UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-7806

FEDERAL EXPRESS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		71-0427007
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer
		Identification No.)
3610 Hacks Cross Road
Memphis, Tennessee		38125
(Address of principal executive offices)		(ZIP Code)

(901) 369-3600
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of common stock outstanding as of March 16, 2011 was 1,000. The Registrant is a wholly owned subsidiary of FedEx Corporation, and there is no market for the Registrant’s common stock.

The Registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H(2).

 

 

FEDERAL EXPRESS CORPORATION

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets February 28, 2011 and May 31, 2010			3
Condensed Consolidated Statements of Income Three- and Nine-Months Ended February 28, 2011 and 2010			5
Condensed Consolidated Statements of Cash Flows Nine-Months Ended February 28, 2011 and 2010			6
Notes to Condensed Consolidated Financial Statements			7
Report of Independent Registered Public Accounting Firm			13
ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			21
ITEM 4. Controls and Procedures			21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			22
ITEM 1A. Risk Factors			22
ITEM 6. Exhibits			22
Signature			23
Exhibit Index			E-1
Exhibit 12.1
Exhibit 15.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FEDERAL EXPRESS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

		February 28,
		2011				May 31,
		(Unaudited)				2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	570			$	512
Receivables, less allowances of $73 and $71			1,605				1,455
Spare parts, supplies and fuel, less allowances of $165 and $170			344				317
Deferred income taxes			376				360
Due from parent company and other FedEx subsidiaries			512				839
Prepaid expenses and other			83				80
Total current assets			3,490				3,563
PROPERTY AND EQUIPMENT, AT COST			21,282				19,812
Less accumulated depreciation and amortization			10,893				10,511
Net property and equipment			10,389				9,301
OTHER LONG-TERM ASSETS
Goodwill			1,079				958
Other assets			999				776
Total other long-term assets			2,078				1,734
		$	15,957			$	14,598

The accompanying notes are an integral part of these condensed consolidated financial statements.

FEDERAL EXPRESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)

		February 28,
		2011				May 31,
		(Unaudited)				2010
LIABILITIES AND OWNER’S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt		$	17			$	12
Accrued salaries and employee benefits			759				779
Accounts payable			987				952
Accrued expenses			1,058				1,080
Due to other FedEx subsidiaries			549				146
Total current liabilities			3,370				2,969
LONG-TERM DEBT, LESS CURRENT PORTION			655				655
OTHER LONG-TERM LIABILITIES
Deferred income taxes			1,867				1,500
Pension, postretirement healthcare and other benefit obligations			840				786
Self-insurance accruals			621				609
Deferred lease obligations			686				723
Deferred gains, principally related to aircraft transactions			249				265
Other liabilities			114				102
Total other long-term liabilities			4,377				3,985
COMMITMENTS AND CONTINGENCIES
OWNER’S EQUITY
Common stock, $0.10 par value; 1,000 shares authorized, issued and outstanding			—				—
Additional paid-in capital			609				608
Retained earnings			6,840				6,376
Accumulated other comprehensive income			106				5
Total owner’s equity			7,555				6,989
		$	15,957			$	14,598

The accompanying notes are an integral part of these condensed consolidated financial statements.

FEDERAL EXPRESS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS)

		Three Months Ended								Nine Months Ended
		February 28,								February 28,
		2011				2010				2011				2010
REVENUES		$	5,914			$	5,365			$	17,524			$	15,482
OPERATING EXPENSES:
Salaries and employee benefits			2,255				2,076				6,636				6,053
Purchased transportation			313				268				910				773
Rentals and landing fees			419				392				1,238				1,164
Depreciation and amortization			263				251				778				749
Fuel			898				695				2,454				1,903
Maintenance and repairs			330				260				999				786
Intercompany charges, net			491				490				1,502				1,420
Other			769				663				2,225				1,920
			5,738				5,095				16,742				14,768
OPERATING INCOME			176				270				782				714
OTHER INCOME (EXPENSE):
Interest, net			2				—				6				13
Other, net			(22	)			(26	)			(59	)			(66	)
			(20	)			(26	)			(53	)			(53	)
INCOME BEFORE INCOME TAXES			156				244				729				661
PROVISION FOR INCOME TAXES			56				91				265				257
NET INCOME		$	100			$	153			$	464			$	404

The accompanying notes are an integral part of these condensed consolidated financial statements.

