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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission file number 1-15829

FEDEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Registrant's telephone number, including area code: (901) 818-7500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes ý    No o

        The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing price as of the last business day of the Registrant's most recently completed second fiscal quarter, November 28, 2003, was approximately $20.2 billion. The Registrant has no non-voting stock.

        As of July 12, 2004, 299,997,050 shares of the Registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's definitive proxy statement to be delivered to stockholders in connection with the 2004 annual meeting of stockholders to be held on September 27, 2004 are incorporated by reference in response to Part III of this Report.

TABLE OF CONTENTS

PART I

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PART I

Item 1.    Business

Overview

        FedEx Corporation ("FedEx") provides a broad portfolio of transportation, e-commerce and business services with companies that operate independently and compete collectively under the respected FedEx brand. These companies are included in four reportable business segments:

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FedEx Express: Federal Express Corporation ("FedEx Express") is the world's largest express transportation company, offering time-certain delivery within one to three business days and serving markets that comprise more than 90% of the world's gross domestic product. The FedEx Express segment also includes FedEx Trade Networks, Inc. ("FedEx Trade Networks"), which provides international trade services, specializing in customs brokerage and global cargo distribution.



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FedEx Ground: FedEx Ground Package System, Inc. ("FedEx Ground") is North America's second largest provider of small-package ground delivery service. FedEx Ground provides low-cost residential delivery to nearly 100% of U.S. residences through its FedEx Home Delivery service. The FedEx Ground segment also includes FedEx Supply Chain Services, Inc. ("FedEx Supply Chain Services"), which offers supply chain solutions.



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FedEx Freight: FedEx Freight Corporation ("FedEx Freight") is a leading U.S. provider of regional next-day and second-day and interregional less-than-truckload ("LTL") freight services. The FedEx Freight segment also includes FedEx Custom Critical, Inc. ("FedEx Custom Critical"), North America's largest time-specific, critical shipment carrier, and Caribbean Transportation Services, Inc., the leading provider of airfreight forwarding services between the United States and Puerto Rico.



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FedEx Kinko's: FedEx Kinko's Office and Print Services, Inc. ("FedEx Kinko's") is a leading provider of document solutions and business services, including copying and printing services, signs and graphics, videoconferencing, high-speed wireless and wired Internet access and computer usage. FedEx Kinko's offers retail access to the full range of FedEx day-definite ground shipping and time-definite global express shipping services at all of its U.S. locations.

        For financial information concerning our reportable business segments, refer to Note 13 of the accompanying audited financial statements.

        Our Web site is located at fedex.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to such reports available, free of charge, through our Web site, as soon as reasonably practicable after they are filed with or furnished to the SEC. These and other SEC filings are available through the Investor Relations page of our Web site, the address of which is http://www.fedex.com/us/investorrelations. The information on our Web site, however, does not form part of this Report.

        Except as otherwise specified, any reference to a year indicates our fiscal year ended May 31 of the year referenced.

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Strategy

        FedEx was incorporated in Delaware on October 2, 1997 to serve as the parent holding company of FedEx Express and each of our other operating companies. Through our holding company and FedEx Corporate Services, Inc. ("FedEx Services"), we provide strategic direction to, and coordination of, the FedEx portfolio of companies. We intend to continue to leverage and extend one of our greatest assets, the FedEx brand, and to provide our customers with convenient, seamless access to our entire portfolio of integrated business solutions. We are pursuing a number of initiatives to continue to enhance the FedEx customer experience, including improving the capabilities of our sales professionals. For instance, through our FedEx OneCall program, we assign a single customer service agent to handle virtually all issues of a customer's account.

        We believe that sales and marketing activities, as well as the information systems that support the extensive automation of our package delivery services, are functions that are best coordinated across subsidiary lines. Through the use of advanced information systems that connect the FedEx companies, we make it convenient for customers to use the full range of FedEx services. We believe that seamless information integration is critical to obtain business synergies from multiple operating units. For example, our Web site, fedex.com, provides a single point of contact for our customers to access FedEx Express, FedEx Ground and FedEx Freight shipment tracking, customer service and invoicing information.

        We manage our business as a portfolio—in the best interest of FedEx as a whole, not a particular operating company. As a result, we base decisions on capital investment, expansion of delivery and information technology networks, and service additions or enhancements on achieving the highest overall long-term return on capital. For each FedEx company, we focus on making appropriate investments in the technology and transportation assets necessary to optimize our earnings performance and cash flow. As an example of our commitment to managing collaboratively, certain of our incentive compensation programs are now tied in part to the performance of FedEx as a whole.

        While we have increased our emphasis on competing collectively and managing collaboratively, we continue to believe that operating independent networks, each focused on its own respective markets, results in optimal service quality, reliability and profitability from each business unit. Each FedEx subsidiary is free to focus exclusively on the market sectors in which it has the most expertise. Everything about each company—operations, cost structure, policies and culture—is designed to serve the unique customer needs of a particular market segment.

        Our "operate independently, compete collectively, manage collaboratively" strategy also provides flexibility in sizing our various operating companies to comport with varying macro-economic conditions and shipping demand for the market segments in which they operate. For example,

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At our rapidly growing FedEx Ground subsidiary, we expect to double daily package volume capacity to 5.1 million by 2010 through a $1.8 billion network capacity expansion plan.



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To accommodate international growth at FedEx Express, we have added flights, increased capacity and improved services between Europe and Asia, based on the growth prospects of these regions.

On the other hand, we have streamlined resources within the U.S. domestic FedEx Express network, based on its slower growth rates. We are implementing focused strategies to decrease spending and to increase usage of FedEx Express services. During 2004, we offered voluntary early retirement and severance programs to eligible FedEx Express employees to continue resizing the FedEx Express U.S. organization and improving our profitability.

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        We believe the following four trends are driving world commerce and will accelerate as the economy continues and sustains its broad-based recovery:

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Increase in High-Tech and High-Value-Added Businesses: High-tech and high-value-added goods continue to increase as a percentage of total economic output. These goods can be roughly defined as any product with a relatively high value-to-weight ratio or a high value-added content—for example, computers, pharmaceuticals, automotive goods, electronics, high-fashion goods and aviation products. Our various operating companies offer a unique menu of services to fit virtually all shipping needs of high-tech and high-value-added industries.



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Globalization: As the world's economy becomes more fully integrated, and as barriers and borders to trade continue to decrease, companies are sourcing and selling globally. As a result, companies have streamlined their supply chains and opened new markets. Since 1990, the volume of international trade has grown 6.7% a year, almost double the growth rate in real gross domestic product. This, in turn, has opened multiple legs of transportation on both the inbound "sourcing" side and the outbound "selling" side. With customers in 215 countries, we facilitate this supply chain through our global reach, delivery services and information capabilities.



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Supply Chain Acceleration: As the economy has become increasingly global, it has also become more fast-paced. Companies cannot wait weeks to source components and finished goods from around the world, especially in high-tech industries with high obsolescence rates, so companies of all sizes depend on the delivery of just-in-time inventory to help them compete faster and more efficiently. We have taken advantage of the move toward faster, more efficient supply chains by helping customers substitute near real-time information to manage inventory in motion, thereby reducing overhead and obsolescence and speeding time-to-market.



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Growth of the Internet and E-Commerce: E-commerce acts as a catalyst for the other three trends and is a vital growth engine for businesses today. It makes low-cost information available to anyone with Internet access, regardless of time or space. It enables small and mid-sized companies to source and sell globally, just like large corporations. Business-to-consumer e-commerce sales are growing rapidly, and the business-to-business e-commerce marketplace is substantially larger than the consumer sector.

        We have positioned our companies to capitalize on these trends and move toward even stronger long-term growth, productivity and profitability by:

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Reducing costs and capital expenditures—for example, through the business realignment efforts at FedEx Express.



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Optimizing and expanding our worldwide FedEx Express network, particularly in key markets such as China, and aggressively growing the capacity of our FedEx Ground and FedEx Freight networks.



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Increasing our emphasis on technological innovation and the integration of technology platforms, including the services available at fedex.com and electronic document management of FedEx Kinko's.



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Making service improvements and focusing our employees and contractors on delivering the best customer experience in the industry, across all FedEx companies.

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Emphasizing the "compete collectively" part of our core strategy, resulting in better alignment across the entire FedEx network.

We made another important move in 2004 toward increasing long-term stockholder value by acquiring FedEx Kinko's, formerly known as Kinko's, Inc. This strategic business acquisition has increased our retail presence for FedEx shipping services and offers growth opportunities in commercial document solutions.

        In May 2004, we began offering the full range of day-definite ground and time-definite global express shipping services at all U.S. FedEx Kinko's Office and Print Centers. This added approximately 1,000 staffed locations to our retail network, substantially increasing customer access to FedEx Express and FedEx Ground. We also plan to offer complete "pack-and-ship" capabilities to FedEx Kinko's customers later this calendar year, in time for the peak holiday season, and FedEx Consolidated Return Service, a powerful resource that helps e-tailers cost-effectively handle returns. Internationally, FedEx Kinko's Office and Print Centers also plan to add FedEx shipping services in the future.

        FedEx Kinko's redefines the future of the business services marketplace by serving as a complete office on the road for business customers. FedEx Kinko's creates a one-stop resource, offering the industry's broadest range of business services, including document services, retail products and services, large format signs and graphics and other services for large commercial accounts.

Reputation and Responsibility

        By competing collectively under the FedEx banner, our operating companies benefit from one of the world's most recognized brands. FedEx is one of the most trusted and respected brands in the world, and the FedEx brand name is a powerful sales and marketing tool. Among the many reputation awards we received during 2004, FedEx ranked seventh in "corporate reputation" on The Wall Street Journal's Harris Interactive/Reputation Institute RQ Gold Survey, and for the third consecutive year, FedEx ranked in the top ten of FORTUNE magazine's "America's Most Admired Companies" and "World's Most Admired Companies" lists. FedEx is the only transportation company and one of the very few companies overall to rank this highly in all three reputation surveys. FedEx ranked highest in customer satisfaction in the University of Michigan Business School National Quality Research Center's American Customer Satisfaction Index in the parcel delivery category. Wal-Mart Stores, Inc., the world's largest retailer, also selected FedEx as the recipient of its "Carrier of the Year" award. BusinessWeek recognized FedEx Kinko's in the magazine's "Web Smart 50" report for the company's innovative use of Internet technology to transform business processes and reduce costs.

        FedEx is well recognized as a leader, not only in the transportation industry and technological innovation, but also in social and environmental responsibility and corporate governance. FedEx is known for treating people well, from our employees to the communities in which we operate. Along with a strong reputation among customers and the general public, FedEx is widely acknowledged as a great place to work. In 2004, we were listed among FORTUNE's "100 Best Companies to Work for in America," a list that we have made every year it has been published, and in June 2004, we were listed among Computerworld magazine's "100 Best Places to Work in IT." It is our people—our greatest asset—that give us our strong reputation. In addition to superior physical and information networks, FedEx has an exemplary human network, with more than 240,000 employees and contractors who are "absolutely, positively" focused on safety, the highest ethical and professional standards and the needs of their customers and communities. Through our internal Purple Promise and Humanitarian Award programs, we recognize and reward employees who enhance customer service and promote human welfare.

