx number one in customer satisfaction in our industry and first among all companies listed.

Consistent with these achievements we will continue in this fiscal year, FY '09, to improve the customer experience, improving quality across the board in all of our operations in order to keep our famous Purple Promise -- we will make every FedEx experience outstanding.

Let me close my remarks by again thanking every member of the FedEx team who continues to do a superb job in an extremely challenging economic environment.

We continue to recognize that more than any other element our front-line folks are what really sets FedEx apart in our key to our continuing success.

Before I turn it over to Alan let me just state again our strong belief that we have a number of levers that we can pull regardless of the economic circumstances which we face.

I personally believe that significant demand destruction in the oil market will mitigate some of the recent run-up in oil prices.

But, regardless of whether the oil prices go up and down, we have a very strong balance sheet and cash flows and, as I said a moment ago, many short-term and long-term levers that we can pull to reach our goal of coming out of these years of difficult economic times, FY '08 and '09, and get back on the proper trajectory in FY '10 that we demonstrated in FY '07.

As I mentioned a moment ago, the one thing that we will not do is to mitigate or put at risk the customer service reputation that FedEx has so justly earned over the years.

And now to put more meat on the bones of that chicken, let me turn it over to our Chief Financial Officer, Alan Graf.

Thank you, Fred, and good morning, everyone.

As Fred mentioned, some very strong headwinds from a weak economy and extremely high fuel prices pressured volumes and yields across our entire portfolio.

As a result our ongoing earnings declined $0.45 per share excluding the asset impairment charges at FedEx Office this year and the Airbus settlement last year.

All in all, given the headwinds, I think we had a pretty good quarter.

I should note that the fuel surcharge elasticity had its most dampening effect on Domestic Express volumes and yields and that we expect this difficult economic environment to persist in FY '09.

Taking a look at the segments in the fourth quarter and starting with Express, international volumes, exchange-rate benefits and net fuel price were all positive contributors to operating income in the quarter versus last year.

However, they were not enough to offset base package yield rate declines, domestic volume declines and the impact of one less operating day.

As a result operating income at Express declined $187 million from last year's fourth quarter.

At Ground we're very pleased with volumes increasing 6% and yields up 4%.

We clearly continue to take market share.

However, cost growth outpaced revenue growth as fuel surcharge revenue at Ground did not cover the fuel cost increase and expenses associated with continued expansion and enhancing and defending the independent contractor model rose.

Additionally, operating income at Ground was hampered by one less day in the quarter, one less operating day.

Freight, the good news there is our shipment volumes rose 3% in a very tough and declining market as we continue to take market share there as well.

Net fuel expense, higher purchase transportation costs and, in this case, two fewer operating days caused operating income to decline.

And although we don't report it separately, at FedEx Office net operating costs increased in the fourth quarter versus last year which result in higher chargebacks to the Express and Ground segments which are included in their reported numbers.

Looking at the balance sheet, as Fred mentioned, it remains very healthy.

We had positive cash flow in fiscal '08, paid down over $600 million in debt, cash balances remain relatively flat at $1.5 billion, and notably our pension plans are fully funded.

Looking ahead to '09, we do expect conditions to remain extremely challenging and we anticipate in both the first-quarter guidance and the yearly target the current economic weakness will continue and the current level of fuel costs will not mitigate.

We will continue with cost vigilance and have numerous projects underway throughout the Company to further lower overhead and improve productivity, while at the same time we will continue to improve our service and enhance our customer experience.

I would like to emphasize again that our first-quarter guidance, $0.80 to $1.00, and our annual target of $4.75 to $5.25 assume that economic conditions do not worsen and that the current fuel cost levels persist.

We will manage the cash flow positive and will be scrubbing our CapEx numbers throughout the year.

Although we currently expect to spend about the same on CapEx in fiscal '09 as we did in '08, largely due to 777 progress payments and the acquisition off 757's for conversion, we can significantly lower that number if conditions worsen and we need to do so.

And with that let's open the floor for questions.

(OPERATOR INSTRUCTIONS).

John Barnes, BB&T Capital Markets.

Hi, good morning, guys.

Alan, on your last comment concerning your capital expenditures and fleet replacement and that type of thing -- I mean, given what you currently see in the marketplace can you just talk a little bit more in detail in terms of what magnitude of CapEx pullback you would consider if kind of the current economic trends were to persist for the balance of this year, maybe into '09?