FEDERAL EXPRESS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

		Nine Months Ended
		February 28,
		2011				2010
Operating Activities:
Net income		$	464			$	404
Noncash charges:
Depreciation and amortization			779				749
Other, net			372				197
Changes in assets and liabilities, net			546				103
Cash provided by operating activities			2,161				1,453
Investing Activities:
Capital expenditures			(2,038	)			(1,237	)
Business acquisition, net of cash acquired			(96	)			—
Other			11				25
Cash used in investing activities			(2,123	)			(1,212	)
Financing Activities:
Principal payments on debt			(12	)			(132	)
Cash used in financing activities			(12	)			(132	)
Effect of exchange rate changes on cash			32				5
Net increase in cash and cash equivalents			58				114
Cash and cash equivalents at beginning of period			512				360
Cash and cash equivalents at end of period		$	570			$	474

The accompanying notes are an integral part of these condensed consolidated financial statements.

FEDERAL EXPRESS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of Federal Express Corporation (“FedEx Express”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2010 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted because such items are disclosed therein.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of February 28, 2011, the results of our operations for the three- and nine-month periods ended February 28, 2011 and 2010 and cash flows for the nine-month periods ended February 28, 2011 and 2010. Operating results for the three- and nine-month periods ended February 28, 2011 are not necessarily indicative of the results that may be expected for the year ending May 31, 2011.

We are a wholly owned subsidiary of FedEx Corporation (“FedEx”) engaged in a single line of business and operate in one business segment — the worldwide express transportation and distribution of goods and documents.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2011 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. Our pilots, which represent a small number of our total employees, are employed under a collective bargaining agreement that became amendable on October 31, 2010. In January 2011, we reached a tentative agreement with the pilots’ union on a new labor contract. The proposed new contract includes safety initiatives, increases in hourly pay rates and travel per diem rates, and provisions for opening a European crew base. Contract ratification is expected during the fourth quarter of 2011, but cannot be assured. If ratified, the new contract is scheduled to become amendable in March 2013 unless the union exercises its option to shorten the contract, in which case the agreement would be amendable in March 2012 and a portion of the hourly pay increases would be canceled.

BUSINESS ACQUISITIONS. On February 22, 2011, we completed the acquisition of the Indian logistics, distribution and express businesses of AFL Pvt. Ltd. and its affiliate Unifreight India Pvt. Ltd. for $96 million in cash. The financial results of the acquired businesses are included in our results from the date of acquisition and were not material to our results of operations or financial condition. Substantially all of the purchase price was allocated to goodwill.

On December 15, 2010, FedEx entered into an agreement to acquire Servicios Nacionales Mupa, SA de CV (MultiPack), a Mexican domestic express package delivery company. This acquisition will be funded with cash from operations and is expected to be completed during 2011, subject to customary closing conditions. The financial results of the acquired company will be included in our results from the date of acquisition and will be immaterial to our 2011 results.

These acquisitions will give us more robust domestic transportation and added capabilities in these important global markets.

STOCK-BASED COMPENSATION. FedEx has two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under FedEx’s incentive stock plans are set forth in FedEx’s Annual Report.

Our stock-based compensation expense was $6 million for the three-month period ended February 28, 2011 and $23 million for the nine-month period ended February 28, 2011. Our stock-based compensation expense was $6 million for the three-month period ended February 28, 2010 and $23 million for the nine-month period ended February 28, 2010. This amount represents the amount charged to us by FedEx for awards granted to our employees.