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Community

        We are committed to causes that help improve the communities where we live and work, all around the world. As an example, we routinely donate our transportation equipment and services to deliver aid to disaster sites and to support charitable causes. For instance, in 2004, we transported more than 88,000 pounds of concert equipment in support of Nelson Mandela's global AIDS awareness and fundraising campaign, "46664—Give One Minute of Your Life to AIDS." In addition to corporate philanthropy and employee volunteerism, we develop strategic relationships with charitable organizations that share our ethics and values, including:

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United Way of America: We believe the United Way is one of the most effective and efficient ways of meeting community needs. FedEx supports a yearly fundraising campaign company-wide and received the United Way's "Spirit of America" Award in 2003 in honor of our national corporate involvement and commitment to building better communities.



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American Red Cross: FedEx works with the Red Cross to provide a quick response to disasters around the world. FedEx uses its logistics and transportation expertise to provide complimentary shipping of emergency supplies and assists with trained volunteers and financial support. In 2004, FedEx Kinko's donated two million sheets of paper to the Red Cross to aid in disaster relief efforts following Hurricane Isabel.



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National SAFE KIDS Campaign: Reflecting the fact that safety is one of our top priorities, FedEx is a sponsor of SAFE KIDS "Walk This Way," a program that advocates child pedestrian safety in the United States, Brazil and Asia, with an increasing global presence.



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ORBIS International: FedEx helps ORBIS International provide eye care and treatment to people in developing countries. ORBIS presented FedEx with its 2004 Global Humanitarian Award for providing free aircraft maintenance and volunteer pilots for its "flying eye hospital"—a converted DC-10 aircraft equipped with surgical and training facilities.



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National Civil Rights Museum: FedEx serves as a major corporate sponsor of the National Civil Rights Museum, which educates the public on the lessons of the civil rights movement in the United States and its impact and influence on the human rights movement worldwide.



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March of Dimes: Thousands of FedEx employees participate in March of Dimes' WalkAmerica and other events that raise funds to help improve the health of babies by preventing birth defects and infant mortality.

Environment

        We are committed to protecting the environment. FedEx evaluates the environmental impacts of FedEx packaging products and minimizes waste generation through efforts that include recycling and pollution prevention. FedEx is actively involved in efforts to promote cleaner air by reducing emissions through efficient route planning and the use of clean and alternative fuels. For example, the FedEx Express OptiFleet E700 hybrid electric vehicle decreases particulate emissions by 90 percent, reduces smog-causing emissions by 75 percent and increases fuel efficiency by 50 percent. In March 2004, we placed the first FedEx Express OptiFleet E700 hybrid electric vehicle into service, and we plan to roll out more of these low-emission vehicles over time. FedEx Express is also modernizing its aircraft fleet,

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replacing many older Boeing 727s with more fuel-efficient and quieter planes, which will have the effect of reducing greenhouse gas emissions and airport noise.

        FedEx Kinko's history also includes a longstanding dedication to protecting the environment and its Global Commitment sets standards for incorporating sustainable business practices that generate economic, social and environmental value today and for future generations. During 2004, FedEx Kinko's received several awards, including awards from the United States Environmental Protection Agency and Department of Energy, recognizing its leadership in renewable energy purchases.

Governance

        We are committed to good corporate governance and have been proactive in early compliance with many aspects of the Sarbanes-Oxley Act of 2002 and the New York Stock Exchange's recently adopted corporate governance listing standards. We have fully embraced the spirit of corporate governance reform rather than merely meeting minimum compliance standards. Reflecting our longstanding commitment to good corporate governance:

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We added three highly qualified, independent directors to the Board during 2004: August A. Busch IV, the president of Anheuser-Busch, Inc.; John A. Edwardson, the chairman and chief executive officer of CDW Corporation; and J. Kenneth Glass, the chairman, president and chief executive officer of First Horizon National Corporation.



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In January 2004, our Board of Directors announced its decision to submit to stockholders a proposal to amend FedEx's bylaws to require each director to stand for election annually. FedEx stockholders will vote on the Board's declassification proposal at the September 27, 2004 annual meeting.



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We have fully implemented a company-wide whistleblower hotline, the FedEx Alert Line, to help maintain our high standard of business and personal ethics.



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We have adopted a strict written policy on engagement of our independent registered public accounting firm in order to ensure that the firm maintains the highest level of independence from FedEx, in both appearance and fact. Our Audit Committee must preapprove all audit and non-audit services to be provided by the firm.



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We are leveraging the work we are undertaking to comply with the reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002 to further improve our already rigorous disclosure controls and procedures and internal control over financial reporting.

        Our Board of Directors has adopted Corporate Governance Guidelines, charters for its Audit, Compensation and Nominating & Governance Committees and a Code of Business Conduct & Ethics, which applies to all of our directors, officers and employees, including our principal executive officer and senior financial officers. Each of these documents is available, free of charge, in print to any stockholder who requests it and in the corporate governance section of the Investor Relations page of our Web site at http://www.fedex.com/us/investorrelations. In addition, we intend to post in the corporate governance section of the Investor Relations page of our Web site information regarding any amendment to, or waiver from, the provisions of our Code of Business Conduct & Ethics to the extent such disclosure is required. The information on our Web site, however, does not form part of this Report.

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Business Segments

        The following describes in more detail the operations of each of our business segments, as well as FedEx Services:

FedEx Express Segment

FedEx Express

Overview

        FedEx Express invented express distribution in 1973 and remains the industry leader, providing rapid, reliable, time-definite delivery of packages, documents and freight to 215 countries. FedEx Express offers time-certain delivery within one to three business days, serving markets that comprise more than 90% of the world's gross domestic product through door-to-door, customs-cleared service, with a money-back guarantee. FedEx Express's extensive air route authorities and transportation infrastructure, combined with its leading-edge information technologies, make it the world's largest express transportation company. FedEx Express employs more than 133,500 employees and operates approximately 52,000 drop-off locations, 645 aircraft and 47,000 vehicles and trailers in its integrated global network.

Services

        FedEx Express offers a wide range of shipping services for delivery of documents, packages and freight. Overnight document and package services are backed by money-back guarantees and extend to virtually the entire United States population. FedEx Express offers three U.S. overnight delivery services: FedEx First Overnight, FedEx Priority Overnight and FedEx Standard Overnight. FedEx SameDay service is for urgent shipments up to 70 pounds to virtually any U.S. destination. FedEx Express also offers express freight services to handle the needs of the time-definite global freight market.

        With unmatched air route authorities and an extensive air/ground infrastructure, FedEx Express provides customs-cleared, door-to-door service to more international locations than any competitor. International express delivery with a money-back guarantee is available to 215 countries, with a variety of time-definite services to meet distinct customer needs. FedEx Express also offers the most comprehensive international freight service in the industry, backed by a money-back guarantee, real-time tracking and advanced customs clearance.

        During 2004, as part of its continued international expansion, FedEx Express:

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Increased capacity on flights between Europe and Asia. For instance, by adding a refueling stop in Kazakhstan, FedEx Express was able to increase its cargo capacity between Hong Kong and Paris by an additional 55,000 pounds for each flight.



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Expanded our network within Europe and Asia. FedEx Express added 13 additional weekly flights in and out of Hong Kong, allowing us to offer even greater access to Asia from the U.S. and Europe as well as within the Asia-Pacific region. FedEx Express also now provides customers with better intra-Asian connectivity as a result of adding six weekly flights to Subic Bay, Philippines, linking customers to the FedEx AsiaOne network and the rest of the world.



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Increased our presence in China. FedEx announced plans to establish a new regional headquarters in Shanghai and to expand service from 220 Chinese cities to 320 over the next five

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years. The new regional structure there will provide broader expertise and expanded resources and service offerings to mainland customers as part of our long-term commitment to China. FedEx Express also launched the industry's first direct flight from southern China to North America, further expanding our airlift capacity from China.

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Launched express service to Iraq. Our role as one of the world's leading drivers of international trade and growth will be a significant asset to Iraq and its business community as the country works toward rebuilding its infrastructure and economy.

        In June 2004, the United States and the People's Republic of China signed a new aviation accord that will further facilitate trade to and from China. The agreement, which extends through 2010, provides 111 new weekly U.S.-China flights for U.S. cargo airlines such as FedEx Express. The U.S. Department of Transportation will be responsible for allocating the new flights, the first of which is scheduled to be available in August 2004.

        Through an alliance with La Poste, one of the world's leading postal organizations, customers of Chronopost International, a subsidiary of La Poste, have access to the FedEx Express air network. Additionally, FedEx customers in France and Belgium have benefited from the enhanced ground infrastructure of La Poste.

        Looking forward to our future needs, we have agreed to purchase ten Airbus A380 aircraft. The immense capacity, extensive range and excellent efficiency of this aircraft make it ideally suited for the anticipated needs of the FedEx Express global network later this decade. To facilitate the use of this growing network, we have strengthened our international trade consulting services and offer a variety of online tools that enable customers to more easily determine and comply with international shipping requirements.

        For information regarding FedEx Express e-shipping tools and solutions, see "FedEx Services—Technology." In addition, detailed information about FedEx Express delivery services can be found on the FedEx Web site at fedex.com. The information on our Web site, however, does not form part of this Report.

U.S. Postal Service Agreements

        Under two agreements with the U.S. Postal Service that run through August 2008, FedEx Express provides air capacity for transportation of Priority, Express and First-Class Mail and has placed approximately 5,000 drop boxes at U.S. Post Offices in approximately 325 metropolitan areas. In March 2004, the air transportation agreement was amended to allow us to continue carrying incremental pounds of mail through November 30, 2004 at higher committed volumes than required under the original agreement.

        Effective July 1, 2004, the U.S. Postal Service chose FedEx Express as the provider of transportation and delivery for the international delivery service called Global Express Guaranteed (GXG). The service, which is available at over 7,400 postal locations, offers international express delivery with a money-back guarantee (subject to certain limitations). Customers bring their packages to a U.S. Post Office where they fill out the GXG air waybill, pay postage and fees and drop off their packages. The U.S. Postal Service tenders the packages to FedEx Express, and FedEx Express provides transportation and delivery to the ultimate international destination.

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Pricing

        FedEx Express periodically publishes list prices in its Service Guides for the majority of its services. In general, during 2004, U.S. shipping rates were based on the service selected, destination zone, weight, size, any ancillary service charge and whether the shipment was picked up by a FedEx Express courier or dropped off by the customer at a FedEx Express location. International rates are based on the type of service provided and vary with size, weight and destination. FedEx Express offers its customers discounts generally based on actual or potential average daily revenue produced.

