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 December 15, 2009 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 November 30, 2009 and May 31, 2009			3-4
Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 2009 and 2008			5
Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 2009 and 2008			6
Notes to Condensed Consolidated Financial Statements			7-13
Report of Independent Registered Public Accounting Firm			14
ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			15-22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			23
ITEM 4. Controls and Procedures			23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			24
ITEM 1A. Risk Factors			24
ITEM 6. Exhibits			24
Signature			25
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)

		November 30,
		2009				May 31,
		(Unaudited)				2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	443			$	360
Receivables, less allowances of $66 and $80			1,342				1,162
Spare parts, supplies and fuel, less allowances of $168 and $175			311				294
Deferred income taxes			355				355
Due from parent company and other FedEx subsidiaries			658				841
Prepaid expenses and other			55				82
Total current assets			3,164				3,094
PROPERTY AND EQUIPMENT, AT COST			19,065				18,202
Less accumulated depreciation and amortization			10,232				9,840
Net property and equipment			8,833				8,362
OTHER LONG-TERM ASSETS
Goodwill			976				903
Other assets			981				947
Total other long-term assets			1,957				1,850
		$	13,954			$	13,306

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)

		November 30,
		2009				May 31,
		(Unaudited)				2009
LIABILITIES AND OWNER’S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt		$	39			$	153
Accrued salaries and employee benefits			757				646
Accounts payable			900				835
Accrued expenses			979				1,029
Due to other FedEx subsidiaries			134				144
Total current liabilities			2,809				2,807
LONG-TERM DEBT, LESS CURRENT PORTION			656				667
OTHER LONG-TERM LIABILITIES
Deferred income taxes			1,333				1,185
Pension, postretirement healthcare and other benefit obligations			624				596
Self-insurance accruals			594				607
Deferred lease obligations			810				725
Deferred gains, principally related to aircraft transactions			274				286
Other liabilities			101				114
Total other long-term liabilities			3,736				3,513
COMMITMENTS AND CONTINGENCIES
OWNER’S EQUITY
Common stock, $0.10 par value; 1,000 shares authorized, issued and outstanding			—				—
Additional paid-in capital			609				492
Retained earnings			5,976				5,689
Accumulated other comprehensive income			168				138
Total owner’s equity			6,753				6,319
		$	13,954			$	13,306

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								Six Months Ended
		November 30,								November 30,
		2009				2008				2009				2008
REVENUES		$	5,235			$	6,040			$	10,117			$	12,400
OPERATING EXPENSES:
Salaries and employee benefits			1,978				2,011				3,977				4,091
Purchased transportation			258				277				505				596
Rentals and landing fees			391				400				772				813
Depreciation and amortization			248				238				498				475
Fuel			637				954				1,208				2,272
Maintenance and repairs			266				380				526				773
Intercompany charges, net			464				529				930				1,061
Other			649				724				1,257				1,459
			4,891				5,513				9,673				11,540
OPERATING INCOME			344				527				444				860
OTHER INCOME (EXPENSE):
Interest, net			7				(1	)			13				(3	)
Other, net			(20	)			2				(40	)			—
			(13	)			1				(27	)			(3	)
INCOME BEFORE INCOME TAXES			331				528				417				857
PROVISION FOR INCOME TAXES			130				201				166				333
NET INCOME		$	201			$	327			$	251			$	524

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)

		Six Months Ended
		November 30,
		2009				2008
Operating Activities:
Net income		$	251			$	524
Noncash charges:
Depreciation and amortization			498				475
Other, net			92				133
Changes in assets and liabilities, net			341				(325	)
Net cash provided by operating activities			1,182				807
Investing Activities:
Capital expenditures			(1,014	)			(753	)
Other			27				8
Net cash used in investing activities			(987	)			(745	)
Financing Activities:
Principal payments on debt			(125	)			(1	)
Payment on loan from parent company			—				(17	)
Net cash used in financing activities			(125	)			(18	)
Effect of exchange rate changes on cash			13				(26	)
Net increase in cash and cash equivalents			83				18
Cash and cash equivalents at beginning of period			360				298
Cash and cash equivalents at end of period		$	443			$	316

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, 2009 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since 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 November 30, 2009, the results of our operations for the three- and six-month periods ended November 30, 2009 and 2008 and cash flows for the six-month periods ended November 30, 2009 and 2008. Operating results for the three- and six-month periods ended November 30, 2009 are not necessarily indicative of the results that may be expected for the year ending May 31, 2010.