LONG-TERM DEBT. Long-term debt, exclusive of capital leases, had a carrying value of $540 million compared with an estimated fair value of $612 million at February 28, 2011, and $539 million compared with an estimated fair value of $640 million at May 31, 2010. The estimated fair values were determined based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

(2) Comprehensive Income

The following table provides a reconciliation of net income reported in our financial statements to comprehensive income for the periods ended February 28 (in millions):

		Three Months Ended
		2011				2010
Net income		$	100			$	153
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $3 in 2011 and $5 in 2010			32				(27	)
Amortization of unrealized pension actuarial gains/losses and other			—				(2	)
Comprehensive income		$	132			$	124

		Nine Months Ended
		2011				2010
Net income		$	464			$	404
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $19 in 2011 and $6 in 2010			101				7
Amortization of unrealized pension actuarial gains/losses and other, net of tax of $1 in 2010			—				(6	)
Comprehensive income		$	565			$	405

(3) Retirement Plans

We sponsor or participate in programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. A majority of our employees are covered by the FedEx Corporation Employees’ Pension Plan (“FedEx Plan”), a defined benefit pension plan sponsored by FedEx. The FedEx Plan covers certain U.S. employees age 21 and over with at least one year of service and provides benefits primarily based on earnings, age and years of service. Defined contribution plans covering a majority of U.S. employees and certain international employees are in place. We also sponsor or participate in nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. For more information, refer to the financial statements of FedEx included in its Form 10-Q for the quarter ended February 28, 2011.

Our retirement plans costs for the periods ended February 28 were as follows (in millions):

		Three Months Ended								Nine Months Ended
		2011				2010				2011				2010
Pension plans sponsored by FedEx		$	80			$	39			$	241			$	118
Other U.S. domestic and international pension plans			12				8				33				26
U.S. domestic and international defined contribution plans			46				31				121				75
Postretirement healthcare plans			12				9				36				26
		$	150			$	87			$	431			$	245

The three- and nine-month periods ended February 28, 2011 reflect higher retirement plans costs for the plans sponsored by FedEx due to a significantly lower discount rate used to measure our benefit obligations at our May 31, 2010 measurement date. Additionally, we incurred higher expenses for our 401(k) plans due to the partial reinstatement of the company-matching contributions on January 1, 2010 and the full restoration of company-matching contributions on January 1, 2011.

The components of the net periodic benefit cost of the pension and postretirement healthcare plans currently sponsored by us were individually immaterial for all periods presented. No material contributions were made during the first nine months of 2011 or 2010 to pension plans sponsored by us, and we do not expect to make material contributions in 2011.

(4) Commitments

As of February 28, 2011, our purchase commitments under various contracts for the remainder of 2011 and annually thereafter were as follows (in millions):

		Aircraft and
		Aircraft
		Related(1)				Other(2)				Total
2011 (remainder)		$	122			$	6			$	128
2012			1,169				14				1,183
2013			1,014				11				1,025
2014			755				14				769
2015			493				8				501
Thereafter			1,431				113				1,544

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

We had $546 million in deposits and progress payments as of February 28, 2011 (an increase of $109 million from May 31, 2010) on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our condensed consolidated balance sheets. In addition to our commitments to purchase B777Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations.

The following table is a summary of the number and type of aircraft we are committed to purchase as of February 28, 2011, with the year of expected delivery:

		B777F(1)				B757				MD11				Total
2011 (remainder)			—				2				1				3
2012			6				11				—				17
2013			6				—				—				6
2014			7				—				—				7
2015			3				—				—				3
Thereafter			10				—				—				10
Total			32				13				1				46

A summary of future minimum lease payments under capital leases and noncancelable operating leases with an initial or remaining term in excess of one year at February 28, 2011 is as follows (in millions):