Sure, John.

This company has over the last several years developed a very strong cash flow.

We're going to have very strong cash flow in '09.

Our EBITDA is going to be very positive.

As you know, we have a significant amount of depreciation in our income statement.

If we needed to we could reduce our CapEx to below our depreciation number.

But having said that, we certainly would like to get 757's and 777's into our fleet as rapidly as possible because of their energy efficiency that Fred mentioned.

So that will be a balancing act as we go through the year.

Personally I'd like not to restrict those because those will be very good high ROIC assets in our company for the long haul.

And I would imagine -- I mean, just given the long-term nature of an asset like that, you're not looking at it in the vacuum of the next 18 months.

But is there anything from a CapEx perspective that you see where you would be much more aggressive over say the next 18 to 24 months?

Is it terminal expansions put on hold?

Is it additional fleet -- fleet additions to the Ground network or something like that?

I know some of those costs are de minimis in comparison to an aircraft addition, but can you move the needle on CapEx enough with those types of pullbacks?

Well, we have been doing that, but we intend to grow our businesses and we expect international, Freight and Ground to all have growth in '09 and that requires vehicles and doors and sorting equipment and computer technology, etc.

So it will depend on, if I'm correct, about those growth assumptions which are in our guidance and target.

William Greene, Morgan Stanley.

I'm wondering -- I know you think that 2008-2009 in terms of the fuel prices were a bit of an anomaly, but do you think that if we stay at this -- because we're assuming that fuel prices now don't change -- will there be a permanent shift in how your customers use you?

In other words, will we have a permanent shift down in the volumes at Express that would cause you to need to rethink the size of that network?

Well, let me give you the market perspective.

This is Mike.

We've been saying this for some time, as you know.

We have been talking as it relates to the U.S.

portion of the Express market that we did not see any material growth and have been saying that for the last three years understanding that consumers were going to become more efficient in their supply chains as they get more information and more visibility.

And quite frankly, we made enhancements to our Ground network and our Freight network to add features such as real-time, tracking time, definite delivery and money back guarantees.

So this is not a surprise to us.

Obviously fuel prices stay at their current levels.

We do anticipate lower demand from the domestic part.

Having said that, we run a global network and we're seeing strong growth in the international sector, albeit a bit dampened currently, but we still like our prospects internationally and believe that the Express business offers a lot of opportunities for growth on a global basis.

So you don't think that if we stay at these fuel prices we'll see any permanent shift in the domestic market?

Well, I'll let David Bronczek speak to the network structure, but obviously we'll respond to the levels of traffic by reconfiguring networks as required to be the most efficient possible to handle the traffic levels we have.

Yes, this is Dave.

William, in fact we looked at our network and, of course, we've been talking about this for years.

We always try to right size our U.S.

network to our U.S.

domestic volumes.

However, we've actually seen a dramatic increase in our U.S.

system, if you will, because of the global nature of our company at Express that Mike just mentioned.

So all of our additions that we've had, wherever they've been in the United States, have been because of our international products flowing through the United States and out of the United States.

It's a very important point that Mike pointed out.

Fred?

At the risk of being a broken record that I've said this over the past several years, FedEx Express has not bought a unit of capacity for the domestic Express business in years and years and years.

The network in the United States has been expanded basically to move inland international traffic.

And at the same time, of course, we've had this marvelous growth in our Ground and Express network.

And increasingly in the years to come in the international market we believe that the movement of goods by air will be in smaller lots in door-to-door Express movements rather than in the large consolidations that marked the industry structure several years ago.

And we've built a network of regional hubs; we opened one in Greensboro in 2009, Dave?

2009, and what those regional operations allow us to increasingly do is to drive fly across the oceans and then drive on the other side so we have both international priority and international economy.

So we have not been adding capacity for the domestic Express market for many years; this is not a new thing for us.

And the 757 is such an important piece of equipment because it operates with unit costs that are basically as good as the bigger plane.

And so it gives us a tremendous amount of flexibility to route to the regional hubs or to downsize the domestic Express network.

And most of our airplanes are owned so we have tremendous flexibility in configuring the fleet to the optimal size to reflect what the Express network is, both the domestic and, much more importantly, the interior movement of the Express business.

And it's critical for the people that follow this company to understand those issues.

Let me just add one last thing.

This is an important piece.

