Securities and exchange commission

Percent of Revenue
		Three Months Ended										Nine Months Ended
		2018					2017					2018					2017
Operating expenses:
Salaries and employee benefits			18.3		%			17.8		%			18.3		%			18.1		%
Purchased transportation			42.8					43.0					41.9					41.5
Rentals			4.0					4.2					4.2					4.2
Depreciation and amortization			3.6					3.7					3.6					3.8
Fuel			0.1					0.1					0.1					0.1
Maintenance and repairs			1.6					1.8					1.7					1.8
Intercompany charges			7.1					7.0					7.3					7.3
Other			10.4					11.4					10.9					11.3
Total operating expenses			87.9					89.0					88.0					88.1
Operating margin			12.1		%			11.0		%			12.0		%			11.9		%

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 11% in the third quarter and 10% in the nine months of 2018 due to volume growth and increased yields. Average daily volume at FedEx Ground increased 6% in the third quarter and nine months of 2018 primarily due to continued growth in our residential services. FedEx Ground yield increased 6% during the third quarter and 5% during the nine months of 2018 primarily driven by higher base rates and higher fuel surcharges.

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The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as publi shed by the Department of Energy. Our fuel surcharge ranged as follows for the periods ended February 28:

 

		Three Months Ended								Nine Months Ended
		2018				2017				2018				2017
Low			5.30	%			4.00	%			4.00	%			3.30	%
High			5.80				4.50				5.80				4.50
Weighted-average			5.50				4.10				5.00				3.90

Effective January 1, 2018, FedEx Ground announced a 4.9% average list price increase. In addition, as announced on September 18, 2017, dimensional weight pricing applies to the majority of FedEx SmartPost shipments effective January 22, 2018. Effective February 6, 2017, FedEx Ground fuel surcharges are adjusted on a weekly basis compared to the previous monthly adjustment. On January 2, 2017, FedEx Ground implemented a 4.9% average list price increase and a change to the U.S. domestic dimensional weight divisor.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 23% in the third quarter and 12% in the nine months of 2018 due to volume growth, increased yields and benefits associated with ongoing cost management. Higher purchased transportation, seasonal staffing and network expansion costs and higher incentive compensation accruals partially offset these benefits.

Purchased transportation expense increased 11% in the third quarter and nine months of 2018 primarily due to higher volumes, increased rates and higher fuel expenses. Salaries and employee benefits expense increased 15% in the third quarter and 12% in the nine months of 2018 due to additional staffing to support volume growth, higher incentive compensation accruals, network expansion and merit increases. Intercompany charges increased 12% in the third quarter and 11% in the nine months of 2018 primarily due to higher incentive compensation accruals. Other expenses increased 6% in the nine months of 2018 primarily due to higher self-insurance reserves. Rentals and depreciation and amortization expense increased 6% in the third quarter and 7% in the nine months of 2018 due to network expansion.

Independent Contractor Model

FedEx Ground is involved in lawsuits and administrative proceedings claiming that owner-operators engaged under a contractor model no longer in use should have been treated as employees of FedEx Ground, rather than independent contractors. In addition, we are defending joint-employer cases where it is alleged that FedEx Ground should be treated as an employer of the drivers employed by owner-operators engaged by FedEx Ground. These cases are in varying stages of litigation. We will continue to vigorously defend ourselves in these proceedings and continue to believe that owner-operators engaged by FedEx Ground are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers employed by these owner-operators.

 

For additional information on the FedEx Ground Independent Service Provider model, see “Other Outlook Matters” under Consolidated Results of this MD&A.

 

 

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FEDEX FREIGHT SEGMENT

FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin, selected statistics and operating expenses as a percent of revenue for the periods ended February 28:

 

		Three Months Ended								Percent					Nine Months Ended								Percent
		2018				2017				Change					2018				2017				Change
Revenues		$	1,694			$	1,492				14				$	5,208			$	4,747				10
Operating expenses:
Salaries and employee benefits			825				733				13					2,455				2,266				8
Purchased transportation			263				230				14					792				739				7
Rentals			41				36				14					114				101				13
Depreciation and amortization			77				69				12					219				199				10
Fuel			127				99				28					336				282				19
Maintenance and repairs			52				50				4					169				159				6
Intercompany charges			130				120				8					384				370				4
Other			124				114				9					390				367				6
Total operating expenses			1,639				1,451				13					4,859				4,483				8
Operating income		$	55			$	41				34				$	349			$	264				32
Operating margin			3.2	%			2.7	%			50		bp			6.7	%			5.6	%			110		bp
Average daily LTL shipments (in thousands)
Priority			69.7				65.6				6					73.5				70.3				5
Economy			30.6				29.0				6					31.5				30.9				2
Total average daily LTL shipments			100.3				94.6				6					105.0				101.2				4
Weight per LTL shipment (lbs)
Priority			1,232				1,179				4					1,205				1,173				3
Economy			1,133				1,155				(2	)				1,144				1,121				2
Composite weight per LTL shipment			1,202				1,172				3					1,187				1,157				3
LTL revenue per shipment
Priority		$	242.49			$	224.63				8				$	233.31			$	220.64				6
Economy			295.31				272.74				8					285.99				262.72				9
Composite LTL revenue per shipment		$	259.20			$	239.82				8				$	249.32			$	233.64				7
LTL yield (revenue per hundredweight)
Priority		$	19.67			$	19.06				3				$	19.37			$	18.81				3
Economy			26.07				23.61				10					24.99				23.44				7
Composite LTL yield		$	21.56			$	20.47				5				$	21.01			$	20.19				4