						Operating Leases
						Aircraft								Total
		Capital				and Related				Facilities				Operating
		Leases				Equipment				and Other				Leases
2011 (remainder)		$	2			$	116			$	168			$	284
2012			24				494				629				1,123
2013			117				499				553				1,052
2014			—				473				481				954
2015			—				455				460				915
Thereafter			—				2,003				3,779				5,782
Total			143			$	4,040			$	6,070			$	10,110
Less amount representing interest			9
Present value of net minimum lease payments		$	134

(5) Contingencies

Wage-and-Hour. We are a defendant in a number of lawsuits containing various class-action allegations of wage-and-hour violations. The plaintiffs in these lawsuits allege, among other things, that they were forced to work “off the clock,” were not paid overtime or were not provided work breaks or other benefits. The complaints generally seek unspecified monetary damages, injunctive relief, or both. The following describes the wage-and-hour matters that have been certified as class actions.

In April 2009, in Bibo v. FedEx Express, a California federal court granted class certification, certifying several subclasses of our couriers in California from April 14, 2006 (the date of the settlement of the Foster class action) to the present. The plaintiffs allege that we violated California wage-and-hour laws after the date of the Foster settlement. In particular, the plaintiffs allege, among other things, that they were forced to work “off the clock” and were not provided with required meal breaks or split-shift premiums. The U.S. Court of Appeals for the Ninth Circuit has refused to accept a discretionary appeal of the class certification order at this time.

This class certification ruling does not address whether we will ultimately be held liable. We have denied any liability and intend to vigorously defend ourselves in these wage-and-hour lawsuits. Given the nature and status of these lawsuits, we cannot yet determine the amount or a reasonable range of potential loss, if any. However, we do not believe that any loss is probable in these lawsuits.

ATA Airlines. In October 2010, a jury returned a verdict in favor of ATA Airlines in its lawsuit against us and awarded damages of $66 million, and in January 2011, the court awarded ATA pre-judgment interest of $5 million. The suit was filed in Indiana federal court and alleged that we had breached a contract by not including ATA on our 2009 Civil Reserve Air Fleet (CRAF)/Air Mobility Command (AMC) team, which provides cargo and passenger service to the U.S. military. While we do not agree with the verdict or the amount of damages awarded and have appealed the matter to the U.S. Court of Appeals for the Seventh Circuit, accounting standards required an accrual of a $66 million loss in the second quarter of 2011. We did not accrue the $5 million of interest as a loss because we have additional arguments on appeal that lead us to believe that loss of that amount is not probable.

Other. FedEx Express and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not have a material adverse effect on our financial position, results of operations or cash flows.

(6) Parent/Affiliate Transactions

Affiliate company balances that are currently receivable or payable relate to charges for services provided to or by other FedEx affiliates, which are settled on a monthly basis, or the net activity from participation in FedEx’s consolidated cash management program. In addition, we are allocated net interest on these amounts at market rates.

We maintain an accounts receivable arrangement with FedEx TechConnect, Inc. (“FedEx TechConnect”), a wholly owned subsidiary of FedEx Corporate Services, Inc. (“FedEx Services”). FedEx Services is a wholly owned subsidiary of FedEx. Under this arrangement, we recognize revenue for the transportation services provided to our U.S. customers and factor the related receivables to FedEx TechConnect for collection. We have no continuing involvement with the receivables transferred to FedEx TechConnect. Our net receivables recorded by FedEx TechConnect totaled $1.3 billion at February 28, 2011 and May 31, 2010.

The costs of the FedEx Services segment are allocated to us and are included in the expense line item “Intercompany charges” based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of the functions provided by the FedEx Services segment.