        FedEx Express has a dynamic fuel surcharge for all U.S. domestic and U.S. outbound shipments and for shipments originating internationally, where legally and contractually possible. The surcharge percentage is subject to monthly adjustment based on the spot price for jet fuel. For example, the fuel surcharge for June 2004 was based on the spot price for jet fuel published for April 2004. Changes to the FedEx Express fuel surcharge, when calculated according to the spot price for jet fuel and FedEx Express trigger points, are applied effective from the first Monday of the month. These trigger points may change from time to time, but information on the fuel surcharge for each month is available at fedex.com approximately two weeks before the surcharge is applicable.

Operations

        FedEx Express's primary sorting facility, located in Memphis, serves as the center of the company's multiple hub-and-spoke system. A second national hub is located in Indianapolis. In addition to these national hubs, FedEx Express operates regional hubs in Newark, Oakland and Fort Worth and major metropolitan sorting facilities in Los Angeles and Chicago. Facilities in Anchorage, Paris and Subic Bay, Philippines, serve as sorting facilities for express package and freight traffic moving to and from Asia, Europe and North America. Additional major sorting and freight handling facilities are located at Narita Airport in Tokyo, Stansted Airport outside London and Pearson Airport in Toronto. Facilities in Subic Bay and Paris are also designed to serve as regional hubs for their respective market areas. Throughout its worldwide network, FedEx Express operates city stations and employs a staff of customer service agents, cargo handlers and couriers who pick up and deliver shipments in the station's service area. For more information about our sorting and handling facilities, see Part I, Item 2 of this Report under the caption "FedEx Express Segment." In some international areas, where low package traffic makes FedEx Express's direct presence less economical, Global Service Participants have been selected to complete deliveries and to pick up packages.

        Sister company FedEx Kinko's offers retail access to FedEx Express shipping services at all U.S. locations. FedEx Express also operates FedEx World Service Centers, which are staffed, store-front facilities located in high-traffic, high-density areas. Unmanned FedEx Drop Boxes provide customers the opportunity to drop off packages at locations in office buildings, shopping centers, corporate or industrial parks and outside U.S. Post Offices. FedEx Express has formed alliances with certain retailers to extend this customer convenience network to drop-off sites in retail stores.

Fuel Supplies and Costs

        During 2004, FedEx Express purchased aviation fuel from various suppliers under contracts that vary in length and which provide for specific amounts of fuel to be delivered. The fuel represented by these contracts is purchased at market prices that may fluctuate daily. Because of our dynamic fuel surcharge, we do not have any jet fuel hedging contracts. See "FedEx Express—Pricing."

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        The following table sets forth FedEx Express's costs for aviation fuel and its percentage of total operating expenses for the last five fiscal years:

        Approximately 14% of FedEx Express's requirement for vehicle fuel is purchased in bulk. The remainder of FedEx Express's requirement is satisfied by retail purchases with various discounts.

        We believe that, barring a substantial disruption in supplies of crude oil, our fuel purchase contracts will ensure the availability of an adequate supply of fuel for FedEx Express's needs for the immediate future. A substantial reduction of oil supplies from oil-producing regions or refining capacity, or other events causing a substantial reduction in the supply of aviation fuel, however, could have a significant adverse effect on FedEx Express.

Competition

        The express package and freight markets are both highly competitive and sensitive to price and service. The ability to compete effectively depends upon price, frequency and capacity of scheduled service, ability to track packages, extent of geographic coverage, reliability and innovative service offerings. Competitors in these markets include other package delivery concerns, principally United Parcel Service, Inc. ("UPS"), DHL (which acquired Airborne Express), passenger airlines offering express package services, regional express delivery concerns, airfreight forwarders and the U.S. Postal Service. FedEx Express's principal competitors in the international market are DHL, UPS, foreign postal authorities such as Deutsche Poste and TNT Post Group, passenger airlines and all-cargo airlines.

        FedEx Express's extensive, scheduled international route system allows it to offer single-carrier service to many points not served by its principal all-cargo competitors. This international route system, combined with an integrated air and ground network, enables FedEx Express to offer international customers more extensive single-carrier service to a greater number of U.S. points than can be provided currently by any of our competitors. Many of FedEx Express's competitors in the international market, however, are government-owned, -controlled or -subsidized carriers, which may have greater resources, lower costs, less profit sensitivity and more favorable operating conditions than FedEx Express.

Employees

        David J. Bronczek is the President and Chief Executive Officer of FedEx Express, which is headquartered in Memphis, Tennessee. As of May 31, 2004, FedEx Express employed approximately 84,500 permanent full-time and 49,000 permanent part-time employees, of which approximately 18% are employed in the Memphis area. Employees of FedEx Express's international branches and subsidiaries in the aggregate represent approximately 17% of all employees. FedEx Express believes its relationship with its employees is excellent.

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        The pilots of FedEx Express are represented by the Air Line Pilots Association, International ("ALPA"), and have been employed under a collective bargaining agreement since May 31, 1999. The current agreement did not expire, but became amendable on May 31, 2004. Negotiations with ALPA to reach a new labor agreement began in March 2004 and are still underway. We will continue to operate under our current agreement while we negotiate with our pilots.

        Attempts by other labor organizations to organize certain other groups of employees occur from time to time. Although these organizing attempts have not resulted in any certification of a U.S. domestic collective bargaining representative (other than ALPA), we cannot predict the outcome of these labor activities or their effect, if any, on FedEx Express or its employees.

FedEx Trade Networks

        FedEx Trade Networks is a leading provider of international trade services, specializing in customs brokerage and global cargo distribution. Its value-added products and services include Global Trade Data, an information tool that allows customers to track and manage imports. FedEx Trade Networks provides international trade advisory services, including assistance with the Customs-Trade Partnership Against Terrorism (C-TPAT) program, and a set of integrated international shipping resources known as Global Trade Tools. FedEx Trade Networks has approximately 3,300 employees and 90 offices throughout North America. Offices are also maintained in major Asian markets through dedicated agents.

        FedEx Trade Networks has an alliance with Frans Maas, a leading European provider of international freight forwarding and logistics services, to provide door-to-door air and ocean forwarding transportation services between Europe and North America, as well as similar alliances with S-Net Freight (Holdings) Pte Ltd, an Asian airfreight forwarder, and Capital Distribution Services Group (CDS), an Asian ocean freight forwarder. Through its WorldTariff subsidiary, FedEx Trade Networks publishes customs duty and tax information for 118 customs territories worldwide.

FedEx Ground Segment

FedEx Ground

Overview

        By leveraging the FedEx brand, maintaining a low cost structure and efficiently using information technology and advanced automation systems, FedEx Ground continues to enhance its competitive position as a leading provider of business and residential money-back-guaranteed ground package delivery services. FedEx Ground serves customers in the small-package market in North America, focusing primarily on business and residential delivery of packages weighing up to 150 pounds. FedEx Ground provides ground service to 100% of the United States population and overnight service up to 400 miles to approximately 97% of the United States population. Through a subsidiary, service is also provided to 100% of the Canadian population. In addition, FedEx Ground offers service to Puerto Rico, Alaska and Hawaii via a ground/air network operation coordinated with other transportation providers.

        Over the past two years, FedEx Ground has improved the speed, reach and service capabilities of its network, by:

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Reducing transit time by a day for more than 40 percent of its lanes.



•

Introducing or expanding overnight ground service in over 20 metropolitan areas.

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        At the same time, to meet growing customer demand for its services, FedEx Ground has pursued its network capacity expansion program, which is expected to double its daily package volume capacity to 5.1 million by 2010. The multi-phase plan includes the addition of nine new central distribution hubs and the expansion of 30 existing central distribution hubs, as well as the expansion or relocation of more than 290 existing facilities. In 2004, FedEx Ground began construction on four of the nine new hubs in the metro areas of Cincinnati, Dallas, Memphis and Hagerstown, Maryland. Each of the new hubs will feature the latest automated sorting technology.

        Along with the continuing expansion of FedEx Ground's business-to-business service, the increasing popularity of the FedEx Home Delivery service, which reaches nearly 100% of U.S. residences, has driven growth in FedEx Ground's package volumes and financial results. FedEx Home Delivery is the only service dedicated exclusively to meeting the delivery needs of residential customers. No other carrier provides routine Saturday and evening delivery and premium options such as day-specific, appointment and signature delivery. FedEx Home Delivery brings unmatched services to residential shippers and their customers and also offers a money-back guarantee. To maintain a low-cost structure, FedEx Home Delivery takes advantage of the FedEx Ground network for pickup, package sorting and linehaul operations.

        Detailed information about FedEx Ground delivery services, including FedEx Home Delivery, can be found at the FedEx Web site at fedex.com. The information on our Web site, however, does not form part of this Report.

Pricing

        FedEx Ground periodically publishes list prices in its Service Guide for the majority of its services. In general, during 2004, U.S. shipping rates were based on the service selected, destination zone, weight, size, any ancillary service charge and whether the shipment was picked up by a FedEx Ground contractor or dropped off by the customer at a FedEx Ground location. FedEx Ground discontinued its fuel surcharge effective January 5, 2004.

Operations

        Like FedEx Express, FedEx Ground utilizes a multiple hub-and-spoke sorting and distribution system. As of May 31, 2004, FedEx Ground operated 513 facilities and 27 hubs in the U.S. and Canada. FedEx Ground conducts its operations primarily with 16,200 owner-operated vehicles and 18,700 company-owned trailers. To provide the FedEx Home Delivery service, FedEx Ground is leveraging its existing pickup operation and hub and linehaul network. As of May 31, 2004, FedEx Ground had 298 locations supporting the FedEx Home Delivery service, many of which are co-located with previously existing FedEx Ground facilities, which reduces the cost of providing the FedEx Home Delivery service.

        FedEx Ground uses advanced automated sorting technology to streamline the handling of approximately 2.3 million daily packages. FedEx Ground U.S. hubs have average processing speeds of 18,300 packages per hour. Using overhead laser scanners, hub conveyors electronically guide packages to their appropriate destination chute, where they are loaded for transport to their destination terminals for local delivery. FedEx Ground is still the only U.S. ground carrier to operate a fully automated hub network for greater efficiency and package integrity. FedEx Ground also utilizes software systems and Internet-based applications to offer its customers new ways to connect internal package information with external delivery information. FedEx Ground provides multiple-carrier shipment tracing and proof-of-delivery signature functionality on the FedEx Web site (fedex.com). For additional information regarding FedEx Ground e-shipping tools and solutions, see "FedEx Services—Technology."

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        Sister company FedEx Kinko's offers retail access to FedEx Ground shipping services at all U.S. locations. FedEx Ground is also available as a service option at many FedEx Express facilities and FedEx Authorized ShipCenters in the U.S.

        FedEx Ground is headquartered in Pittsburgh, Pennsylvania. Daniel J. Sullivan is the President and Chief Executive Officer of FedEx Ground, which has approximately 48,800 employees and contractors. FedEx Ground's primary competitors are UPS, DHL (which acquired Airborne Express) and the U.S. Postal Service.

FedEx Supply Chain Services

        FedEx Supply Chain Services offers a range of supply chain solutions, including transportation management, fulfillment and fleet services. FedEx Supply Chain Services focuses on alliance-based and information technology-sensitive business to meet the needs of its customers and to drive transportation business to other FedEx operating companies. FedEx Supply Chain Services' transportation offering uses advanced electronic data interchanges to speed communications between customers and their suppliers, resulting in more cost-effective solutions and enhanced levels of customer service.