Our tremendously powerful international business that we have at FedEx Express, the best in the world, 50% of all of that business comes through the United States either coming in or going out of the United States, 50%.

David Ross, Stifel Nicolaus.

Good morning, gentlemen.

I have a question on the closure of I guess the FedEx Freight West facility and whether or not there is any change in operations in terms of the FedEx Freight network.

It used to be FedEx Freight East, FedEx Freight West and then it was rebranded FedEx Freight.

With this closure of the San Jose office is there a change in the network as well?

David, this is Doug.

No, the operation will remain pretty much as it is.

We've been on the same operating platform at FedEx Freight for some time, but we had two different operating companies -- FedEx Freight East and FedEx Freight West.

As this business has grown and matured this was an opportunity to streamline our management structure and combine general offices.

So it's predominantly a back-office function where we can streamline and get efficiencies, but our operations are really unaffected.

We already have combined sales, marketing and pricing ahead of this.

So from a customer standpoint it's very little impact, but from a cost and efficiency standpoint it's a good move for us to streamline.

Okay, and then if you could just talk a little bit about FedEx National LTL and the progress that that's making in the marketplace.

I know you saw shipment growth at overall Freight, but can you talk about how much National is growing versus the Legacy FedEx Freight operation?

Well, we're delighted with the progress of FedEx National.

The value proposition that we put into place with high reliability and putting in a low-cost network to go after specifically the long-haul business has taken hold and our growth momentum there is nothing short of thrilling at the moment.

So a lot of the growth that you see in these numbers is actually coming from National and we're delighted with our progress.

They're really doing a great job.

Donald Broughton, Avondale Partners.

I'd like to follow through with that.

Can you really give us more color on exactly where the marketshare gains are being made on Freight?

Our numbers would indicate we're gaining market share in both networks, the regional network as well as the national network.

I mean, when you look at our growth numbers when we reported Q3 we were down 2% on shipments year over year and in Q4 we're plus 3%.

That's a huge swing and we believe the bulk of that is all marketshare gains.

We've had sequential growth of shipments since December.

Every month has been bigger than the month before.

So our growth momentum is on track at both networks, but probably more so at the national network, but I think they're both taking market share.

Well, especially given that you were up 15% last year, that's a tough comp.

To be on top of that in this environment is admirable.

Thanks, gentlemen, and I'll let someone else ask a question.

Ed Wolfe, Wolfe Research.

Yes, hi, good morning.

Can we talk a little bit about the Ground side?

Ground operating income is down 26% and the margin at 750 basis points of year-over-year deterioration seems the worst that I've -- since you've owned this business year over year.

The fuel impact is great, but should be less at Ground.

Can you talk to what's really driving what's been a slow decline at Ground in profitability?

Yes, Ed, this is Dave Rebholz.

First of all, let me point out -- it's not directly related to your comment, but I think it's important.

I'm extremely proud that FedEx Ground has achieved an all-time record service level, both quality and on-time service is 98.5%.

And what's important about that is we now deliver more than 56% of our packages in two days or less and 23% of the Ground packages are delivered the next business day.

And you're aware of the fact, if you follow us closely, that part of our investment this past year was to speed up the lanes in recognizing some of the fundamental changes that have already been discussed.

So we're very proud of having about a 13% advantage over UPS.

Fuel was singularly the largest absolute dollar difference in the quarter and I think, as has already been stated by Alan, we did have costs related to the contractor initiatives that we've talked about in the past which have come in two flavors -- the conversion, which I'm proud to say we are completed in California; and some additional incentive to our multi-work area contractors.

Purchased transportation and other cost lines are really where those numbers reside.

The net of it, Ed, is we had a record fourth quarter last year at plus 17%.

And from a comparable basis, along with these investments and one-time costs, I think we've performed extremely well, inclusive of our improvement in our service offering.

Dave, can you give more sense in terms of the conversion costs -- how much costs are still in front of you?

How much of this is ongoing?

And what percent nationally of the drivers are now single contractors versus multi-route franchisees?

Well, Ed, first of all, the bulk of the costs from the conversion are in our numbers with the exception of the trailing MWA's in the fourth quarter.

So there will be a slight amount moving into the first quarter, but the bulk of the numbers are baked into our base right now.

We've had a substantial improvement in multi-work area contractors.

Today if you look at the -- hold on a second.