(7) Supplemental Cash Flow Information

The following table presents supplemental cash flow information for the nine-month periods ended February 28 (in millions):

		2011				2010
Cash payments for:
Interest (net of capitalized interest)		$	9			$	2
Income taxes		$	259			$	196
Income tax refunds received			(256	)			(141	)
Cash tax payments, net		$	3			$	55

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder
Federal Express Corporation

We have reviewed the condensed consolidated balance sheet of Federal Express Corporation as of February 28, 2011, and the related condensed consolidated statements of income for the three-month and nine-month periods ended February 28, 2011 and 2010 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2011 and 2010. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Federal Express Corporation as of May 31, 2010, and the related consolidated statements of income, changes in owner’s equity and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated July 15, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

		/s/ Ernst & Young LLP

Memphis, Tennessee
March 18, 2011

Item 2.		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, which describes the principal factors affecting the results of operations and financial condition of Federal Express Corporation (“FedEx Express”), is abbreviated pursuant to General Instruction H(2)(a) of Form 10-Q. This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2010 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results. For additional information, including a discussion of outlook, liquidity, capital resources, contractual cash obligations and critical accounting estimates, see the Quarterly Report on Form 10-Q of our parent, FedEx Corporation (“FedEx”), for the quarter ended February 28, 2011.

We are the world’s largest express transportation company. Our sister company FedEx Corporate Services, Inc. (“FedEx Services”) provides us and our other sister companies, including FedEx Ground Package System, Inc., with customer-facing sales, marketing and information technology support, as well as retail access for our customers through FedEx Office and Print Services, Inc. and customer service, technical support, and billing and collection services through FedEx TechConnect, Inc.

The operating expenses line item “Intercompany charges” on the financial summary represents an allocation that primarily includes costs for services provided to us by FedEx Services as described above. These costs are allocated based on metrics such as relative revenues or estimated services provided. “Intercompany charges” also includes allocated charges from our parent for management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the net cost of providing these functions.

The key indicators necessary to understand our operating results include:

•

the overall customer demand for our various services;

•

the volume of shipments transported through our network, as measured by our average daily volume and shipment weight;

•

the mix of services purchased by our customers;

•

the prices we obtain for our services, as measured by average revenue per package (yield);

•

our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and

•

the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.

The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent with the change in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2011 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

RESULTS OF OPERATIONS

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income, net income and operating margin (dollars in millions) for the periods ended February 28:

		Three Months Ended								Percent				Nine Months Ended								Percent
		2011				2010				Change				2011				2010				Change
Revenues:
Package:
U.S. overnight box		$	1,514			$	1,413				7			$	4,494			$	4,116				9
U.S. overnight envelope			425				400				6				1,273				1,203				6
U.S. deferred			743				692				7				2,070				1,919				8
Total U.S. domestic package revenue			2,682				2,505				7				7,837				7,238				8
International priority			1,974				1,748				13				5,957				5,105				17
International domestic(1)			158				142				11				471				427				10
Total package revenue			4,814				4,395				10				14,265				12,770				12
Freight:
U.S.			565				525				8				1,618				1,464				11
International priority			412				329				25				1,253				910				38
International airfreight			68				61				11				207				185				12
Total freight revenue			1,045				915				14				3,078				2,559				20
Other			55				55				—				181				153				18
Total revenues			5,914				5,365				10				17,524				15,482				13
Operating expenses:
Salaries and employee benefits			2,255				2,076				9				6,636				6,053				10
Purchased transportation			313				268				17				910				773				18
Rentals and landing fees			419				392				7				1,238				1,164				6
Depreciation and amortization			263				251				5				778				749				4
Fuel			898				695				29				2,454				1,903				29
Maintenance and repairs			330				260				27				999				786				27
Intercompany charges			491				490				—				1,502				1,420				6
Other			769				663				16				2,225				1,920				16
Total operating expenses			5,738				5,095				13				16,742				14,768				13
Operating income		$	176			$	270				(35	)		$	782			$	714				10
Operating margin			3.0	%			5.0	%		(200			) bp		4.5	%			4.6	%		(10		) bp
Other income (expense):
Interest, net			2				—				—				6				13				(54	)
Other, net			(22	)			(26	)			(15	)			(59	)			(66	)			(11	)
			(20	)			(26	)			(23	)			(53	)			(53	)			—
Income before income taxes			156				244				(36	)			729				661				10
Provision for income taxes			56				91				(38	)			265				257				3
Net income		$	100			$	153				(35	)		$	464			$	404				15

		Percent of Revenue								Percent of Revenue
		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		2011				2010				2011				2010
Operating expenses:
Salaries and employee benefits			38.1	%			38.7	%			37.9	%			39.1	%
Purchased transportation			5.3				5.0				5.2				5.0
Rentals and landing fees			7.1				7.3				7.0				7.5
Depreciation and amortization			4.4				4.7				4.4				4.8
Fuel			15.2				13.0				14.0				12.3
Maintenance and repairs			5.6				4.8				5.7				5.1
Intercompany charges			8.3				9.1				8.6				9.2
Other			13.0				12.4				12.7				12.4
Total operating expenses			97.0				95.0				95.5				95.4
Operating margin			3.0	%			5.0	%			4.5	%			4.6	%

The following table compares selected statistics (in thousands, except yield amounts) for the periods ended February 28:

		Three Months Ended								Percent				Nine Months Ended								Percent
		2011				2010				Change				2011				2010				Change
Package Statistics
Average daily package volume (ADV):
U.S. overnight box			1,218				1,190				2				1,194				1,157				3
U.S. overnight envelope			631				601				5				627				608				3
U.S. deferred			952				949				—				887				876				1
Total U.S. domestic ADV			2,801				2,740				2				2,708				2,641				3
International priority			558				530				5				569				511				11
International domestic(1)			337				317				6				338				315				7
Total ADV			3,696				3,587				3				3,615				3,467				4
Revenue per package (yield):
U.S. overnight box		$	20.05			$	19.16				5			$	19.81			$	18.73				6
U.S. overnight envelope			10.87				10.70				2				10.68				10.41				3
U.S. deferred			12.60				11.77				7				12.29				11.53				7
U.S. domestic composite			15.45				14.74				5				15.23				14.43				6
International priority			57.07				53.23				7				55.06				52.59				5
International domestic(1)			7.54				7.22				4				7.33				7.12				3
Composite package yield			21.01				19.76				6				20.77				19.39				7
Freight Statistics
Average daily freight pounds:
U.S.			8,000				7,906				1				7,447				7,217				3
International priority			3,131				2,577				21				3,158				2,427				30
International airfreight			1,262				1,184				7				1,248				1,230				1
Total average daily freight pounds			12,393				11,667				6				11,853				10,874				9
Revenue per pound (yield):
U.S.		$	1.14			$	1.07				7			$	1.14			$	1.07				7
International priority			2.12				2.06				3				2.09				1.97				6
International airfreight			0.88				0.84				5				0.88				0.79				11
Composite freight yield			1.36				1.26				8				1.37				1.24				10

Revenues

Our revenues increased 10% in the third quarter of 2011 primarily due to an increase in FedEx International Priority (“IP”) and U.S. domestic package yields, as well as higher IP package and freight volume. IP package yield increased in the third quarter of 2011 due to increased package weights, rate increases and higher fuel surcharges. Domestic package yields increased in the third quarter of 2011 due to higher fuel surcharges, rate increases and increased package weights. Exports from Asia and Europe drove increases in IP package and freight volume in the third quarter. Despite the growth in our business, our revenues were negatively impacted by severe winter weather conditions in the third quarter of 2011.

In the nine months of 2011, our revenues increased 13% primarily due to higher IP package and freight volume and an increase in U.S. domestic and IP package yields. Exports from Asia and Europe drove increases in IP package and freight volume in the nine months of 2011. U.S. domestic package yields increased in the nine months of 2011 due to higher fuel surcharges, rate increases and increased package weights. IP package yields increased in the nine months of 2011 due to increased package weights and higher fuel surcharges.

Our fuel surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended February 28:

		Three Months Ended								Nine Months Ended
		2011				2010				2011				2010
U.S. Domestic and Outbound Fuel Surcharge:
Low			9.00	%			6.50	%			7.00	%			1.00	%
High			10.00				8.50				10.00				8.50
Weighted-average			9.70				7.42				8.68				5.70
International Fuel Surcharges:
Low			9.00				6.50				7.00				1.00
High			15.00				13.00				15.00				13.00
Weighted-average			12.04				10.25				11.22				9.09

On January 3, 2011, we implemented a 5.9% average list price increase on U.S. domestic and U.S. outbound express package and freight shipments and made various changes to other surcharges, while we lowered our fuel surcharge index by two percentage points. On January 4, 2010, we implemented a 5.9% average list price increase on U.S. domestic and U.S. outbound express package and freight shipments and made various changes to other surcharges, while we lowered our fuel surcharge index by two percentage points.

Operating Income

Our operating income and operating margin decreased during the third quarter of 2011. Increased aircraft maintenance costs, the reinstatement of certain employee compensation programs, higher retirement plans and medical expenses, and the negative impact of severe winter weather more than offset the benefit of increased revenues.

Our operating income increased in the nine months of 2011 as a result of volume and yield growth, particularly in higher-margin IP package and freight services. However, the nine months was also negatively impacted by a $66 million legal reserve associated with the ATA Airlines lawsuit (see Note 5 of the accompanying condensed consolidated financial statements) recorded during the second quarter of 2011 and the inclusion in the second quarter of 2010 of a benefit of $54 million for plan design changes to a self-insurance program, which required a remeasurement of the plan liabilities. The combination of these two items, as well as the severe winter weather noted above, significantly impacted the year-over-year operating margin comparisons for the nine months of 2011.

Salaries and employee benefits expense increased 9% in the third quarter and 10% in the nine months of 2011 due to volume-related increases in labor hours, the reinstatement of several employee compensation programs including merit salary increases, higher pension and medical costs, and full 401(k) company-matching contributions. Purchased transportation costs increased 17% in the third quarter of 2011 and 18% in the nine months of 2011 due to IP package and freight volume growth. Maintenance and repairs expense increased 27% in the third quarter and nine months of 2011 primarily due to an increase in aircraft maintenance expenses as a result of timing of maintenance events and higher utilization of our fleet driven by increased volumes. Other operating expenses increased 16% in the third quarter of 2011 primarily due to other volume- and weather-related expenses.

Fuel costs increased 29% in both the third quarter and nine months of 2011 due to increases in the average price per gallon of fuel and fuel consumption driven by volume increases. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had an immaterial impact on operating income in the third quarter and a positive impact in the nine months of 2011. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for our services.

Income Taxes

Our effective tax rate was 35.9% for the third quarter of 2011 and 36.4% for the nine months of 2011, compared with 37.3% for the third quarter of 2010 and 38.8% for the nine months of 2010. Our lower effective tax rates in 2011 were driven primarily by the benefit derived from increases in international earnings, which are generally taxed at lower rates than in the U.S. For 2011, we expect the effective tax rate to be 36.0% to 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

As of February 28, 2011, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2010. The Internal Revenue Service is currently auditing our 2007 through 2009 consolidated U.S. income tax returns.

We file income tax returns in the U.S. and various U.S. states and foreign jurisdictions. It is reasonably possible that certain U.S. federal, U.S. state and foreign jurisdiction income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. An estimate of the range of the change cannot be made at this time. The expected impact of any changes would not be material to our consolidated financial statements.

NEW ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. We believe that there is no new accounting guidance adopted but not yet effective that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

FORWARD-LOOKING STATEMENTS

Certain statements in this report are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:

•

economic conditions in the global markets in which we operate;

•

the impact of any international conflicts or terrorist activities on the U.S. and global economies in general, the transportation industry or us in particular, and what effects these events will have on our costs or the demand for our services;

•

damage to our reputation or loss of brand equity;

•

disruptions to the Internet or our technology infrastructure, including those impacting our computer systems and web site, which can adversely affect shipment levels;

•

the price and availability of jet and vehicle fuel;

•

the impact of intense competition on our ability to maintain or increase our prices (including our fuel surcharges in response to rising fuel costs) or to maintain or grow our market share;

•

our ability to manage our cost structure for capital expenditures and operating expenses, and match it to shifting and future customer volume levels;

•

our ability to effectively operate, integrate, leverage and grow acquired businesses;

•

any impacts on our businesses resulting from new domestic or international government laws and regulation, including regulatory actions affecting global aviation rights, increased air cargo and other security or safety requirements, and tax, accounting, trade (such as protectionist measures enacted in response to weak economic conditions), labor (such as changes to the Railway Labor Act affecting our employees), environmental (such as climate change legislation) or postal rules;

•

changes in foreign currency exchange rates, especially in the euro, Chinese yuan, Canadian dollar, British pound and Japanese yen, which can affect our sales levels and foreign currency sales prices;

•

any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour and discrimination and retaliation claims, and any other legal proceedings;

•

our ability to maintain good relationships with our employees and prevent attempts by labor organizations to organize groups of our employees, which could significantly increase our operating costs and reduce our operational flexibility;

•

increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits;

•

significant changes in the volume of shipments transported through our network, customer demand for our various services or the prices we obtain for our services;

•

market acceptance of our new service and growth initiatives;

•

the impact of technology developments on our operations and on demand for our services;

•

adverse weather conditions or natural disasters, such as earthquakes, volcanoes, and hurricanes, which can disrupt our electrical service, damage our property, disrupt our operations, increase our fuel costs and adversely affect our shipment levels;

•

widespread outbreak of an illness or any other communicable disease, or any other public health crisis;

•

availability of financing on terms acceptable to FedEx and FedEx’s ability to maintain its current credit ratings, especially given the capital intensity of our operations;

•

the outcome of negotiations to reach a new collective bargaining agreement with the union that represents our pilots; and

•

other risks and uncertainties you can find in FedEx’s and our press releases and Securities and Exchange Commission filings, including the risk factors identified under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report, as updated by our quarterly reports on Form 10-Q.

As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Omitted under the reduced disclosure format permitted by General Instruction H(2)(c) of Form 10-Q.

Item 4.		Controls and Procedures

Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of February 28, 2011 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended February 28, 2011, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings

For a description of all material pending legal proceedings, see Note 5 of the accompanying condensed consolidated financial statements.

In February 2011, we received a demand for the production of information and documents in connection with a civil investigation by the Antitrust Division of the U.S. Department of Justice into the policies and practices of FedEx and United Parcel Service, Inc. for dealing with third-party consultants who work with shipping customers to negotiate lower rates. We are also engaged in related litigation with one of these third-party pricing consultants. We do not believe that we have engaged in any anti-competitive activities, and we are cooperating with this investigation and vigorously defending against the litigation.

Item 1A.		Risk Factors

There have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition”) in response to Part I, Item 1A of Form 10-K, as updated by our quarterly report on Form 10-Q for the quarter ended November 30, 2010.

Item 6.		Exhibits

Exhibit
Number				Description of Exhibit
	10.1			Supplemental Agreement No. 16 (and related side letters) dated as of January 31, 2011, and Supplemental Agreement No. 17 dated as of February 14, 2011, each amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.1 to FedEx Corporation’s FY11 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
	12.1			Computation of Ratio of Earnings to Fixed Charges.
	15.1			Letter re: Unaudited Interim Financial Statements.
	31.1			Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1			Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2			Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

Exhibit
Number				Description of Exhibit
	10.1			Supplemental Agreement No. 16 (and related side letters) dated as of January 31, 2011, and Supplemental Agreement No. 17 dated as of February 14, 2011, each amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.1 to FedEx Corporation’s FY11 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
	12.1			Computation of Ratio of Earnings to Fixed Charges.
	15.1			Letter re: Unaudited Interim Financial Statements.
	31.1			Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1			Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2			Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.