FedEx Freight Segment

FedEx Freight

        FedEx Freight provides regional next-day and second-day and interregional LTL freight services and is known for its exceptional service, reliability and on-time performance. Through a comprehensive network of service centers and advanced information systems, FedEx Freight provides regional LTL freight service to virtually all U.S. ZIP Codes, including Alaska and Hawaii. FedEx Freight also offers a premium service between all regions in the U.S., providing seamless coverage and industry-leading transit times. FedEx Freight's regional and interregional LTL service is supported by a no-fee money-back guarantee on eligible shipments. Internationally, FedEx Freight serves Canada, Mexico, Puerto Rico, Central and South America, the Caribbean, Europe and Asia via alliances and purchased transportation. Similar to its major competitors, FedEx Freight has a dynamic fuel surcharge that applies to the majority of its customers. The surcharge percentage is subject to weekly adjustment based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel.

        FedEx Freight provides tailored shipping solutions to help shippers meet tight deadlines. Through its many service offerings, FedEx Freight can match customers' time-critical needs with reduced transit times, after-hours pickup or delivery, or same-day delivery. During 2004, FedEx Freight further reduced transit times in a number of regions across the U.S. in a continuing focus on fast-cycle distribution. Currently, approximately 90% of FedEx Freight shipments are delivered next- or second-business-day. FedEx Freight has also increased capacity at a number of key locations to better meet customer demand. FedEx Freight's fully integrated Web site and other e-tools, including a bill of lading generator and e-mail delivery notification, make freight shipping easier and bring customers closer to their own account information.

        FedEx Freight has leveraged its relationships with other FedEx operating companies to meet the increasingly global needs of customers. In 2004, the FedEx Freight sales force began selling FedEx Express freight services. At the same time, FedEx Services sales representatives are sharing LTL leads with their counterparts at FedEx Freight. The sales effort is one phase of a broad initiative aimed at leveraging FedEx's competitive advantage in U.S. domestic freight services. In addition, FedEx Freight has collaborated with FedEx Trade Networks and FedEx Ground to serve Asia. FedEx Trade Networks facilitates the preparation and

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containerization of shipments in Asia and manages the ocean portion of the service, as well as customs clearance and document preparation, while FedEx Freight and FedEx Ground handle the inland distribution transportation once shipments are cleared at U.S. container freight stations in gateway cities.

        FedEx Freight subsidiary Caribbean Transportation Services, Inc. ("CTS") is the leading provider of airfreight forwarding services between the United States and Puerto Rico, specializing in arranging the shipment of heavyweight and oversized cargo. CTS, which also offers service to the Dominican Republic and Costa Rica, provides several delivery options for door-to-door or airport-to-airport airfreight forwarder services, principally to the medical, pharmaceutical and technology sectors.

        As of May 31, 2004, FedEx Freight had approximately 24,000 employees operating approximately 37,000 vehicles and trailers from a network of 328 service centers. Douglas G. Duncan is the President and Chief Executive Officer of FedEx Freight, which is based in Memphis, Tennessee. FedEx Freight's primary multiregional LTL competitors are Con-Way Transportation Services, a subsidiary of CNF Inc., USF Corporation and Overnite Corporation.

FedEx Custom Critical

        FedEx Custom Critical provides exclusive-use, time-specific shipment services throughout the United States and Canada and within Europe through a network of 152 ExpressCenters and 1,500 owner-operators. Among its divisions are Surface Expedite, for nonstop, door-to-door transport of critical shipments; White Glove Services, for shipments that require special care in handling, such as temperature-sensitive materials; and Air Expedite, which offers an array of air solutions to meet customers' critical delivery times. FedEx Custom Critical also transports antique cars, race cars and other specialty autos through its Passport Transport subsidiary. Most FedEx Custom Critical shipments are picked up in less than 90 minutes after the customer places the order. Each shipper has exclusive vehicle usage, minimizing freight handling. FedEx Custom Critical continuously monitors shipments through Customer Link, an integrated proprietary shipment control system with two-way satellite communications. Service is available 24 hours a day, 365 days a year, including weekends and holidays at no extra cost. Through the Shipping Toolkit feature of FedEx Custom Critical's Web site (customcritical.fedex.com), customers can quote, ship, track and map shipments, as well as view and print out copies of a shipment's bill of lading, proof of delivery and invoice.

FedEx Kinko's Segment

        FedEx Kinko's is a global leader in the document services market, offering a wide array of innovative business solutions, including retail access to the full range of FedEx day-definite ground shipping and time-definite global express shipping services. See "Strategy" above for a description of our ongoing integration of FedEx Kinko's into the FedEx portfolio of companies. FedEx Kinko's was founded in 1970 with one store in Santa Barbara, California. As of May 31, 2004, its operations included approximately 1,100 FedEx Kinko's Office & Print Centers in the United States and 117 additional locations in nine other countries. These digitally-connected locations create an unmatched global network of state-of-the-art printing and copying technology, which FedEx Kinko's leverages to provide highly differentiated, innovative solutions to its customers.

        In 2005, FedEx Kinko's plans to open approximately 70 new locations, including many internationally. FedEx Kinko's has a strategic plan for international expansion, focusing on growth in Canada, Mexico, Asia-Pacific and Europe, regions where FedEx already has a substantial presence. In November 2003, FedEx Kinko's opened its first location in Mexico, and it already has approximately 20 locations in Canada. FedEx Kinko's operates approximately 60 locations throughout Japan and two

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locations in China. FedEx Kinko's has 15 locations in Korea and 10 locations in Australia. In Europe, FedEx Kinko's operates locations in London, Amsterdam and Rotterdam.

        FedEx Kinko's specifically focuses on key customer segments that are important to the other FedEx companies. To small- and medium-sized business customers, FedEx Kinko's provides complete document management and meets basic office needs. To large corporate customers, FedEx Kinko's provides facilities management and outsourcing of copying, printing and document management services. To the rapidly growing "mobile professional" market segment, which includes business travelers and mobile salespeople, FedEx Kinko's provides a comprehensive "office on the road," including Internet access, videoconferencing and presentation support.

        FedEx Kinko's offers a full range of black-and-white, color and custom printing, copying and binding services and an increasingly broad array of other business services, including facilities management and outsourcing, high-speed Internet access and computer usage, Wi-Fi (wireless fidelity) services, videoconferencing, signs and graphics production services and FedEx Express and FedEx Ground shipping services. FedEx Kinko's has capitalized on the trend toward e-business, offering many Web-based services, including DocStore, an online ordering solution for digital print-on-demand, and ImageX Business Stationery Print System, which allows organizations to order, manage and distribute branded communications materials, such as business cards and stationery, via customized online catalogs. FedEx Kinko's also offers retail products, such as specialty papers, greetings cards, printer cartridges, stationery and office supplies.

        Detailed information about FedEx Kinko's services can be found at fedexkinkos.com. The information on our Web site, however, does not form part of this Report.

        FedEx Kinko's is headquartered in Dallas, Texas. Gary M. Kusin is the President and Chief Executive Officer of FedEx Kinko's, which has approximately 20,000 employees. FedEx Kinko's competitors on the retail side of its business include office-supply superstores, such as Staples, Inc., OfficeMax (a subsidiary of Boise Cascade Corporation) and Office Depot, Inc., franchise quick printers and small local and regional copy shops. FedEx Kinko's competitors on the facilities management and corporate outsourcing side of its business include Xerox Global Services, IKON Office Solutions, Inc. and Pitney Bowes Inc.

FedEx Services

        FedEx Services provides a convenient single point of access for many customer support functions, such as customer service, sales and automation. Much of the sales, marketing and information technology support for FedEx Express and FedEx Ground have been combined under FedEx Services to more effectively sell the entire portfolio of express and ground services. FedEx Services sells and markets the full portfolio of services offered by our principal package-delivery subsidiaries and provides customer-facing solutions that meet customer needs.

        Through FedEx Services, we provide our customers with a high level of service quality, as evidenced by our ISO 9001 certification for our global express and ground operations. ISO 9001 registration is required by thousands of customers around the world. FedEx's global certification, encompassing the processes of FedEx Express, FedEx Ground and FedEx Services, enhances our single-point-of-access strategy and solidifies our reputation as the quality leader in the transportation industry. ISO 9001 is currently the most rigorous international standard for Quality Management and Assurance. ISO standards were developed by the International Organization for Standardization in Geneva, Switzerland to promote and facilitate international trade. More than 150 countries, including European Union members, the United States and Japan, recognize ISO standards.

        T. Michael Glenn is the President and Chief Executive Officer of FedEx Services, which is based in Memphis, Tennessee. As of May 31, 2004, FedEx Services had approximately 9,050 employees.

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Technology

        In 1979, FedEx founder Frederick W. Smith said, "The information about a package is as important as the delivery of the package itself." Mr. Smith's vision for FedEx technology in 1979 was a radical idea. Yet, today's FedEx is a world leader in technology, and his vision remains at the core of our comprehensive technology strategy.

        Our technology strategy is driven by our desire for customer satisfaction. We strive to build technology solutions that will solve our customers' business problems with simplicity, convenience, speed and reliability. The focal point of our strategy is our award-winning Web site, together with our integration solutions.

        The fedex.com Web site is widely recognized for its speed, ease of use and customer-focused features. In 2003, the Web Marketing Association praised fedex.com as the "Best Transportation Web Site," and in 2002, eWeek saluted it as a top e-business innovator. At fedex.com, our customers ship packages, determine international documentation requirements, track package status, pay invoices and more. Our FedEx Insight Web-based application provides customers with visibility and package status of their inbound and outbound FedEx Express and FedEx Ground shipments. Our FedEx Global Trade Manager online resource enables customers to more easily navigate the complexities of international commerce by helping them identify the documents they need to ship to and from specific countries. FedEx Global Trade Manager also offers a currency converter, profiles of regulatory information by country, a customs regulation guide and, through its "Estimate Duties and Taxes" features, customers can estimate applicable governmental charges, duties and fees. Our MyFedEx.com customer portal goes beyond simple tracking and tracing capabilities to offer personalized services for registered users.

        We have extended the reach of the fedex.com Web site to be accessible from most wireless devices, making it faster and easier for U.S. and Canadian customers to access real-time package status tracking information and drop-off location data for FedEx Express and FedEx Ground shipments. Our wireless service is available through Web-enabled devices, such as mobile telephones, personal digital assistants and Research In Motion (RIM) devices. FedEx also uses wireless data collection devices to scan bar codes on shipments. FedEx's newest data collection device, the FedEx PowerPad, uses Bluetooth wireless technology to give our couriers wireless access to the FedEx network, thereby enhancing and accelerating the package information available to our customers.