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, 2010 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

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.

FedEx uses the Black-Scholes option pricing model to calculate the fair value of stock options. The value of restricted stock awards is based on the price of the stock on the grant date. We recognize stock-based compensation expense on a straight-line basis over the requisite service period of the award in the “Salaries and employee benefits” caption of our condensed consolidated income statement.

Our total stock-based compensation expense was $6 million for the three months ended November 30, 2009 and $17 million for the six months ended November 30, 2009. Our total stock-based compensation expense was $7 million for the three months ended November 30, 2008 and $17 million for the six months ended November 30, 2008. 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 carrying values of $540 million compared with an estimated fair value of $640 million at November 30, 2009, and $539 million compared with an estimated fair value of $560 million at May 31, 2009. The estimated fair values were determined based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

NEW ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. We believe the following new accounting guidance is relevant to the readers of our financial statements.

On June 1, 2008, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on fair value measurements, which provides a common definition of fair value, establishes a uniform framework for measuring fair value and requires expanded disclosures about fair value measurements. On June 1, 2009, we implemented the previously deferred provisions of this guidance for nonfinancial assets and liabilities recorded at fair value, as required. The adoption of this new guidance had no impact on our financial statements.

In December 2007, the FASB issued authoritative guidance on business combinations and the accounting and reporting for noncontrolling interests (previously referred to as minority interests). This guidance significantly changed the accounting for and reporting of business combination transactions, including noncontrolling interests. For example, the acquiring entity is now required to recognize the full fair value of assets acquired and liabilities assumed in the transaction, and the expensing of most transaction and restructuring costs is now required. This guidance became effective for us beginning June 1, 2009 and had no material impact on our financial statements.

In December 2008, the FASB issued authoritative guidance on employers’ disclosures about postretirement benefit plan assets. This guidance provides objectives that an employer should consider when providing detailed disclosures about assets of a defined benefit pension or other postretirement plan, including disclosures about investment policies and strategies, categories of plan assets, significant concentrations of risk and the inputs and valuation techniques used to measure the fair value of plan assets. This guidance will be effective for our fiscal year ending May 31, 2010.

In April 2009, the FASB issued new accounting guidance related to interim disclosures about the fair value of financial instruments. This guidance requires disclosures about the fair value of financial instruments for interim reporting periods in addition to annual reporting periods and became effective for us beginning with the first quarter of fiscal year 2010.

In May 2009, the FASB issued new accounting guidance related to the accounting and disclosures of subsequent events, which establishes general standards for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance requires us to disclose the date through which we have evaluated subsequent events, which for SEC registrants is the date we file our financial statements with the SEC, and became effective for our first quarter of fiscal year 2010. Events occurring after the date of the condensed consolidated balance sheet but before the issuance of the financial statements included in this filing have been evaluated through the time of this filing.

(2) Comprehensive Income

The following table provides a reconciliation of net income reported in our financial statements to comprehensive income for the periods ended November 30 (in millions):

		Three Months Ended
		2009				2008
Net income		$	201			$	327
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $3 in 2009 and benefit of $22 in 2008			25				(123	)
Amortization of unrealized pension actuarial gains/losses, net of tax of $1 in 2009			(2	)			(1	)
Comprehensive income		$	224			$	203

		Six Months Ended
		2009				2008
Net income		$	251			$	524
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $11 in 2009 and benefit of $30 in 2008			34				(166	)
Amortization of unrealized pension actuarial gains/losses, net of tax of $1 in 2009 and $1 in 2008			(4	)			(1	)
Comprehensive income		$	281			$	357

(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 November 30, 2009.