If you look at the multiple work areas, they roughly are about 3,500 of our contractors, 3,600, and are in control of about 10,000 of the service areas.

Single work areas are about 7,600 for the organization and of course they're a 1-for-1 even though they periodically employ their own employees for peak times, etc.

We've had a substantial improvement in the MWA's with the last 500 additions all being 100% MWA's.

And as I mentioned, out with the 489 single area work contractors in California, 410 of them have converted to multiple work area performance.

So we have the vast majority of our contractors that have converted and our ongoing growth is in the multi-work area -- our long-term goal to continue to reinforce that part of the model.

Jon Langenfeld, Robert W.

Baird.

Good morning.

Can you talk a little bit about the domestic Express side, specifically the box -- overnight box volume trends which appear to be relatively stable with what you've been seeing over the last two years versus the overnight envelope which has shown an accelerated decline?

It seems like that's a little bit counter to the last couple cycles you've been through.

Well John, the overall Express market in the first calendar quarter of the year actually declined about 3.5% which is obviously well below GDP.

A lot of that was driven by the envelope sector.

So we have seen a mix change to some degree in the sector.

The box has been a bit more stable but has been at a lower level and is more consistent with the overall market performance.

Any reason you can think for that divergence?

Well, I think clearly every time that you see a downturn in the economy the box traffic is affected by that with consumers looking for lower cost alternatives to move the traffic and will trade-off service to some degree for price.

And I think that's what we're seeing.

Tom Wadewitz, JPMorgan.

Yes, good morning.

I wanted to ask about what you're seeing looking into fiscal '09.

I think you implied within the guidance it would be a pretty material decline in Express margins.

And I wanted to see if you could comment on whether that's largely a volume weakness issue or if there's a significant cost inflation issue that's hurting the margin side?

No, it's quite the contrary.

We're working very hard on our costs.

We have a significant amount of cost reductions and productivity improvements dialed into the Express P&L for fiscal '09.

It's just a reflection of the unbelievably high elasticity at these fuel surcharge levels that are pressuring the volumes and the yield significantly on the domestic Express market.

So if you've taken the incentive comp down 220 year over year in fiscal '08, is there a meaningful further reduction in that or can you maybe mention some other line items where you see opportunity for cost reduction?

Certainly.

Again, let me emphasize that we are still growing our international Ground and Freight traffic.

But a lot of the levers that we have at our hand are certainly the annual long-term incentive comp, reduction in flat hours and hours worked, we can reduce line haul and pickup and delivery routes by rerigging the system, and of course we have -- on the overhead side we have been using and are using attrition there.

So I think all those are working.

We have a lot of cost reductions dialed in.

The target that I gave you for the year all look very achievable.

While at the same time, unlike some in our market, not sacrificing service but improving it and enhancing the customer experience.

This is Dave Bronczek.

Alan is exactly right.

We have looked at all of our cost initiatives and we've been doing them for several months now -- many months.

We have fuel burns with our flight crew that have been very significant savings for us and will be going forward domestic flying, as Alan mentioned -- labor cost, productivity increases really across the board.

We're very pleased with where we're coming out on our expense side for FY '09.

Gary Chase, Lehman Brothers.

Good morning, guys.

Could I just piggyback on that?

I mean, as you look into fiscal '09 it would seem from the comments you just made that you're expecting the volume weakness in Express to pick up a little bit.

Are you seeing that already or is that something you anticipate as these fuel prices make their way into the market over the next couple of months?

Well first of all, and I'll let Mike finish up, we just saw it in this quarter and, as I mentioned, it's continuing now in the summer.

We're going to have a 32.5% surcharge in July, that's going to create a lot of mode shift.

We didn't have that a year ago.

Fuel prices are up 80% on a jet fuel basis versus last summer.

And last year we had a terrific first quarter at Express.

That can't repeat.

As Fred says, we can't levitate; all we can do is manage through this.

I was just going to add that the domestic Express volumes were actually fairly consistent through the quarter.

Obviously you have some seasonal effect as you move into the summer.

So we will expect to see that, but we're about where we thought we would be at this point, although there's certainly some pressure on volumes as fuel prices continue to go up.

So this is the kind of volume reduction that you're expecting next year that's in the guidance, somewhere in the down 3 or 4 range, and it's not materially different than that?

As I mentioned, the Express market in the U.S.

declined 3.6% in the first quarter and that's consistent -- we expect that to continue until we see some relief in the economic activity and the rising fuel prices.

Art Hatfield, Morgan Keegan.

Good morning, everybody.

Just first question -- was there a point with regards to the fuel surcharge level where you really started to see the elasticity on demand kick in?

Art, it's difficult to say exactly where that occurs because you have a combination of factors here.

You have a slowing economy and you have rising fuel prices, so it's very difficult to dissect that and say what's causing the activity.

You see mode shift when the economy weakens and we've seen that many, many times in the past.

And obviously as the fuel surcharge increases, that puts pressure on our customers to be more efficient in their supply-chain decisions as well.

So it's clearly more difficult to point that out, but when we've been as high as 20% in the past with -- I would say impact, but not necessarily as material.

And once we crossed over that threshold and started heading towards 30% I think our customers obviously want to take a second look.

Thanks.

Just a follow-up.

Alan, you had talked about really watching CapEx going forward and maybe slowing things down or additions or planned expenditures if things slow down further.

Is there the possibility and would it really make a meaningful expense difference if things slowed down further if you were to accelerate some of your aircraft retirement plans?

Well, we always scrub our capital and where a year ago we were planning to have a lot more growth today than we're having, obviously we've had to reduce those plans to match that reality of the marketplace.

One of the trade-offs that we have right now is we have some 727-200's out there that if we could get rid of them today I would do that, despite the capital expense, because on a per unit basis 757 is 47% more fuel-efficient.

We just can't get them acquired and mounted as rapidly as we would like.

So in our plan we have a very rapid acquisition and mod program for the 757.

I think that we would be very wise to continue that.

But we also realize we need to remain cash flow positive, so we will manage what comes in front of us and, as I've said, we are very well-positioned to do so.

We've got a very strong balance sheet.

We've got staying power.

You've seen all lot of trucks parked.

You're seeing freighters come out of passenger airline fleets.

You're seeing a reduction of passenger flying which reduces belly space.

So there's some opportunity there too.

Art, this is Dave Bronczek.

Alan is right.

We have -- the first 757 is coming into revenue service for us in September and we're looking at every possible way to get more 757's in faster.

Obviously all of that would be good news.

The 777 comes in in the second half of FY '10 -- at the end of the first half, I'm sorry.

It should be noted though that, as I mentioned before, we own the vast majority of our airplanes.

So if we need to structurally take capacity out of the Express system, that's relatively easy for us to do by simply accelerating the retirement of some of the airplanes regardless of the replacement lift.

That's what I was talking about with the many levers that we have to run -- have to pull.

And the reason that we believe we can come out of FY '09 and get back on our trajectory is -- it's always difficult when you're on these earnings calls and talking about some numbers on a piece of paper.

I mean, the FedEx networks are enormously big.

There are millions and millions and millions of discrete transactions going on every day in thousands of air segments and surface movements and so forth.

So to reengineer and reconfigure those networks without doing damage to our service levels and our customer reputation is something that takes some time.

And I would remind everyone, as we went into the first quarter last year it was a gangbuster quarter.

And as late as the second quarter of last fiscal year we were looking towards another record financial performance.

It's only when the continued run-up in fuel prices -- and as Alan mentioned, they doubled over the past year -- that the real impact started being felt in the late fall and the early part of the year.

So we'll get these networks right and we're very confident that we'll come out on the other side of this thing stronger and better, more market share and so forth.

David Campbell, Thompson Davis & Co.

Yes, good morning.

You didn't mention any possible benefits from the -- in terms of the decision of DHL to terminate its domestic flying and also to transfer that to UPS and the Ground area to substantially reduce their ground services.

Do you see any -- is that included in your estimates for '09, any benefit from that?

David, we've seen a lot of uncertainty on the part of customers and potential customers as it relates to the decisions of our two primary competitors here in the U.S.

We've received a number of phone calls and are responding appropriately to that.

These customers have an interest in what FedEx's value proposition can do for them and we're aggressively talking to them just as quickly as we possibly can.

We do see some potential benefit from that, some of which has been assumed but not all.

Okay, thanks.

And on the international business, how are U.S.

export packages and freight increasing faster than the rest of the business?

Yes, this is Dave Bronczek again.

Yes, that's correct.

The Asia, Europe and U.S.

export business has been very solid and leading the way of course in all of our revenue growths.

Our IP was up 16%, 6% on volume and those three parts of the world led the way, so you're correct.

What's going to happen in the international marketplace, and you can read it in the trade press everywhere, is the traditional airport-to-airport freighter services are being reduced and coming down.

In fact, one of the major carriers in the Middle East has said that they're going to take their orders I think it was for 16 freighters and convert them into passengers.

One of the big combination carriers in Asia that operates a big all cargo system said they're going to be taking on a tremendous amount of capacity.

As I mentioned a moment ago, and have mentioned on this call many times, what's happening is the mode shift in the international area makes what happens in the domestic Express business pale in comparison.

There is a tremendous movement of the lower value added traffic off of the traditional freighter airplanes onto the water, onto the sea.

We pick that traffic up in FedEx Ground and FedEx Freight as it comes into the United States and we manage a fair amount of it in our FedEx Trade Networks unit.

That's one of the reasons we bought Watkins and converted it into FedEx National.

It is perfectly suited to move items that are coming in on the water into the interior points of the United States in the absolutely most efficient manner.

So these long-term secular trends play to our strengths.

It's exactly the way we're configured.

And I just came back from Europe last week and, again, went to a couple of our locations.

You can see this taking place right in front of your eyes.

Robin Byde, HSBC.

Hi, good morning, everybody.

Actually, just a follow up on international markets.

Are you seeing a significant slowdown on mode shift or yield compression in any specific markets, national or regional?

The answer to that question is no.

We're seeing increases in all of our markets international -- especially in Asia, Europe and the United States export.

Can you be more specific about particular countries perhaps?

Well, we don't break them down by country, but Asia-Pacific, all the European countries in our EMEA region of the world and our U.S.

export actually almost everywhere in the world including Mexico has been very strong for us.

So country by country I can't specifically tell you that.

We all obviously know that, but it's around the world growth in all those sectors.

Mary Jane Credeur, Bloomberg news.

Hi, gentlemen.

Has there been any discussion or consideration of going in and proactively cutting jobs or trying to park more aircraft in addition to just trimming the capital expenditure budget going into '09 -- or going -- yes, going into fiscal '09?

I think I mentioned earlier about all the levers that we're pulling, reducing flight hours and hours worked, attrition, redesigning routes -- all those have been ongoing and continue to be ongoing.

Are you going to actually park planes though or proactively reduce headcount?

Right now we are rotating parking airplanes on a temporary basis.

William Greene, Morgan Stanley.

Yes, hi.

Alan, you mentioned earlier on there were some base rate declines that I just was hoping you could expand upon.

Are you saying that customers are actually demanding and getting rate decreases?

Is that what you meant?

Well, obviously customers are out there trying to reduce their costs any way they can.

They're doing that through a number of different levers that they're pulling, again looking at the actual services that they're using and talking with us about moving some traffic from Express to Ground, some traffic from Ground to Freight and so on and so forth.

We are renegotiating some agreements at this point in exchange for longer-term agreements, so where that's a benefit to FedEx we'll certainly consider those things.

Okay, and then can we just get -- I think you're talking to the IRS this quarter, I don't know if it was in June or May.

But can you give us an update on how those talks have gone?

Yes, this is Chris Richards.

We've started those conversations.

At this point in time there's a good chance they'll continue on into the first quarter.

We're still at the audit level and, depending upon the outcome at that level, we will then see how we go forward.

This is Alan.

I've got one follow-up to the last question.

Also when we see an economic weakness we see a decline in our weights per package which also impacts base yield.

Ed Wolfe, Wolfe Research.

Alan, have you broken out or at least given us some range of what the fuel drag was in the quarter and how much of that, assuming fuel stays flat from here, you think you could recover?

Surprisingly it was not material in the quarter because of the anomalies of last year.

I think I mentioned at Express it was actually a net fuel as we measured on a static basis, which is simply the surcharge versus the increase in cost, was a slight benefit in the quarter.

But what -- overall just this absolute size of the surcharge and the elasticity, the pressure on the yields and the volumes is much more important right now than the surcharge versus the additional cost of fuel.

That does conclude today's question-and-answer session.

At this time I'll turn the conference back to management for any additional remarks.

Thank you for your participation in the FedEx Corporation fourth-quarter earnings release conference call.

Please feel free to call anyone on the IR team if you have any additional questions.

Thank you very much for your time.

That concludes today's conference.

We thank you for your participation.