        We design our e-commerce tools and solutions to be easily integrated into our customers' applications, as well as into third-party software being developed by leading e-procurement, systems integration and enterprise resource planning companies. This is increasingly important, given the growing customer trend toward sophisticated multi-carrier shipping platforms. Our FedEx Ship Manager suite of solutions offers a wide range of options to help our customers manage their shipping and associated processes. Our FedEx Returns Portfolio, which includes the FedEx Consolidated Return service, makes it easier for consumers to make merchandise returns and helps merchants better manage their returns process.

        Detailed information about our e-commerce tools and solutions can be found on the FedEx Web site at fedex.com. The information on our Web site, however, does not form part of this Report.

Marketing

        The FedEx brand name is a symbol for high-quality service, reliability and speed. FedEx is one of the most widely recognized brands in the world. Special emphasis is placed on promoting and protecting the FedEx brand, one of our most important assets. In addition to traditional print and broadcast

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advertising, we promote the FedEx brand through corporate sponsorships and special events. For example, FedEx is the "Official Delivery Service Sponsor" of the National Football League. In addition, FedEx sponsors:

•

FedExField, home of the NFL's Washington Redskins



•

The FedEx Orange Bowl, host of one of college football's Bowl Championship Series games



•

FedExForum, the home of the NBA's Memphis Grizzlies



•

The PGA TOUR and the Champions Tour golf organizations



•

The FedEx St. Jude Classic, a PGA TOUR event which raises millions of dollars for St. Jude Children's Research Hospital



•

The FedEx Kinko's Classic, a PGA Champions Tour event



•

The BMW WilliamsF1 Formula One racing team



•

The National Thoroughbred Racing Association (NTRA)



•

The French Open tennis tournament

Regulation

        Air.    Under the Federal Aviation Act of 1958, as amended, both the U.S. Department of Transportation ("DOT") and the Federal Aviation Administration ("FAA") exercise regulatory authority over FedEx Express.

        The FAA's regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, personnel and ground facilities, which may from time to time affect the ability of FedEx Express to operate its aircraft in the most efficient manner. FedEx Express holds an air carrier certificate granted by the FAA pursuant to Part 119 of the federal aviation regulations. This certificate is of unlimited duration and remains in effect so long as FedEx Express maintains its standards of safety and meets the operational requirements of the regulations.

        The DOT's authority relates primarily to economic and security aspects of air transportation. The DOT's jurisdiction extends to aviation route authority and to other regulatory matters, including the transfer of route authority between carriers. FedEx Express holds various certificates issued by the DOT, authorizing FedEx Express to engage in U.S. and international air transportation of property and mail on a worldwide basis. FedEx Express's international authority permits it to carry cargo and mail from several points in its U.S. route system to numerous points throughout the world. The DOT regulates international routes and practices and is authorized to investigate and take action against discriminatory treatment of United States air carriers abroad. The right of a United States carrier to serve foreign points is subject to the DOT's approval and generally requires a bilateral agreement between the United States and the foreign government. The carrier must then be granted the permission of such foreign government to provide specific flights and services. The regulatory environment for global aviation rights may from time to time impair the ability of FedEx Express to operate its air network in the most efficient manner.

        In 2001, the Aviation and Transportation Security Act transferred responsibility for aviation security from the FAA to the Transportation Security Administration ("TSA") within the DOT, and ultimately, the new Department of Homeland Security. The TSA has adopted and may in the future adopt security-related regulations, including new requirements for cargo security, which could impact our air operations or otherwise increase our costs.

        FedEx Express participates in the Civil Reserve Air Fleet ("CRAF") program. Under this program, the U.S. Department of Defense may requisition for military use certain of FedEx Express's wide-bodied aircraft in the event of a declared need, including a national emergency. FedEx Express is compensated

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for the operation of any aircraft requisitioned under the CRAF program at standard contract rates established each year in the normal course of awarding contracts. Through its participation in the CRAF program, FedEx Express is entitled to bid on peacetime military cargo charter business. FedEx Express, together with a consortium of other carriers, currently contracts with the U.S. Government for charter flights.

        Ground.    The ground transportation performed by FedEx Express is integral to its air transportation services. The enactment of the Federal Aviation Administration Authorization Act of 1994 abrogated the authority of states to regulate the rates, routes or services of intermodal all-cargo air carriers and most motor carriers. States may now only exercise jurisdiction over safety and insurance. FedEx Express is registered in those states that require registration.

        The operations of FedEx Ground, FedEx Freight and FedEx Custom Critical in interstate commerce are currently regulated by the DOT and the Federal Motor Carrier Safety Administration, which retain limited oversight authority over motor carriers. Federal legislation preempts regulation by the states of rates and service in intrastate freight transportation.

        Like other interstate motor carriers, our operations are subject to certain DOT safety requirements governing interstate operations. In addition, vehicle weight and dimensions remain subject to both federal and state regulations.

        Communication.    Because of the extensive use of radio and other communication facilities in its aircraft and ground transportation operations, FedEx Express is subject to the Federal Communications Commission Act of 1934, as amended. Additionally, the Federal Communications Commission regulates and licenses FedEx Express's activities pertaining to satellite communications.

        Environmental.    Pursuant to the Federal Aviation Act, the FAA, with the assistance of the U.S. Environmental Protection Agency, is authorized to establish standards governing aircraft noise. FedEx Express's aircraft fleet is in compliance with current noise standards of the federal aviation regulations. FedEx Express's aircraft are also subject to, and are in compliance with, the regulations governing engine emissions. In addition to federal regulation of aircraft noise, certain airport operators have local noise regulations, which limit aircraft operations by type of aircraft and time of day. These regulations have had a restrictive effect on FedEx Express's aircraft operations in some of the localities where they apply but do not have a material effect on any of FedEx Express's significant markets. Congress's passage of the Airport Noise and Capacity Act of 1990 established a National Noise Policy, which enabled FedEx Express to plan for noise reduction and better respond to local noise constraints. FedEx Express's international operations are also subject to noise regulations in certain of the countries in which it operates.

        We are subject to federal, state and local environmental laws and regulations relating to, among other things, contingency planning for spills of petroleum products, the disposal of waste oil and the disposal of toners and other products used in FedEx Kinko's copy machines and photo film developing operations. Additionally, we are subject to numerous regulations dealing with underground fuel storage tanks, hazardous waste handling, vehicle and equipment emissions and the discharge of effluents from our properties and equipment. We have environmental management programs to ensure compliance with these regulations.

        Customs.    Our activities, including customs brokerage and freight forwarding, are subject to regulation by the Bureau of Customs and Border Protection and the TSA within the Department of Homeland Security (customs brokerage and security issues), the U.S. Federal Maritime Commission

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(ocean freight forwarding) and the DOT (airfreight forwarding). Our offshore operations are subject to similar regulation by the regulatory authorities of foreign jurisdictions.

Item 2.    Properties

FedEx Express Segment

        FedEx Express's principal owned and leased properties include its aircraft, vehicles, national, regional and metropolitan sorting facilities, administration buildings, FedEx World Service Centers, FedEx Drop Boxes and data processing and telecommunications equipment.

Aircraft and Vehicles

        As of May 31, 2004, FedEx Express's operating aircraft fleet consisted of the following:

(1)

Maximum operational revenue payload is the lesser of the net volume-limited payload and the net maximum structural payload.

(2)

The MD10-30s and MD10-10s are DC10-30s and DC10-10s, respectively, that have been converted to an MD10 configuration.

(3)

Includes 13 aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

(4)

Includes five aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

(5)

Not currently in operation and awaiting completion of passenger-to-freighter modification.

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•

The MD11s are three-engine, wide-bodied aircraft that have a longer range and larger capacity than DC10s.



•

The DC10s are three-engine, wide-bodied aircraft that have been specially modified to meet FedEx Express's cargo requirements. The DC10s come in two versions, the DC10-10 and the DC10-30. The DC10-30 has a longer range and higher weight capacity than the DC10-10.



•

The MD10s are three-engine, wide-bodied DC10 aircraft that have received an Advanced Common Flightdeck (ACF) modification, which includes a conversion to a two-pilot cockpit, as well as upgrades of electrical and other systems.



•

The A300s and A310s are two-engine, wide-bodied aircraft that have a longer range and more capacity than B727s.



•

The B727s are three-engine aircraft configured for cargo service.



•

The Fokker F27 and Cessna 208 turbo-prop aircraft are leased, and the ATR turbo-prop aircraft will be leased following their passenger-to-freighter modification, to independent operators to support FedEx Express operations in areas where demand does not justify use of a larger aircraft.

        An inventory of spare engines and parts is maintained for each aircraft type.

        In addition, FedEx Express "wet leases" 40 smaller piston-engine and turbo-prop aircraft which feed packages to and from airports served by FedEx Express's larger jet aircraft. The wet lease agreements call for the owner-lessor to provide flight crews, insurance and maintenance, as well as fuel and other supplies required to operate the aircraft. FedEx Express's wet lease agreements are for terms not exceeding one year and are generally cancelable upon 30 days' notice.

        At May 31, 2004, FedEx Express operated approximately 47,000 ground transport vehicles, including pickup and delivery vans, larger trucks called container transport vehicles and over-the-road tractors and trailers.

Aircraft Purchase Commitments

        FedEx Express is committed to purchase two A310s, seven ATRs and ten Airbus A380s (a new high-capacity, long-range aircraft). The A310s and ATRs are expected to be delivered in 2005. FedEx Express expects to take delivery of three of the ten A380 aircraft in each of 2009, 2010 and 2011 and the remaining one in 2012. FedEx Express also holds options for ten additional A380 aircraft. Deposits and progress payments of $25 million have been made toward these purchases and other planned aircraft-related transactions. Also see Note 17 of the accompanying audited financial statements for more information about our purchase commitments.

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Sorting and Handling Facilities

        At May 31, 2004, FedEx Express operated the following sorting and handling facilities:

(1)

Documents and packages.

(2)

Handles international express package and freight shipments to and from Asia, Europe and North America.

(3)

Handles intra-Asia express package and freight shipments, as well as international express package and freight shipments to and from Asia.

(4)

Handles intra-Europe express package and freight shipments, as well as international express package and freight shipments to and from Europe.

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        FedEx Express's facilities at the Memphis International Airport also include aircraft maintenance hangars, flight training and fuel facilities, administrative offices and warehouse space. FedEx Express leases these facilities from the Memphis-Shelby County Airport Authority (the "Authority") under several leases. The leases cover land, administrative and sorting buildings, other facilities, ramps and certain related equipment. FedEx Express has the option to purchase certain equipment (but not buildings or improvements to real estate) leased under such leases at the end of the lease term for a nominal sum. The leases obligate FedEx Express to maintain and insure the leased property and to pay all related taxes, assessments and other charges. The leases are subordinate to, and FedEx Express's rights thereunder could be affected by, any future lease or agreement between the Authority and the U.S. Government.

        FedEx Express has major international sorting and freight handling facilities located at Narita Airport in Tokyo, Japan, Stansted Airport outside London, England and Pearson Airport in Toronto, Canada. FedEx Express also has a substantial presence at Chek Lap Kok Airport in Hong Kong, CKS International Airport in Taiwan, Dubai, United Arab Emirates, Frankfurt, Germany and Miami International Airport.