Our retirement plans costs for the periods ended November 30 were as follows (in millions):

		Three Months Ended								Six Months Ended
		2009				2008				2009				2008
Pension plans sponsored by FedEx		$	40			$	12			$	79			$	24
Other U.S. domestic and international pension plans			9				10				18				19
U.S. domestic and international defined contribution plans			22				48				44				100
Postretirement healthcare plans			8				12				17				24
		$	79			$	82			$	158			$	167

The increase in pension costs for the plans sponsored by FedEx for the three- and six-month periods ended November 30, 2009 reflects the negative impact of market conditions on pension plan assets at the May 31, 2009 measurement date. This increase in pension costs was offset by lower expenses for our 401(k) plans due to the temporary suspension of the company-matching contributions, as described in our Annual Report.

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 six months of 2010 or 2009 to pension plans sponsored by us, and we do not expect to make material contributions in 2010.

(4) Commitments

As of November 30, 2009, our purchase commitments under various contracts for the remainder of 2010 and annually thereafter were as follows (in millions):

						Aircraft-
		Aircraft (1)				Related (2)				Other (3)				Total
2010 (remainder)		$	123			$	140			$	18			$	281
2011			776				30				27				833
2012			527				10				15				552
2013			425				19				11				455
2014			466				—				10				476
Thereafter			1,924				—				92				2,016

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 $589 million in deposits and progress payments as of November 30, 2009 (an increase of $45 million from May 31, 2009) 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 commitment 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. Also, we have committed to modify our DC10 aircraft for two-man cockpit configurations. Future payments related to these activities are included in the table above. 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 November 30, 2009, with the year of expected delivery:

		B757				B777F (1)				Total
2010 (remainder)			1				2				3
2011			17				4				21
2012			8				3				11
2013			—				3				3
2014			—				3				3
Thereafter			—				13				13
Total			26				28				54

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 November 30, 2009 is as follows (in millions):

						Operating Leases
		Capital				Aircraft and Related				Facilities and				Total Operating
		Leases				Equipment				Other				Leases
2010 (remainder)		$	32			$	364			$	313			$	677
2011			18				526				565				1,091
2012			6				504				498				1,002
2013			118				499				436				935
2014			—				472				377				849
Thereafter			—				2,458				3,460				5,918
Total			174			$	4,823			$	5,649			$	10,472
Less amount representing interest			18
Present value of net minimum lease payments		$	156

While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

We make payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass-through certificates. The pass-through certificates are not our direct obligations, nor do we guarantee them.

(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.

In April 2009, in one of these wage-and-hour cases, 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. We asked the U.S. Court of Appeals for the Ninth Circuit to accept a discretionary appeal of the class certification order, but the court refused to accept it 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. We do not believe that any loss is probable in these lawsuits.

ATA Airlines. ATA Airlines has sued us in Indiana federal court alleging that we 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. After being advised that it would not be a part of the 2009 team, ATA ceased operations and filed for bankruptcy. ATA has alleged damages of $106 million, including lost profits, aircraft acquisition costs and bankruptcy-related expenses. We have denied any liability and contend that ATA has suffered no damages. Trial is currently scheduled for April 2010, and we still do not believe that any loss is 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 Customer Information Services, Inc. (“FCIS”), a wholly owned subsidiary of FedEx Corporate Services, Inc. (“FedEx Services”). FedEx Services is a wholly owned subsidiary of FedEx. Under this arrangement, FCIS records and collects receivables associated with our U.S. customers, while we continue to recognize revenue for the transportation services provided. Our net receivables recorded by FCIS totaled $1.1 billion at November 30, 2009 and $1.0 billion at May 31, 2009.

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 six-month periods ended November 30 (in millions):

		2009				2008
Cash payments for:
Interest (net of capitalized interest)		$	—			$	8
Income taxes		$	112			$	246
Income tax refunds received			(69	)			(4	)
Cash tax payments, net		$	43			$	242

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 November 30, 2009, and the related condensed consolidated statements of income for the three-month and six-month periods ended November 30, 2009 and 2008 and the condensed consolidated cash flows for the six-month periods ended November 30, 2009 and 2008. 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, 2009, 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 10, 2009, 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, 2009, 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
December 18, 2009

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, 2009 (“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 November 30, 2009.