Administrative and Other Properties and Facilities

        The World Headquarters of FedEx Express are located in southeastern Shelby County, Tennessee. The headquarters campus, which comprises eight separate buildings with more than 1.1 million square feet of space, houses approximately 1,600 employees. FedEx Express also has facilities housing administrative and technical operations on approximately 200 acres adjacent to the Memphis International Airport. Of the eight buildings located on this site, four are subject to long-term leases and the other four are owned by FedEx Express. FedEx Express also leases approximately 40 facilities in the Memphis area for administrative offices and warehouses. FedEx Express leases state-of-the-art technology centers in Collierville, Tennessee, Irving, Texas, Colorado Springs, Colorado, and Orlando, Florida. These facilities house FedEx Express personnel and FedEx Services personnel responsible for strategic software development and other functions that support FedEx's technology and e-commerce solutions.

        FedEx Express owns or leases 677 facilities for city station operations in the United States. In addition, 205 city stations are owned or leased throughout FedEx Express's international network. The majority of these leases are for terms of five to ten years. City stations serve as the sorting and distribution center for a particular city or region. We believe that suitable alternative facilities are available in each locale on satisfactory terms, if necessary.

        As of May 31, 2004, FedEx Express owned or leased space for 351 FedEx World Service Centers in the United States and had approximately 40,400 Drop Boxes, including 5,000 Drop Boxes outside U.S. Post Offices. As of May 31, 2004, FedEx Express also had approximately 8,400 FedEx Authorized ShipCenters and FedEx ShipSites, which are drop-off locations situated within certain retailers, such as OfficeMax, Staples and sister company FedEx Kinko's. Internationally, FedEx Express has approximately 2,000 drop-off locations, including 102 FedEx World Service Centers.

FedEx Ground Segment

        FedEx Ground's corporate offices and information and data centers are located in the Pittsburgh, Pennsylvania area in an approximately 500,000 square-foot building owned by FedEx Ground. As of May 31, 2004, FedEx Ground had 16,200 owner-operated vehicles and 18,700 company-owned trailers and owned or leased 513 facilities, including 27 hubs. Of the 298 facilities that support the FedEx Home Delivery service, 158 are co-located with existing FedEx Ground facilities. Leased facilities generally have terms of five years or less. The 27 hub facilities are strategically located to cover the geographic area served by FedEx Ground. These facilities average 192,000 square feet and range in size from 31,000

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to 411,000 square feet.

FedEx Freight Segment

        FedEx Freight's corporate headquarters are located in Memphis, Tennessee. FedEx Freight also has administrative offices located in Harrison, Arkansas and San Jose, California. As of May 31, 2004, FedEx Freight operated approximately 37,000 vehicles and trailers and 328 service centers, which are strategically located to provide service to virtually all U.S. ZIP Codes. These facilities range in size from 600 to 220,400 square feet of office and dock space. FedEx Custom Critical's headquarters are located in Green, Ohio.

FedEx Kinko's Segment

        FedEx Kinko's corporate headquarters are located in Dallas, Texas in leased facilities. As of May 31, 2004, FedEx Kinko's operated approximately 1,220 locations, including 117 locations in nine foreign countries, and 36 commercial production centers. Substantially all FedEx Kinko's Office and Print Centers are leased, generally for terms of five to ten years with varying renewal options. FedEx Kinko's Office and Print Centers are generally located in strip malls, office buildings or stand-alone structures and average approximately 5,750 square feet in size.

Item 3.    Legal Proceedings

        FedEx and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these actions will not materially adversely affect FedEx's financial position, results of operations or cash flows.

Item 4.    Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of 2004.

EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers

        Information regarding executive officers of FedEx is as follows (included herein pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K):

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27

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        Executive officers are elected by, and serve at the discretion of, the Board of Directors. There is no arrangement or understanding between any executive officer and any person, other than a director or executive officer of FedEx or of any of its subsidiaries acting in his or her official capacity, pursuant to which any executive officer was selected. There are no family relationships between any executive officer and any other executive officer or director of FedEx or of any of its subsidiaries.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        FedEx's common stock is listed on the New York Stock Exchange under the symbol "FDX." As of July 12, 2004, there were 17,901 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low sale prices, as reported on the NYSE, and the cash dividends paid per share of common stock.

        FedEx paid its first cash dividend on July 8, 2002 and has paid a cash dividend each subsequent quarter, including on July 1, 2004 ($0.07 per share). We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by our Board of Directors. We intend to evaluate the dividend payment amount on an annual basis at the end of each fiscal year.

        There are no material restrictions on our ability to declare dividends, nor are there any material restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances.

        FedEx did not repurchase any of its common stock during the fourth quarter of 2004.

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Item 6.    Selected Financial Data

        The following table sets forth certain selected consolidated financial and operating data for FedEx as of and for the five years ended May 31, 2004. This information should be read in conjunction with the audited financial statements, Management's Discussion and Analysis of Results of Operations and Financial Condition and other financial data appearing elsewhere in this Report.

(1)

Results for 2004 include $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs. See Note 4 to the accompanying audited financial statements.

(2)

Results for 2004 include the financial results of FedEx Kinko's from February 12, 2004 (the date of acquisition). See Note 2 to the accompanying audited financial statements.

(3)

Results for 2004 include $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on an aircraft engine maintenance tax case and the reduction of our effective tax rate. See Note 11 to the accompanying audited financial statements.

(4)

Results for 2001 include the financial results of FedEx Freight East from January 1, 2001 (the date of acquisition for financial reporting purposes).

(5)

Asset impairment charges of $102 million ($65 million, net of tax, or $0.22 per diluted share) at FedEx Express and reorganization costs of $22 million ($14 million, net of tax, or $0.05 per diluted share) at FedEx Supply Chain Services were recorded in 2001.

(6)

Results for 2002 reflect our adoption of SFAS 142, "Goodwill and Other Intangible Assets." We recognized an adjustment of $25 million ($15 million, net of tax, or $0.05 per share) to reduce the carrying value of certain goodwill to its implied fair value. See Note 3 to the accompanying audited financial statements.

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Item 7.    Management's Discussion and Analysis of Results of Operations and Financial Condition

GENERAL

        The following Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") describes the principal factors affecting the results of operations, liquidity, capital resources and contractual cash obligations, as well as the critical accounting policies and estimates, of FedEx Corporation (also referred to as "FedEx"). This discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K ("Annual Report"), including "Item 1: Business"; "Item 6: Selected Financial Data"; "Item 8: Financial Statements and Supplementary Data"; and "Item 9A: Controls and Procedures," which include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

        Our MD&A is comprised of three major sections: Results of Operations, Financial Condition and Critical Accounting Policies and Estimates. Results of Operations begins with an overview of consolidated 2004 results compared to 2003, and of 2003 results compared to 2002. This section includes a discussion of key actions, such as our business realignment initiatives and the acquisition of FedEx Kinko's, as well as a discussion of our outlook for 2005. The overview is followed by a financial summary and narrative (including a discussion of both historical operating results and our outlook for 2005) for each of our four reportable operating segments. We then provide an analysis of changes in our balance sheet and cash flows and discuss our financial commitments in the Financial Condition section. We conclude with a discussion of the critical accounting policies and estimates that we believe are important to understanding the judgments and assumptions incorporated in our reported financial results.

        FedEx provides a broad portfolio of transportation, e-commerce and business services with companies that operate independently and compete collectively under the respected FedEx brand. These operating companies are primarily represented by FedEx Express, the world's largest express transportation company; FedEx Ground, North America's second largest provider of small-package ground delivery service; FedEx Freight, a leading U.S. provider of regional LTL freight services; and FedEx Kinko's, a leading provider of document solutions and business services. These companies form the core of our reportable segments. In 2004, we changed the reporting and responsibility relationships of our smaller business units so that they now report directly to a core segment. See "Reportable Segments" for further discussion and refer to "Item 1: Business" for a more detailed description of each of our operating companies.

        The key factors that affect our operating results are as follows:

•

the overall customer demand for our various services;



•

the volumes of transportation and business services provided through our networks, primarily measured by our average daily volume and shipment weight;



•

the mix of services purchased by our customers;



•

the prices we obtain for our services, primarily measured by average price per shipment (yield);



•

our ability to manage our cost structure for capital expenditures and operating expenses such as salaries and benefits, fuel and maintenance; and



•

our ability to match operating costs to shifting volume levels.

        Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2004 or ended May 31 of the year referenced and comparisons are to the prior year.

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RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

        The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in millions, except per share amounts) for the years ended May 31:

(1)

Includes $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs described below. See Note 4 to the accompanying audited financial statements.

(2)

Includes a $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on a tax case and the reduction of our effective tax rate described below. See Note 11 to the accompanying audited financial statements.

(3)

Results for 2002 reflect our adoption of SFAS 142, "Goodwill and Other Intangible Assets." We recognized an adjustment of $25 million ($15 million, net of tax, or $0.05 per diluted share) to reduce the carrying value of certain goodwill to its implied fair value. See Note 3 to the accompanying audited financial statements.

        The following table shows changes in revenues and operating income by reportable segment for 2004 compared to 2003, and 2003 compared to 2002 (in millions):

(1)

Includes $428 million of business realignment costs described below.

(2)

Includes the results of operations of FedEx Kinko's from February 12, 2004 (date of acquisition) through February 29, 2004 (approximately $100 million of revenue and $6 million of operating income).

        Revenue growth during 2004 was attributable to increased volumes of FedEx Express International Priority (IP), FedEx Ground and FedEx Freight shipments, as well as strong growth of IP yields at FedEx Express. Yield improvements at FedEx Ground and FedEx Freight also contributed to revenue growth. In addition, FedEx Kinko's (acquired on February 12, 2004) added $621 million of revenue during 2004.

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During 2003, revenue growth was due to the substantial growth of our FedEx Ground business, increased international volumes at FedEx Express and higher revenues at FedEx Freight. Increased U.S. freight volumes at FedEx Express also contributed to consolidated revenue growth in 2003, as we benefited from a full twelve months of revenue under the transportation agreement with the U.S. Postal Service ("USPS"), which commenced in late August 2001.

        Operating income decreased 2% in 2004 as costs related to our business realignment initiatives totaled $435 million (partially offset by approximately $150 million of savings). See "Business Realignment Costs" for a discussion of these costs and related savings. In total, operating expenses, other than business realignment costs, increased less than the increase in revenue during 2004, despite significant increases in incentive compensation, pension and maintenance costs. During 2003, operating income increased 11% as FedEx Ground significantly improved its operating margin, which more than offset a decline in the operating margin at FedEx Express. The sluggish economy, combined with significant increases in pension and healthcare costs and higher maintenance expenses, reduced profitability at FedEx Express in 2003 despite continued cost control efforts.

        Salaries and benefits expense increased 10% during 2004 due to higher incentive compensation and pension costs, wage rate increases and the acquisition of FedEx Kinko's. Incentive compensation increased approximately $240 million during 2004 due to above-plan operating income, primarily at FedEx Express and FedEx Freight. Incentive compensation declined in 2003 based on below-plan performance at FedEx Express. Pension costs were approximately $115 million higher in 2004 (on top of an $80 million increase in 2003), due principally to lower discount rates and decreased returns on pension plan assets. Although not legally required, we made $320 million in contributions to our qualified U.S. pension plans in 2004 compared to total contributions exceeding $1 billion in 2003. Our 2003 contributions were made to ensure our qualified U.S. pension plan assets exceeded the related accumulated benefit obligations at our February 28, 2003 plan measurement date.

Other Income and Expense and Income Taxes

        Net interest expense decreased slightly in 2004 as the effects of the tax case described below offset increases to interest expense. These increases were due to the amendment of aircraft operating leases and the adoption of Financial Accounting Standards Board Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which together resulted in eight MD11 aircraft being recorded as fixed assets and the related obligations being recorded as long-term debt. Interest expense also increased due to additional borrowings related to the FedEx Kinko's acquisition. Net interest expense was 15% lower in 2003 due to reduced borrowings.

        In August 2003, we received a favorable ruling from the U.S. District Court in Memphis over the tax treatment of jet engine maintenance costs. The Court held that these costs were ordinary and necessary business expenses and properly deductible. As a result of this decision, we recognized a one-time benefit in 2004 of $26 million, net of tax, or $0.08 per diluted share, primarily related to the reduction of accruals related to this matter and the recognition of interest earned on amounts previously paid to the IRS. Future periods are not expected to be materially affected by the resolution of this matter. Although the IRS has appealed this ruling, we believe the District Court's ruling will be upheld (also, see Note 11 to the accompanying audited financial statements).

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        Our effective tax rate was 36.5% in 2004, 38.0% in 2003 and 37.5% in 2002. The lower effective rate in 2004 was primarily attributable to the favorable decision in the tax case discussed above, stronger than anticipated international results and the results of tax audits during 2004. Our stronger than anticipated international results, along with other factors, increased our ability to credit income taxes paid to foreign governments on foreign income against U.S. income taxes paid on the same income, thereby mitigating our exposure to double taxation. The 38.0% effective tax rate in 2003 was higher than the 2002 rate primarily due to lower state taxes in 2002. The effective tax rate exceeds the statutory U.S. federal tax rate primarily because of state income taxes. For 2005, we expect the effective tax rate to be approximately 38.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

Business Realignment Costs

        During 2004, voluntary early retirement incentives with enhanced pension and postretirement healthcare benefits were offered to certain groups of employees at FedEx Express who were age 50 or older. Voluntary cash severance incentives were also offered to eligible employees at FedEx Express. These programs, which commenced August 1, 2003 and expired during the second quarter, were limited to eligible U.S. salaried staff employees and managers. Approximately 3,600 employees accepted offers under these programs. The response to these voluntary programs substantially exceeded our expectations. Consequently, replacement management and staff were required and some employee departure dates were deferred (up to May 31, 2004). Costs were also incurred in 2004 for the elimination of certain management positions at FedEx Express and other business units based on the staff reductions from the voluntary programs and other cost reduction initiatives. Costs for the benefits provided under the voluntary programs were recognized in the period that eligible employees accepted the offer. Other costs associated with business realignment activities were recognized in the period incurred.

        We recognized $435 million of business realignment costs during 2004. Savings of approximately $150 million were realized, reflected primarily in lower salaries and benefits costs. The components of our business realignment costs and changes in the related accruals were as follows for the year ended May 31, 2004 (in millions):

(1)

Other includes costs for management severance agreements, which are payable over future periods, including compensation related to the modification of previously granted stock options and incremental pension and healthcare benefits. Other also includes professional fees directly associated with the business realignment initiatives and relocation costs.

        Total cash payments under these programs are expected to be approximately $220 million. Amounts charged to other assets/liabilities relate primarily to incremental pension and healthcare benefits.

        Over the past few years, we have taken many steps toward bringing our expense growth in line with revenue growth, particularly at FedEx Express, while maintaining our industry-leading service levels. We have significantly decreased capital expenditures by reducing aircraft orders, consolidating facilities and discontinuing low-value programs. These business realignment initiatives are another step in this

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ongoing process of reducing our cost structure in order to increase our competitiveness, meet the future needs of our employees and provide the expected financial returns for our shareholders.

FedEx Kinko's Acquisition

        On February 12, 2004, we acquired FedEx Kinko's for approximately $2.4 billion in cash. We also assumed $39 million of capital lease obligations. FedEx Kinko's is a leading provider of document solutions and business services. Its network of worldwide locations offers access to color printing, finishing and presentation services, Internet access, videoconferencing, outsourcing, managed services, Web-based printing and document management solutions.

        The transaction was accounted for as a purchase. Accordingly, the assets and liabilities of FedEx Kinko's were recorded at their fair values and the excess of the purchase price over the fair value of assets acquired was recorded as goodwill. A significant amount of the purchase price was recorded as goodwill, as the acquisition of FedEx Kinko's expands our portfolio of business services, while providing a substantially enhanced capability to provide package-shipping services to small- and medium-sized business customers through FedEx Kinko's array of retail store locations.

        The assets and liabilities related to FedEx Kinko's have been included in the accompanying audited balance sheet based on a purchase price allocation. The allocation of the purchase price to the fair value of the assets acquired, liabilities assumed and goodwill, as well as the assignment of goodwill to our reportable segments, was based primarily on internal estimates of cash flows and independent appraisals. We used an independent appraisal firm to determine the fair value of certain assets and liabilities, primarily property and equipment and acquired intangible assets, including the Kinko's trade name, customer-related intangibles, technology assets and contract-based intangibles. While the purchase price allocation is substantially complete and we do not expect any material adjustments, we may make adjustments to the purchase price allocation if new data becomes available. See Notes 2 and 3 to the accompanying audited financial statements for further discussion of the purchase price allocation and goodwill and intangible assets.

        The results of operations of FedEx Kinko's have been included in our consolidated financial statements from February 12, 2004. During 2004, FedEx Kinko's contributed $621 million of revenue and $0.06 per diluted share of earnings, which includes approximately $15 million of interest and financing costs and $3 million of rebranding costs. Note 2 to the accompanying audited financial statements includes the unaudited pro forma results of operations of FedEx as if the acquisition had occurred as of the beginning of 2003. The accounting literature establishes firm guidelines around how this pro forma information is presented, which precludes the assumption of business synergies. Therefore, this unaudited pro forma information is not intended to represent, nor do we believe it is indicative of the consolidated results of operations of FedEx that would have been reported had the acquisition been completed as of the beginning of 2003. Furthermore, this pro forma information is not representative of the future consolidated results of operations of FedEx.

        We paid a portion of the purchase price from available cash balances. To finance the remainder of the purchase price, we entered into a six-month credit facility for $2 billion. During February 2004, we issued commercial paper backed by unused commitments under this facility. In March 2004, we replaced the commercial paper with the issuance of $1.6 billion of senior unsecured notes in three maturity tranches: one, three and five years at $600 million, $500 million and $500 million, respectively. We canceled the six-month credit facility in March 2004. See Notes 2 and 6 of the accompanying audited financial statements for further discussion.

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Airline Stabilization Compensation

        Operations in 2002 were significantly affected by the terrorist attacks on September 11, 2001. During 2002, we recognized a total of $119 million of compensation under the Air Transportation Safety and System Stabilization Act (the "Act"), of which $101 million had been received as of May 31, 2004. The amounts recognized were for our estimate of losses we incurred as a result of the mandatory grounding of our aircraft and for incremental losses incurred through December 31, 2001. All amounts recognized were reflected as reduction of operating expense under the caption "Airline stabilization compensation."

        In the fourth quarter of 2003, the Department of Transportation ("DOT") asserted that we were overpaid by $31.6 million and has demanded repayment. We have filed requests for administrative and judicial review. We received an opinion from the District of Columbia U.S. Court of Appeals stating that most of the determinations that we requested were not yet ripe for decision and the Court will not rule prior to final determination by the DOT and exhaustion of administrative remedies.

        Pursuant to the Federal Aviation Administration reauthorization enacted during the third quarter of 2004, the General Accounting Office submitted a report to Congress on June 4, 2004, on the criteria and procedures used by the Secretary of Transportation under the Act. Issuance of the report frees the DOT to make a final determination on our claim and also reinforces the Congressional directive to the DOT to refer any remaining disputed claims to an administrative law judge upon an affected claimant's request.

        We agreed to mediation with the DOT, but it did not result in a resolution of the dispute. We will continue to pursue our claim for compensation under the Act.

        We believe that we have complied with all aspects of the Act, that it is probable we will ultimately collect the remaining $18 million receivable and that we will not be required to pay any portion of the DOT's $31.6 million demand. We cannot be assured of the ultimate outcome; however, it is reasonably possible that a material reduction to the $119 million of compensation we have previously recognized under the Act could occur. Based on the DOT's assertion, the range for potential loss on this matter is zero to $49.6 million.

Outlook

        During 2005 (particularly during the first half), we expect the U.S. economy to sustain the growth evident in the second half of 2004. This growth is supported by strong corporate earnings, higher consumer confidence (led by both increasing income and an improving job market) and public sector improvement. The macro economic environment during 2004 was particularly challenging for our business, as the manufacturing and wholesale sectors of the economy lagged behind gross domestic product, and year-over-year performance in the economy lagged sequential quarter-to-quarter growth. We expect the current economic expansion to broaden into the manufacturing and wholesale sectors during 2005 as supported by the recent strengthening of durable goods sales, indicating the inventory restocking cycle has started. This is further supported by the positive year-over-year volume trends across all our transportation companies in the fourth quarter of 2004. We also expect a strong global economy in 2005, evidenced by recent broad-based growth across multiple sectors and regions, particularly in Asia.

        Our outlook anticipates revenue and earnings growth in all our reportable segments for 2005, as we continue to leverage our "compete collectively" philosophy. Our optimism stems from increasing customer demand for services across our operating companies, a lower cost structure at FedEx Express, as well as improving worldwide economic conditions. During 2005, we expect continued strong growth

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of international volumes and yields at FedEx Express. We expect only slight U.S. domestic volume growth at FedEx Express, with higher U.S. domestic yields to account for a large portion of revenue growth at FedEx Express. We anticipate improved volumes and yields at FedEx Ground and FedEx Freight, as FedEx Ground continues its multi-year capacity expansion plan and FedEx Freight continues to grow its regional and interregional business and enhance its portfolio of services. FedEx Kinko's revenue is projected to be approximately $2.1 billion, which is significantly higher than the partial year revenue included in our 2004 results. FedEx Kinko's will focus on continuing to generate revenue growth by aggressively growing current lines of business and by leveraging its new relationship with FedEx.