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

The operating expenses line item “Intercompany charges” on the financial summary represents an allocation that primarily includes salaries and benefits, depreciation and other costs for the sales, marketing, information technology and customer service support provided to us by FedEx Services and FedEx Office’s net operating costs. 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 the total amounts allocated reasonably reflect the 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 volume. The following discussion of operating expenses describes the key drivers impacting expense trends beyond changes in revenues and volume.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2010 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 three- and six-month periods ended November 30:

		Three Months Ended								Percent				Six Months Ended								Percent
		2009				2008				Change				2009				2008				Change
Revenues:
Package:
U.S. overnight box		$	1,372			$	1,619				(15	)		$	2,703			$	3,330				(19	)
U.S. overnight envelope			395				486				(19	)			803				1,011				(21	)
U.S. deferred			626				740				(15	)			1,227				1,502				(18	)
Total U.S. domestic package revenue			2,393				2,845				(16	)			4,733				5,843				(19	)
International Priority (IP)			1,763				1,930				(9	)			3,357				3,974				(16	)
International domestic (1)			151				158				(4	)			285				328				(13	)
Total package revenue			4,307				4,933				(13	)			8,375				10,145				(17	)
Freight:
U.S.			490				594				(18	)			939				1,192				(21	)
International priority freight			321				323				(1	)			581				663				(12	)
International airfreight			63				111				(43	)			124				242				(49	)
Total freight revenue			874				1,028				(15	)			1,644				2,097				(22	)
Other			54				79				(32	)			98				158				(38	)
Total revenues			5,235				6,040				(13	)			10,117				12,400				(18	)
Operating expenses:
Salaries and employee benefits			1,978				2,011				(2	)			3,977				4,091				(3	)
Purchased transportation			258				277				(7	)			505				596				(15	)
Rentals and landing fees			391				400				(2	)			772				813				(5	)
Depreciation and amortization			248				238				4				498				475				5
Fuel			637				954				(33	)			1,208				2,272				(47	)
Maintenance and repairs			266				380				(30	)			526				773				(32	)
Intercompany charges			464				529				(12	)			930				1,061				(12	)
Other			649				724				(10	)			1,257				1,459				(14	)
Total operating expenses			4,891				5,513				(11	)			9,673				11,540				(16	)
Operating income		$	344			$	527				(35	)		$	444			$	860				(48	)
Operating margin			6.6	%			8.7	%			(210	) bp			4.4	%			6.9	%			(250	) bp
Other income (expense):
Interest, net			7				(1	)			NM				13				(3	)			NM
Other, net			(20	)			2				NM				(40	)			—				NM
			(13	)			1				NM				(27	)			(3	)			NM
Income before income taxes			331				528				(37	)			417				857				(51	)
Provision for income taxes			130				201				(35	)			166				333				(50	)
Net income		$	201			$	327				(39	)		$	251			$	524				(52	)

		Percent of Revenue (1)								Percent of Revenue (1)
		Three				Three				Six				Six
		Months				Months				Months				Months
		Ended				Ended				Ended				Ended
		2009				2008				2009				2008
Operating expenses:
Salaries and employee benefits			37.8	%			33.3	%			39.3	%			33.0	%
Purchased transportation			4.9				4.6				5.0				4.8
Rentals and landing fees			7.4				6.6				7.6				6.6
Depreciation and amortization			4.7				3.9				4.9				3.8
Fuel			12.2				15.8				12.0				18.3
Maintenance and repairs			5.1				6.3				5.2				6.2
Intercompany charges			8.9				8.8				9.2				8.6
Other			12.4				12.0				12.4				11.8
Total operating expenses			93.4				91.3				95.6				93.1
Operating income (margin)			6.6	%			8.7	%			4.4	%			6.9	%

The following table compares selected statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30:

		Three Months Ended								Percent				Six Months Ended								Percent
		2009				2008				Change				2009				2008				Change
Package Statistics
Average daily package volume (ADV):
U.S. overnight box			1,154				1,086				6				1,141				1,094				4
U.S. overnight envelope			606				611				(1	)			611				621				(2	)
U.S. deferred			858				832				3				840				830				1
Total U.S. domestic ADV			2,618				2,529				4				2,592				2,545				2
IP			529				500				6				502				497				1
International domestic (1)			338				311				9				315				309				2
Total ADV			3,485				3,340				4				3,409				3,351				2
Revenue per package (yield):
U.S. overnight box		$	18.87			$	23.66				(20	)		$	18.51			$	23.96				(23	)
U.S. overnight envelope			10.36				12.62				(18	)			10.27				12.84				(20	)
U.S. deferred			11.58				14.13				(18	)			11.40				14.25				(20	)
U.S. domestic composite			14.51				17.86				(19	)			14.26				18.08				(21	)
IP			52.88				61.30				(14	)			52.27				62.93				(17	)
International domestic (1)			7.09				8.06				(12	)			7.07				8.34				(15	)
Composite package yield			19.62				23.44				(16	)			19.19				23.84				(20	)
Freight Statistics
Average daily freight pounds:
U.S.			7,193				7,335				(2	)			6,883				7,315				(6	)
International priority freight			2,571				2,216				16				2,353				2,264				4
International airfreight			1,207				1,605				(25	)			1,253				1,737				(28	)
Total average daily freight pounds			10,971				11,156				(2	)			10,489				11,316				(7	)
Revenue per pound (yield):
U.S.		$	1.08			$	1.29				(16	)		$	1.07			$	1.28				(16	)
International priority freight			1.98				2.32				(15	)			1.93				2.31				(16	)
International airfreight			0.83				1.09				(24	)			0.77				1.10				(30	)
Composite freight yield			1.26				1.46				(14	)			1.22				1.46				(16	)

Revenues

Our revenues decreased 13% in the second quarter of 2010 and 18% in the first half of 2010 due to lower yields primarily driven by a decrease in fuel surcharges. As a result of modestly improved global economic conditions, yield decreases during the second quarter and first half of 2010 were partially offset by increased U.S. domestic package volume and IP volume, particularly from Asia and Latin America. In addition, the impact of one additional operating day partially offset the decline in revenue in the first half of 2010.

Lower fuel surcharges were the primary driver of decreased composite package and freight yield in the second quarter and first half of 2010. Our weighted-average U.S. domestic and outbound fuel surcharge was 6.35% in the second quarter of 2010 and 4.81% in the first half of 2010, compared with 29.95% in the second quarter of 2009 and 30.83% in the first half of 2009. U.S. domestic package yield also declined during the second quarter and first half of 2010 due to a lower rate per pound and lower package weights. In addition to lower fuel surcharges, IP and international domestic yields decreased during the second quarter and first half of 2010 due to lower rates, partially offset by favorable exchange rates in the second quarter of 2010.

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 three- and six-month periods ended November 30:

		Three Months Ended								Six Months Ended
		2009				2008				2009				2008
U.S. Domestic and Outbound Fuel Surcharge:
Low			5.50	%			27.00	%			1.00	%			27.00	%
High			7.50				34.50				7.50				34.50
Weighted-average			6.35				29.95				4.81				30.83
International Fuel Surcharges:
Low			5.50				17.00				1.00				17.00
High			12.50				34.50				12.50				34.50
Weighted-average			9.57				24.18				8.50				24.72

On September 17, 2009, we announced a 5.9% average list price increase effective January 4, 2010 on our 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. Furthermore, in connection with these changes, the structure of our fuel surcharge table was modified. In September 2008, we announced a 6.9% average list price increase effective January 5, 2009 on our 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 declined during the second quarter and first half of 2010 as a result of significantly lower fuel surcharges (described above) and a more competitive pricing environment. Continued reductions in network operating costs driven by lower flight hours and improved route efficiencies as well as other actions to control spending partially mitigated the negative impact of lower fuel surcharges on our results. In addition, during the second quarter of 2010, plan design changes to a self-insurance program produced a benefit of $54 million from a remeasurement of the plan liabilities, but was largely offset by variable incentive compensation accruals.

Fuel costs decreased 33% in the second quarter of 2010 and 47% in the first half of 2010 due to decreases in the average price per gallon of fuel and fuel consumption. 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 a negative impact to operating income in the second quarter and first half of 2010. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for our services.

Purchased transportation costs decreased 7% in the second quarter of 2010 and 15% in the first half of 2010 due to lower utilization of third-party transportation providers (primarily in international locations). Maintenance and repairs expense decreased 30% in the second quarter of 2010 and 32% in the first half of 2010 primarily due to reductions in flight hours and the grounding of certain aircraft due to excess capacity in the current economic environment. Depreciation expense increased 4% in the second quarter of 2010 and 5% in the first half of 2010 primarily due to the addition of 16 new aircraft into service since the second quarter of 2009. Other operating expenses decreased 10% in the second quarter of 2010 and 14% in the first half of 2010 primarily due to actions to control spending.

Other Income and Income Taxes

Interest expense decreased during the second quarter and first half of 2010 primarily due to increased capitalized interest primarily related to progress payments on aircraft purchases. Other expense increased during the second quarter and first half of 2010 primarily due to higher management fees.

Our effective tax rate was 39.2% for the second quarter of 2010 and 39.7% for the first half of 2010, compared with 38.1% for the second quarter of 2009 and 38.9% for the first half of 2009. The rates in 2009 and 2010 were favorably impacted by the resolution of immaterial state and federal income tax matters during those periods. In addition, the 2010 rate was negatively impacted by lower pre-tax income. For the remainder of 2010, we expect the effective tax rate to be between 40% and 42%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

As of November 30, 2009, there had been no material changes to our liabilities for unrecognized tax benefits from May 31, 2009. The Internal Revenue Service is currently auditing FedEx’s 2007 and 2008 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 the following new accounting guidance is relevant to the readers of our financial statements.

On June 1, 2008, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on fair value measurements, which provides a common definition of fair value, establishes a uniform framework for measuring fair value and requires expanded disclosures about fair value measurements. On June 1, 2009, we implemented the previously deferred provisions of this guidance for nonfinancial assets and liabilities recorded at fair value, as required. The adoption of this new guidance had no impact on our financial statements.

In December 2007, the FASB issued authoritative guidance on business combinations and the accounting and reporting for noncontrolling interests (previously referred to as minority interests). This guidance significantly changed the accounting for and reporting of business combination transactions, including noncontrolling interests. For example, the acquiring entity is now required to recognize the full fair value of assets acquired and liabilities assumed in the transaction, and the expensing of most transaction and restructuring costs is now required. This guidance became effective for us beginning June 1, 2009 and had no material impact on our financial statements.

In December 2008, the FASB issued authoritative guidance on employers’ disclosures about postretirement benefit plan assets. This guidance provides objectives that an employer should consider when providing detailed disclosures about assets of a defined benefit pension or other postretirement plan, including disclosures about investment policies and strategies, categories of plan assets, significant concentrations of risk and the inputs and valuation techniques used to measure the fair value of plan assets. This guidance will be effective for our fiscal year ending May 31, 2010.

In April 2009, the FASB issued new accounting guidance related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial instruments for interim reporting periods in addition to annual reporting periods and became effective for us beginning with the first quarter of fiscal year 2010.

In May 2009, the FASB issued new accounting guidance related to the accounting and disclosures of subsequent events, which establishes general standards for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance requires us to disclose the date through which we have evaluated subsequent events, which for Securities and Exchange Commission (“SEC”) registrants is the date we file our financial statements with the SEC and became effective for our first quarter of fiscal year 2010. Events occurring after the date of the condensed consolidated balance sheet but before the issuance of the financial statements included in this filing have been evaluated through the time of this filing.

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 United States 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 requirements, and tax, accounting, trade (such as protectionist measures enacted in response to the current 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 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 and hurricanes, which can disrupt electrical service, damage our property, disrupt our operations, increase fuel costs and adversely affect 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 and the current volatility of credit markets;

•

credit losses from our customers’ inability or unwillingness to pay for previously provided services as a result of, among other things, weak economic conditions and tight credit markets; and

•

other risks and uncertainties you can find in FedEx’s and our press releases and SEC 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 November 30, 2009 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended November 30, 2009, 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.

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.

Item 6.		Exhibits

Exhibit
Number				Description of Exhibit
	10.1			Letter Agreement dated September 29, 2009, amending the Transportation Agreement dated July 31, 2006 between the United States Postal Service 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 FY10 Second 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, 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			Letter Agreement dated September 29, 2009, amending the Transportation Agreement dated July 31, 2006 between the United States Postal Service 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 FY10 Second 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.