        We anticipate significant year-over-year growth of both operating income and margins. These measures will be positively impacted by revenue growth and the full-year savings from our business realignment initiatives (which are expected to be approximately $80 million to $90 million higher than 2004 savings) discussed above. Over the past several years we have experienced significant year-over-year increases in pension cost. For 2005, we expect a modest $30 million increase in pension cost, as 2004 actual asset returns have substantially improved the funded status of our pension plans in spite of a continued decline in the discount rate. Also, incentive compensation programs were reinstated to more normalized levels in 2004, after several years of declines. Our management teams continue to examine additional cost reduction and operational productivity opportunities as we focus on optimizing our networks, improving our service offerings, enhancing the customer experience and positioning FedEx to increase cash flow and financial returns by improving our operating margin.

        During 2005, we expect to incur approximately $20 million of expenses related to the FedEx Kinko's rebranding. In addition, we plan to open approximately 70 new FedEx Kinko's locations, including many internationally. Despite these costs, we expect FedEx Kinko's to contribute to earnings growth in 2005 as we move quickly to expand our service offerings at its U.S. locations. See "FedEx Kinko's Acquisition" and "Reportable Segments" for additional discussion.

        The pilots of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement. Negotiations with the pilots' union began in March 2004, as the current agreement became amendable on May 31, 2004. We will continue to operate under our current agreement while we negotiate with our pilots. Our financial results for 2005 may be affected by the results of these negotiations. However, we cannot estimate the financial impact, if any, the results of these negotiations may have on our results of operations.

        Increased security requirements for air cargo carriers have been put in place and have not had a material impact on our operating results for the periods presented. Although no specific proposals have been issued, further measures may be forthcoming. The impact on our results of operations of any such additional measures is unknown.

        Future results will depend upon a number of factors, including U.S. and international economic conditions, the impact from any terrorist activities or international conflicts, our ability to match our cost structure and capacity with shifting volume levels, our ability to effectively leverage our new service and growth initiatives and our ability to effectively operate, integrate and leverage the FedEx Kinko's business. In addition, adjustments to our fuel surcharges at FedEx Express lag changes in actual jet fuel prices paid. Therefore, our operating income could be materially affected should the spot price of jet fuel suddenly change by a significant amount or should we be unable to further increase our fuel surcharges in response to rising fuel prices due to competitive pressures. See "Forward-Looking Statements" for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.

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Seasonality of Business

        Our express package and freight businesses are seasonal in nature. Historically, the U.S. express package business experiences an increase in volumes in late November and December. International business, particularly in the Asia to U.S. market, peaks in October and November due to U.S. holiday sales. Our first and third fiscal quarters, because they are summer vacation and post winter-holiday seasons, have historically exhibited lower volumes relative to other periods.

        The transportation and business services industries are affected directly by the state of the overall domestic and international economies. Seasonal fluctuations affect volumes, revenues and earnings. Normally, the fall of each year is the busiest shipping period for FedEx Ground, while late December, January, June and July of each year are the slowest periods. For FedEx Freight, the spring and fall of each year are the busiest periods and the latter part of December, January and February of each year are the slowest periods. Shipment levels, operating costs and earnings for each of our transportation companies can also be adversely affected by inclement weather.

NEW ACCOUNTING PRONOUNCEMENTS

        No new accounting pronouncements had a material effect on our financial position, results of operations or cash flows during 2004.

REPORTABLE SEGMENTS

        FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko's form the core of our reportable segments. In 2004, we changed the reporting and responsibility relationships of our smaller business units so they now report directly to a core segment. Prior year amounts have been reclassified to conform to the new segment presentation. (For further discussion of our operating companies, refer to "Item 1: Business.") Our reportable segments include the following businesses:

        FedEx Services provides customer-facing sales, marketing and information technology support, primarily for FedEx Express and FedEx Ground. The costs for these activities are allocated based on metrics such as relative revenues and estimated services provided. These allocations materially approximate the cost of providing these functions. The line item "Intercompany charges" on the accompanying financial summaries of our reportable segments includes the allocations from FedEx Services to FedEx Express, FedEx Ground and FedEx Freight, allocations for services provided between operating companies, and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. Management evaluates segment financial performance based on operating income.

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FEDEX EXPRESS SEGMENT

        The following table compares revenues, operating expenses and operating income and margin (dollars in millions) and selected statistics (in thousands, except yield amounts) for the years ended May 31:

(1)

Other includes FedEx Trade Networks.

(2)

Package and freight statistics include only the operations of FedEx Express.

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FedEx Express Segment Revenues

        FedEx Express segment total revenues increased 6% in 2004, principally due to higher IP revenues in Asia, Europe and U.S. outbound. IP revenues increased significantly on volume growth (7%) and higher yield (9%). Asia experienced strong average daily volume growth (led by China with volume growth of over 50%), while outbound shipments from Europe, the United States and Latin America continued to improve. The increase in IP yield was largely attributable to Europe. The yield increase was primarily due to higher average weight per package, favorable exchange rate differences and higher fuel surcharge revenue.

        U.S. domestic package revenue increased 2% in 2004 as both volumes and yields grew slightly. For U.S. domestic composite yield, a small decline in average rate per pound was offset by increases in average weight per package and fuel surcharge revenue. For U.S. domestic shipments and U.S. outbound international shipments, an average list price increase of 2.5%, along with certain surcharge increases, became effective January 5, 2004. Freight revenue increased in 2004 due to increased yields related to service mix, despite lower volumes.

        FedEx Express segment total revenues increased 7% in 2003, largely due to increased IP and U.S. freight revenues. Year-over-year revenue comparisons reflect the impact in 2002 of the terrorist attacks on September 11, 2001, which adversely affected both U.S. outbound international shipments and U.S. domestic shipments, and the economic decline that began in calendar 2001. IP volume growth occurred predominantly in Asia and Europe, which experienced average daily volume growth rates of 21% and 11%, respectively, during 2003. IP yield improvements during 2003 were due to favorable exchange rate differences, increased fuel surcharge revenue and growth in higher-yielding lanes.

        U.S. domestic package revenue increased 2% in 2003 due to higher yield and volumes in the U.S. deferred and overnight box categories. The increase in U.S. domestic package yield during 2003 was due to higher fuel surcharge revenue and average list price increases. Higher U.S. freight revenues from increased average daily pounds during 2003 also affected year-over-year revenue comparisons, as we benefited from a full twelve months of operations and higher shipping levels under our transportation contract with the USPS, which began in August 2001.

        Fuel surcharge revenue was higher in 2004 and 2003 primarily due to higher jet fuel prices and the introduction of certain international dynamic fuel surcharges in September 2002. Our dynamic fuel surcharges are based on the spot price for jet fuel. During 2003, fuel surcharge revenue was also higher because our dynamic index for determining our U.S. domestic fuel surcharge was not implemented until the second quarter of 2002. Using this index, the U.S. domestic fuel surcharge ranged between 3.0% and 6.5% during 2004, 2.0% and 5.5% during 2003 and between 0% and 3% from November 2001 through May 2002. International fuel surcharges ranged between 2% and 6.5% during 2004 and were as high as 6% during 2003.

FedEx Express Segment Operating Income

        During 2004, operating income decreased 20% due to business realignment costs totaling $428 million (partially offset by approximately $150 million of savings). Higher incentive compensation and pension costs and base salary increases, as well as higher maintenance expenses, were offset by revenue growth and ongoing cost control efforts. In addition, 2004 benefited from one additional operating day. During 2003, the 2% decrease in operating income and the decline in operating margin at FedEx Express were attributable to increased employee benefits costs, higher maintenance expenses and, to a lesser extent, the net impact of higher fuel costs in an economic environment of sluggish U.S. domestic average daily package volumes. Contributing to the decrease in operating income was one fewer operating day.

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Operating results during 2003 were also impacted by unusually inclement weather during the winter and spring, which decreased business shipping, reduced operational efficiency and increased certain operating costs, such as for snow removal and de-icing.

        Salaries and benefits were higher during 2004 due to higher incentive compensation and pension costs and wage rate increases. This increase was partially offset by savings from the business realignment initiatives. The 2003 increase was due to wage rate increases and higher pension and healthcare costs. In addition, higher salaries and benefits were partially the result of cost increases related to the USPS contract. Incentive compensation provisions declined in 2003 based on below-plan performance.

        Purchased transportation costs increased in 2004 and 2003 as IP volume growth led to an increase in contract pick-up and delivery services. Higher maintenance costs in both 2004 and 2003 were primarily due to the timing of scheduled aircraft maintenance events, higher utilization of aircraft related to USPS volumes and a higher average age of certain types of our aircraft. Intercompany charges increased during 2004 due to higher incentive compensation, healthcare and pension costs and base salary increases at FedEx Services.

        Fuel costs were higher in 2004 due to a 10% increase in the average price per gallon of aircraft fuel, as fuel consumption was flat. However, fuel surcharge revenue more than offset higher jet fuel prices primarily due to the introduction of certain international dynamic fuel surcharges in September 2002. Fuel consumption was higher in 2003, primarily due to an increase in aircraft usage as a result of incremental U.S. freight pounds transported under the USPS agreement and IP volume growth. Fuel costs were also higher in 2003 due to a 16% increase in the average price per gallon of aircraft fuel. Higher net fuel costs at FedEx Express negatively affected operating income during 2003, as fuel surcharge revenue increases were not sufficient to offset higher jet fuel prices.

        Rentals and landing fees decreased in 2004 due to the amendment of operating leases for six MD11 aircraft that resulted in these aircraft being recorded as fixed assets under capital lease. In addition, as discussed in Note 16 to the accompanying audited financial statements, two additional MD11s were recorded as fixed assets at September 1, 2003 as a result of the adoption of FIN 46. Depreciation and amortization expense declined slightly due to decreases in capital spending, despite the additional depreciation from the eight MD11 aircraft added to fixed assets.

        During 2003, other operating expenses increased at FedEx Express as reimbursements in 2002 from the USPS for network expansion costs were reflected as credits in other operating expenses. These reimbursements, however, had no effect on operating income, as they represented the recovery of incremental costs incurred. Partially offsetting operating costs during 2003 was a gain from the insurance settlement on an aircraft destroyed in an accident in July 2002 that resulted in a net $8 million favorable impact on operating income. During 2002, other operating expenses included $27 million from the favorable resolution of certain state tax matters.

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FedEx Express Segment Outlook

        We anticipate revenue growth at FedEx Express during 2005, in both the domestic and international markets. Revenue increases will be led by IP, where we expect volume and yield growth, particularly in Asia, U.S. outbound and Europe. We expect only slight U.S. domestic volume growth at FedEx Express, with higher U.S. domestic yields to account for a large portion of revenue growth at FedEx Express.

        We expect significant operating margin improvement at FedEx Express during 2005, led by the full-year salaries and benefits savings of our 2004 business realignment initiatives. These cost management actions and improved volumes, along with a sharp focus on productivity, are expected to produce improved operational efficiency. In addition, we expect additional improvement due to IP volume growth with solid incremental margins, increased U.S. domestic yields and volumes aided by the FedEx Kinko's retail presence and the impact of reduced capital spending in prior years. While capital expenditures at FedEx Express are expected to be higher than 2004 due to planned aircraft purchases to support IP volume growth, they are expected to remain below historical levels.

FEDEX GROUND SEGMENT

        The following table compares revenues, operating expenses and operating income and margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the years ended May 31: