**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**        ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For thefiscal year ended May 31, 2005.**

**OR**

**o**           TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For thetransition period from                         to                         .**

**Commissionfile number 1-7806**

**FEDERAL EXPRESS CORPORATION**

(Exact Name of Registrant asSpecified 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)                            |

 

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

**Securitiesregistered pursuant to Section 12(b) of the Act:**

|      | **Title of each class** | ** ** | ** ** | **Name of each exchange on which registered** | ** ** |
|------|-------------------------|------------|------------|-----------------------------------------------|------------|
| None | None                    |

 

**Securitiesregistered pursuant to Section 12(g) of the Act: **None

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405of this chapter) is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 ofthe Act.)  Yes o  No x

The Registrant is a whollyowned subsidiary of FedEx Corporation, a Delaware corporation, and there is nomarket for the Registrant’s common stock, par value $0.10 per share. As of July 11,2005, 1,000 shares of the Registrant’s common stock were outstanding.

**The Registrant meets the conditions set forth inGeneral Instruction I(1)(a) and (b) of Form 10-K and istherefore filing this Form with the reduced disclosure format permitted byGeneral Instruction I(2).**

 

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**TABLE OFCONTENTS**
|                                           | ** **                                                                                                         | ** ** | **Page** | ** ** |
|-------------------------------------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**                           |
| ITEM  1.                                  | Business                                                                                                           | 3          |     |
| ITEM 2.                                   | Properties                                                                                                         | 11         |     |
| ITEM 3.                                   | Legal Proceedings                                                                                                  | 14         |     |
| ITEM 4.                                   | Submission of Matters to a Vote of  Security Holders                                                               | 14         |     |
| **PART II**                          |
| ITEM 5.                                   | Market for Registrant’s Common  Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 15         |     |
| ITEM 6.                                   | Selected Financial Data                                                                                            | 15         |     |
| ITEM 7.                                   | Management’s Discussion and  Analysis of Results of Operations and Financial Condition                   | 15         |     |
| ITEM 7A.                                  | Quantitative and Qualitative  Disclosures About Market Risk                                                        | 15         |     |
| ITEM 8.                                   | Financial Statements and  Supplementary Data                                                                       | 15         |     |
| ITEM 9.                                   | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                         | 15         |     |
| ITEM 9A.                                  | Controls and Procedures                                                                                            | 15         |     |
| ITEM 9B.                                  | Other Information                                                                                                  | 16         |     |
| **PART III**                         |
| ITEM 10.                                  | Directors and Executive Officers  of the Registrant                                                                | 16         |     |
| ITEM 11.                                  | Executive Compensation                                                                                             | 16         |     |
| ITEM 12.                                  | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters               | 16         |     |
| ITEM 13.                                  | Certain Relationships and Related  Transactions                                                                    | 16         |     |
| ITEM 14.                                  | Principal Accounting Fees and  Services                                                                            | 16         |     |
| **PART IV**                          |
| ITEM  15.                                 | Exhibits, Financial Statement  Schedules                                                                           | 17         |     |
| **FINANCIAL SECTION**                     |
| Table of Contents                         | 20                                                                                                                 |       |
| Management’s Discussion and Analysis | 21                                                                                                                 |       |
| Consolidated Financial  Statements        | 28                                                                                                                 |       |
| Other  Financial Information              | 56                                                                                                                 |       |
| **EXHIBITS**                              |
| Exhibit Index                        | E-1                                                                                                                |       |

 

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**PART I**

**ITEM 1.   BUSINESS**

**Overview**

Federal Express Corporation (“FedEx Express”) inventedexpress distribution in 1973 and remains the industry leader, providing rapid,reliable, time-definite delivery of packages, documents and freight to morethan 220 countries and territories. FedEx Express is a wholly owned subsidiaryof FedEx Corporation (“FedEx”), which was incorporated in Delaware on October 2,1997 to serve as the parent holding company of FedEx Express. We offertime-certain delivery within one to three business days, serving markets that generate more than 90% of the world’s grossdomestic product through door-to-door, customs-cleared service, with amoney-back guarantee. Our unmatched air route authorities and extensivetransportation infrastructure, combined with our leading-edge informationtechnologies, make us the world’s largest express transportation company. Weemploy more than 138,000 employees and operate approximately 50,000 drop-offlocations, 670 aircraft and 45,000 vehicles and trailers in our integratedglobal network.

FedEx Corporate Services, Inc. (“FedEx Services”),a wholly owned subsidiary of FedEx, provides a convenient single point ofaccess for many customer support functions, such as marketing, sales andautomation. Much of the sales, marketing and information technology support forFedEx Express and FedEx Ground Package System, Inc. (“FedEx Ground”), awholly owned subsidiary of FedEx, have been combined under FedEx Services tomore effectively sell the entire portfolio of express and ground services. FedExServices sells and markets the full portfolio of services offered by us andFedEx’s other principal package-delivery companies and provides customer-facingsolutions that meet customer needs. FedEx Services also includes substantiallyall of the information technology groups from FedEx, FedEx Express and FedExGround. The majority of FedEx’s e-commerce groups are also part of FedExServices.

FedEx acquired FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”) in February 2004 andhas completed the rebranding of Kinko’s locations as FedEx Kinko’sOffice and Print Centers and converted 176 FedEx World Service Centers intofull-service FedEx Kinko’s Ship Centers. This strategic business acquisitionhas substantially increased our retail presence worldwide, expanding customeraccess to our shipping services. FedEx Kinko’s has approximately 1,440locations and has launched the full range of our services at virtually all ofits U.S. locations and is adding our shipping services at its internationallocations. In addition, FedEx Kinko’s has added packing supplies and boxes toits retail product assortment and launched packing services—creating a complete“pack-and-ship” solution—at virtually all U.S. FedEx Kinko’s Office and PrintCenters.

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

**Services**

We offer a wide range of shipping services fordelivery of documents, packages and freight. Overnight document and packageservices are backed by money-back guarantees and extend to virtually the entireUnited States population. We offer three U.S. overnight delivery services:FedEx First Overnight, FedEx Priority Overnight and FedEx Standard Overnight. FedExSameDay service is for urgent shipments up to 70 pounds to virtually any U.S.destination. We also offer express freight services to handle the needs of thetime-definite global freight market.

International express delivery with a money-backguarantee is available to more than 220 countries and territories, with avariety of time-definite services to meet distinct customer needs. We alsooffer the most comprehensive international freight service in the industry,backed by a money-back guarantee, real-time tracking and advanced customsclearance.

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We provide our customers with a high level of servicequality, as evidenced by our ISO 9001 certification for our global operations. ISO9001 registration is required by thousands of customers around the world. Ourglobal certification solidifies our reputation as the quality leader in thetransportation industry. ISO 9001 is currently the most rigorous internationalstandard for Quality Management and Assurance. ISO standards were developed bythe International Organization for Standardization in Geneva, Switzerland topromote and facilitate international trade. More than 150 countries, including European Union members, the United Statesand Japan, recognize ISO standards.

Information regarding oure-shipping tools and solutions can be found below (“Technology”). In addition,detailed information about all of our delivery services and e-commerce toolsand solutions can be found on the FedEx Web site, *fedex.com*.The information on the FedEx Web site, however, is not incorporated byreference in, and does not form part of, this Report.

**International Expansion**

We are focused on further expanding our internationalpresence, especially in key markets such as China. For example, we recently announcedplans to build a new Asia-Pacific hub at the Guangzhou Baiyun InternationalAirport in Southern China to better serve our global customers doing businessin and with the fast-growing China and Asia-Pacific markets.  The new Asia-Pacific hub is expected toassume and expand the current activities of our existing hub in Subic Bay,Philippines, beginning in 2009. We began serving China in 1984 and, since thattime, have expanded our service to cover more than 200 cities across thecountry with plans to add 100 additional cities over the next few years. Welaunched the industry’s first direct flight from southern China to NorthAmerica, and in 2005, we established a new regional headquarters in Shanghai. Thenew regional structure there provides broader expertise and expanded resourcesand service offerings to mainland customers as part of our long-term commitmentto China.

We have more all-cargo flights to and from China thanany other U.S. airline. In June 2004,the United States and the People’s Republic of China signed a new aviationaccord that will further facilitate trade to and from China. The agreement,which extends through 2010, provides for 111 new weekly U.S.-China flights forU.S. cargo airlines such as us. The U.S. Department of Transportation (“DOT”)is responsible for allocating the new flights. In October 2004, the DOTawarded us 12 additional weekly flights to China, giving us a total of 23weekly flights to China. Also, we have received tentative DOT approval forthree more weekly flights to China, effective March 2006, which will bringour total to 26.

In 2005, we launched a daily direct flight fromShanghai to Frankfurt, Germany—the express air cargo industry’s first directflight from mainland China to Europe—further expanding our airlift capacity fromChina. The new China-Europe flight forms an important link in our globalnetwork, connecting the United States, Asia and Europe. It is part of a newwestbound around-the-world lane that originates and terminates in Memphis,Tennessee and provides connections via the FedEx AsiaOne network to and frommore than 130 cities in northern and eastern China. Additionally, the flightlinks key manufacturing regions in Germany into our network, while other partsof Europe connect with the FedEx EuroOne network via our Paris hub. We alsointroduced five weekly direct flights from Cologne, Germany to Memphis during2005. The flights will provide next-business day service improvements forshippers in the industrial heartland of Germany, as well as key markets inBelgium and the Netherlands. The flight increases westbound trans-Atlanticcapacity by 20 percent, and shippers in western Germany will benefit from laterpick-up times. We already provide direct flights from Stansted, England; Paris,France; and Frankfurt, Germany to our U.S. hub locations.

Through an alliance with La Poste, one of the world’sleading postal organizations, customers of Chronopost International, asubsidiary of La Poste, have access to our air network. Additionally, our 

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customers in France and Belgiumhave benefited from the enhanced ground infrastructure of La Poste.

In anticipation of our futureneeds, we have agreed to purchase ten Airbus A380 aircraft, with deliveriesbeginning in 2009. We will be the first company to take delivery of theAirbus A380 freighter and the first to deploy the plane into service. Theimmense capacity, extensive range and excellent efficiency of this aircraftmake it ideally suited for the anticipated needs of our global network laterthis decade. To facilitate the use of our growing international network, weoffer strong international trade consulting services and a variety of onlinetools that enable customers to more easily determine and comply withinternational shipping requirements.

**Technology**

In 1979, FedEx Express founder Frederick W. Smithsaid, “The information about a package is as important as the delivery of thepackage itself.” Mr. Smith’s vision for our technology in 1979 was aradical idea. Yet, today we are a world leader in technology, and his visionremains at the core of our comprehensive technology strategy.

Our technology strategy is driven by our desire forcustomer satisfaction. Through FedEx Services, we strive to build technologysolutions that will solve our customers’ business problems with simplicity,convenience, speed and reliability. The focal point of our strategy is theaward-winning FedEx Web site, together with our integration solutions.

The *fedex.com* Website was launched over ten years ago, and during that time, customers have usedthe Web site to track the status of over a billion packages online. The *fedex.com* Web site is widely recognizedfor its speed, ease of use and customer-focused features. At *fedex.com*, our customers ship packages, determineinternational documentation requirements, track package status and pay invoices.The FedEx Insight Web-based application provides our customers with visibilityand package status of their inbound and outbound shipments. The FedEx GlobalTrade Manager online resource enables our customers to more easily navigate thecomplexities of international commerce by helping them identify the documentsthey need to ship to and from specific countries. FedEx Global Trade Manageralso offers a currency converter, profiles of regulatory information bycountry, a customs regulation guide and, through its “Estimate Duties and Taxes”features, customers can estimate applicable governmental charges, duties andfees. FedEx Billing Online provides our customers with real-time access totheir accounts, invoices and paid shipment details.

The *fedex.com* Website is accessible from most wireless devices, making it faster and easier forour U.S. and Canadian customers to access real-time package status trackinginformation, rates and drop-off location data for shipments. The wirelessservice is available through Web-enabled devices, such as mobile telephones,personal digital assistants and Research In Motion (RIM) devices. We also usewireless data collection devices to scan bar codes on shipments. Our newestdata collection device, the FedEx PowerPad, uses Bluetooth wireless technologyto give our couriers wireless access to our network, thereby enhancing andaccelerating the package information available to our customers.

Our e-commerce tools andsolutions are designed to be easily integrated into our customers’applications, as well as into third-party software being developed by leadinge-procurement, systems integration and enterprise resource planning companies. Thisis increasingly important, given the growing customer trend towardsophisticated multi-carrier shipping platforms. The FedEx Ship Manager suite ofsolutions offers a wide range of options to help our customers manage theirshipping and associated processes.

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**Marketing**

The FedEx brand name isa symbol for high-quality service, reliability and speed. FedEx is one of themost widely recognized brands in the world. Special emphasis is placed onpromoting and protecting the FedEx brand, one of our most important assets. Inaddition to traditional print and broadcast advertising, we promote the FedExbrand through corporate sponsorships and special events. For example, FedExsponsors:

·       TheNational Football League, as its “Official Delivery Service Sponsor”

·       ThePGA TOUR and the Champions Tour golf organizations, as their “Official ShippingCompany”

·       AJoe Gibbs Racing car in the NASCAR NEXTEL Cup Series

·       FedExField,home of the NFL’s Washington Redskins

·       TheFedEx Orange Bowl, host of one of college football’s Bowl Championship Series games

·       FedExForum,the home of the NBA’s Memphis Grizzlies

·       TheFedEx St. Jude Classic, a PGA TOUR event which raises millions of dollars forSt. Jude Children’s Research Hospital

·       TheBMW WilliamsF1 Formula One racing team

·       TheFrench Open tennis tournament

In 2005, FedEx and theNational Basketball Association formed a strategic marketing alliance throughwhich we promoted our international delivery services at NBA events and leaguemedia properties, such as NBA TV and NBA.com.

**U.S. Postal ServiceAgreements**

Under two agreements with the U.S. Postal Service thatrun through August 2008, we provide air capacity for transportation ofPriority, Express and First-Class Mail and have placed approximately 5,000drop boxes at U.S. Post Offices in approximately 325 metropolitan areas. In November 2004,the air transportation agreement was amended to allow us to continue carryingincremental pounds of mail through May 31, 2006 at higher committedvolumes than required under the original agreement.

In 2005, the U.S. Postal Servicechose us as the provider of transportation and delivery for the internationaldelivery service called Global Express Guaranteed (GXG). The service, which isavailable at over 8,100 postal locations, offers international express deliverywith a money-back guarantee (subject to certain limitations). Customers bringtheir packages to a U.S. Post Office where they fill out the GXG air waybill,pay postage and fees and drop off their packages. The U.S. Postal Servicetenders the packages to us, and we provide transportation and delivery to theultimate international destination.

**Pricing**

We periodically publish list prices in our ServiceGuides for the majority of our services. In general, during 2005, U.S. shippingrates were based on the service selected, destination zone, weight, size, anyancillary service charge and whether the shipment was picked up by a FedExExpress courier or dropped off by the customer at a FedEx Express location. Internationalrates are based on the type of service provided and vary with size, weight anddestination. We offer our customers discounts generally based on actual orpotential average daily revenue produced.

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We have a dynamic fuelsurcharge for all U.S. domestic and U.S. outbound shipments and for shipmentsoriginating internationally, where legally and contractually possible. Thesurcharge percentage is subject to monthly adjustment based on the spot pricefor jet fuel. For example, the fuel surcharge for June 2005 was based on thespot price for jet fuel published for April 2005. Changes to our fuelsurcharge, when calculated according to the spot price for jet fuel and FedExExpress trigger points, are applied effective from the first Monday of themonth. These trigger points may change from time to time, but information onthe fuel surcharge for each month is available at *fedex.com*approximately two weeks before the surcharge is applicable.

**Operations**

Our primary sorting facility, located in Memphis,serves as the center of our multiple hub-and-spoke system. A second nationalhub is located in Indianapolis. In addition to these national hubs, we operateregional hubs in Newark, Oakland and Fort Worth and major metropolitan sortingfacilities in Los Angeles and Chicago. Facilities in Anchorage, Paris and SubicBay, Philippines, serve as sorting facilities for express package and freighttraffic moving to and from Asia, Europe and North America. Additional majorsorting and freight handling facilities are located at Narita Airport in Tokyo,Stansted Airport outside London and Pearson Airport in Toronto. Facilities inSubic Bay and Paris are also designed to serve as regional hubs for theirrespective market areas. In 2005, we opened a new facility in Miami—the MiamiGateway Hub—which serves our South Florida, Latin American and Caribbeanmarkets. Throughout our worldwide network, we operate city stations and employa staff of customer service agents, cargo handlers and couriers who pick up anddeliver shipments in the station’s service area. For more information about oursorting and handling facilities, see Part I, Item 2 of this Annual Reporton Form 10-K under the caption “Sorting and Handling Facilities.” In someinternational regions, where low package traffic makes our direct presence lesseconomical, Global Service Participants have been selected to completedeliveries and to pick up packages.

FedEx Kinko’s offers retailaccess to our shipping services at all of its U.S. locations and is adding ourshipping services at its international locations. We also have alliances withcertain other retailers to provide in-store drop-off sites. Our unmanned FedExDrop Boxes provide customers the opportunity to drop off packages in officebuildings, shopping centers, corporate or industrial parks and outside U.S.Post Offices.

**Fuel Supplies and Costs**

During 2005, we purchased aviation fuel from varioussuppliers under contracts that vary in length and which provide for specificamounts of fuel to be delivered. The fuel represented by these contracts ispurchased at market prices that may fluctuate daily. Because of our dynamicfuel surcharge, we do not have any jet fuel hedging contracts. See “Pricing.”

Thefollowing table sets forth our costs for aviation fuel and its percentage ofour total revenues for the last five fiscal years:
| **Fiscal Year** | ** ** | ** ** | ** ** | **Total Cost  (in millions)** | ** ** | **Percentage of  Total Revenues** | ** ** |
|----------------------|------------|------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| 2005                 |       |       | $          | 1,780                                   |       |                                        |       | 9.2 | % |   |
| 2004                 |       |       | 1,160      |                                    |       |                                        | 6.7        |   |   |
| 2003                 |       |       | 1,058      |                                    |       |                                        | 6.5        |   |   |
| 2002                 |       |       | 852        |                                    |       |                                        | 5.6        |   |   |
| 2001                 |       |       | 872        |                                    |       |                                        | 5.6        |   |   |

 

Approximately 14% of our requirement for vehicle fuelis purchased in bulk. The remainder of our requirement is satisfied by retailpurchases with various discounts.

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We believe that, barring asubstantial disruption in supplies of crude oil, our fuel purchase contractswill ensure the availability of an adequate supply of fuel for our needs forthe immediate future. A substantial reduction of oil supplies fromoil-producing regions or refining capacity, or other events causing asubstantial reduction in the supply of aviation fuel, however, could have asignificant adverse effect on us.

**Competition**

The express package and freight markets are bothhighly competitive and sensitive to price and service. The ability to competeeffectively depends upon price, frequency and capacity of scheduled service,ability to track packages, extent of geographic coverage, reliability andinnovative service offerings. Competitors include other package deliveryconcerns, principally United Parcel Service, Inc. (“UPS”), DHL, passengerairlines offering express package services, regional express delivery concerns,airfreight forwarders and the U.S. Postal Service. Our principal competitors inthe international market are DHL, UPS, foreign postal authorities such asDeutsche Poste and TNT Post Group, freight forwarders, passenger airlines andall-cargo airlines.

We currently providecustoms-cleared, door-to-door service with custodial control to moreinternational locations than our competitors. Many of our competitors in theinternational market, however, are government-owned, -controlled or -subsidizedcarriers, which may have greater resources, lower costs, less profitsensitivity and more favorable operating conditions than we do.

**Employees**

We are headquartered in Memphis, Tennessee. David J.Bronczek is our President and Chief Executive Officer. As of May 31, 2005,we employed approximately 87,100 permanent full-time and 51,000 permanentpart-time employees, of which approximately 18% are employed in the Memphisarea. Our international employees in the aggregate represent approximately 17%of all employees. We believe our relationship with our employees is excellent.

Our pilots, who are represented by the Air Line PilotsAssociation, International (“ALPA”), have been employed under a collectivebargaining agreement since May 31, 1999. The current agreement did notexpire, but became amendable on May 31, 2004. Negotiations with ALPA toreach a new labor agreement began in March 2004 and remain underway. Wewill continue to operate under our current agreement while we negotiate withour pilots.

Attempts by other labororganizations to organize certain other groups of employees occur from time totime. Although these organizing attempts have not resulted in any certificationof a U.S. domestic collective bargaining representative (other than ALPA), wecannot predict the outcome of these labor activities or their effect, if any,on us or our employees.

**Trademarks**

The “FedEx” trademark, servicemark and trade name is essential to our worldwide business. FedEx and FedExExpress, among others, are trademarks, service marks and trade names of FederalExpress Corporation for which registrations, or applications for registration,are on file. We have authorized, through licensing arrangements, the use ofcertain of our trademarks, service marks and trade names by our Global ServiceParticipants to support our business. In addition, we license the use ofcertain of our trademarks, service marks and trade names on promotional itemsfor the primary purpose of enhancing brand awareness.

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**Regulation**

***Air*.**   Under the Federal Aviation Actof 1958, as amended, both the DOT and the Federal Aviation Administration (“FAA”)exercise regulatory authority over us.

The FAA’s regulatory authority relates primarily tooperational aspects of air transportation, including aircraft standards,maintenance and corrosion control, as well as personnel and ground facilities,which may from time to time affect our ability to operate our aircraft in themost efficient manner. We hold an air carrier certificate granted by the FAApursuant to Part 119 of the federal aviation regulations. This certificateis of unlimited duration and remains in effect so long as we maintain ourstandards of safety and meet the operational requirements of the regulations.

The DOT’s authority relates primarily to economic andsecurity aspects of air transportation. The DOT’s jurisdiction extends toaviation route authority and to other regulatory matters, including thetransfer of route authority between carriers. We hold various certificatesissued by the DOT, authorizing us to engage in U.S. and international airtransportation of property and mail on a worldwide basis. Our internationalauthority permits us to carry cargo and mail from several points in our U.S.route system to numerous points throughout the world. The DOT regulatesinternational routes and practices and is authorized to investigate and takeaction against discriminatory treatment of United States air carriers abroad. Theright of a United States carrier to serve foreign points is subject to the DOT’sapproval and generally requires a bilateral agreement between the United Statesand the foreign government. The carrier must then be granted the permission ofsuch foreign government to provide specific flights and services. Theregulatory environment for global aviation rights may from time to time impairour ability to operate our air network in the most efficient manner.

In 2001, the Aviation and Transportation Security Acttransferred responsibility for aviation security from the FAA to the TransportationSecurity Administration (“TSA”) within the DOT, and ultimately, the Departmentof Homeland Security. In November 2004, the TSA proposed new rules enhancingmany of the security requirements for air cargo on both passenger and all cargoaircraft. Because the TSA’s proposed rules are subject to comment, anyfinal rules may differ significantly from the proposed rules. Accordingly,it is not yet possible to estimate the impact, if any, that the adoption of newrules by the TSA or any other additional security requirements may have onour results of operations. However, it is possible that increased securityrequirements could impose substantial incremental costs on us and ourcompetitors.

We participate in the Civil Reserve Air Fleet (“CRAF”)program. Under this program, the U.S. Department of Defense may requisition formilitary use certain of our wide-bodied aircraft in the event of a declaredneed, including a national emergency. We are compensated for the operation ofany aircraft requisitioned under the CRAF program at standard contract ratesestablished each year in the normal course of awarding contracts. Through ourparticipation in the CRAF program, we are entitled to bid on peacetime militarycargo charter business. We, together with a consortium of other carriers,currently contract with the U.S. Government for charter flights.

***Ground.*  **Theground transportation performed by us is integral to our air transportationservices. The enactment of the Federal Aviation Administration AuthorizationAct of 1994 abrogated the authority of states to regulate the rates, routes orservices of intermodal all-cargo air carriers and most motor carriers. Statesmay now only exercise jurisdiction over safety and insurance. We are registeredin those states that require registration.

Like other interstate motor carriers, we are subjectto certain DOT safety requirements governing interstate operations. Inaddition, vehicle weight and dimensions remain subject to both federal andstate regulations.

***Communication*.**   Because of the extensive use ofradio and other communication facilities in our aircraft and groundtransportation operations, we are subject to the Federal Communications 

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Commission Act of 1934, as amended. Additionally, theFederal Communications Commission regulates and licenses our activitiespertaining to satellite communications.

***Environmental*.**   Pursuant to the FederalAviation Act, the FAA, with the assistance of the U.S. Environmental ProtectionAgency, is authorized to establish standards governing aircraft noise. Ouraircraft fleet is in compliance with current noise standards of the federalaviation regulations. Our aircraft are also subject to, and are in compliancewith, the regulations governing engine emissions. In addition to federalregulation of aircraft noise, certain airport operators have local noiseregulations, which limit aircraft operations by type of aircraft and time ofday. These regulations have had a restrictive effect on our aircraft operationsin some of the localities where they apply but do not have a material effect onany of our significant markets. Congress’s passage of the Airport Noise andCapacity Act of 1990 established a National Noise Policy, which enabled us toplan for noise reduction and better respond to local noise constraints. Ourinternational operations are also subject to noise regulations in certain ofthe countries in which we operate.

We are subject to federal,state and local environmental laws and regulations relating to, among otherthings, contingency planning for spills of petroleum products and the disposalof waste oil. Additionally, we are subject to numerous regulations dealing withunderground fuel storage tanks, hazardous waste handling, vehicle and equipmentemissions and the discharge of effluents from our properties and equipment. Wehave environmental management programs to ensure compliance with theseregulations.

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**ITEM 2.   PROPERTIES**

Our principal owned and leasedproperties include our aircraft, vehicles, national, regional and metropolitansorting facilities, administration buildings, FedEx Drop Boxes and dataprocessing and telecommunications equipment.

**Aircraft and Vehicles**

As of May 31,2005, our operating aircraft fleet consisted of the following:
| **Description**     | ** ** | ** ** | ** ** | **Owned** | ** ** | **Leased** | ** ** | **Total** | ** ** | **Maximum Operational  Revenue Payload  (Pounds per Aircraft)**(1) | ** ** |
|---------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|----------------------------------------------------------------------------------------|------------|
| Boeing MD11         |       |       | 25         |      |       |       | 32         |      |       | 57                                                                                     | (3)        |   | 155,800 |   |   |
| Boeing MD10-30(2)   |       |       | 3          |      |       |       | 2          |      |       | 5                                                                                      |       |   | 128,900 |   |   |
| Boeing DC10-30      |       |       | 5          |      |       |       | 12         |      |       | 17                                                                                     |       |   | 128,900 |   |   |
| Boeing MD10-10(2)   |       |       | 36         |      |       |       | —     |      |       | 36                                                                                     |       |   | 117,800 |   |   |
| Boeing DC10-10      |       |       | 26         |      |       |       | 4          |      |       | 30                                                                                     | (4)        |   | 117,800 |   |   |
| Airbus A300-600     |       |       | 11         |      |       |       | 36         |      |       | 47                                                                                     | (5)        |   | 91,000 |   |   |
| Airbus A310-200/300 |       |       | 46         |      |       |       | 16         |      |       | 62                                                                                     | (6)        |   | 69,800 |   |   |
| Boeing B727-200     |       |       | 83         |      |       |       | 11         |      |       | 94                                                                                     |       |   | 43,100 |   |   |
| Boeing B727-100     |       |       | 18         |      |       |       | —     |      |       | 18                                                                                     |       |   | 31,100 |   |   |
| ATR 72-202          |       |       | 2          |      |       |       | —     |      |       | 2                                                                                      | (7)        |   | 17,500 |   |   |
| ATR 42-300/320      |       |       | 29         |      |       |       | —     |      |       | 29                                                                                     | (8)        |   | 12,000 |   |   |
| Fokker F27-500      |       |       | 11         |      |       |       | —     |      |       | 11                                                                                     |       |   | 12,500 |   |   |
| Fokker F27-600      |       |       | 6          |      |       |       | —     |      |       | 6                                                                                      |       |   | 11,500 |   |   |
| Cessna 208B         |       |       | 246        |      |       |       | —     |      |       | 246                                                                                    |       |   | 3,400 |   |   |
| Cessna 208A         |       |       | 10         |      |       |       | —     |      |       | 10                                                                                     |       |   | 3,000 |   |   |
| Total               |       |       | 557        |      |       |       | 113        |      |       | 670                                                                                    |       |   |   |   |   |

 

(1)    Maximum operational revenue payload is thelesser of the net volume-limited payload and the net maximum structural payload.

(2)    The MD10-30s and MD10-10s are DC10-30s andDC10-10s, respectively, that have been converted to an MD10 configuration.

(3)    Includes 15 aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(4)    Includes 11 aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(5)    Includes three aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(6)    Includes eight aircraft not currently in operationand awaiting completion of passenger-to-freighter modification.

(7)    Includes two aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(8)    Includes 12 aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

11

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

·       TheDC10s are three-engine, wide-bodied aircraft that have been specially modifiedto meet our cargo requirements. The DC10s come in two versions, the DC10-10 andthe DC10-30. The DC10-30 has a longer range and higher weight capacity than theDC10-10.

·       TheMD10s are three-engine, wide-bodied DC10 aircraft that have received anAdvanced Common Flightdeck (ACF) modification, which includes a conversion to atwo-pilot cockpit, as well as upgrades of electrical and other systems.

·       TheA300s and A310s are two-engine, wide-bodied aircraft that have a longer rangeand more capacity than B727s.

·       TheB727s are three-engine aircraft configured for cargo service.

·       TheFokker F27, Cessna 208 and ATR turbo-prop aircraft are leased to independentoperators to support our operations in areas where demand does not justify useof a larger aircraft.

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

In addition, we “wet lease” approximately 60 smallerpiston-engine and turbo-prop aircraft which feed packages to and from airportsserved by our larger jet aircraft. The wet lease agreements call for theowner-lessor to provide flight crews, insurance and maintenance, as well asfuel and other supplies required to operate the aircraft. Our wet leaseagreements are for terms not exceeding one year and are generally cancelableupon 30 days’ notice.

At May 31, 2005, weoperated approximately 45,000 ground transport vehicles, including pickup anddelivery vans, larger trucks called container transport vehicles andover-the-road tractors and trailers.

**Aircraft PurchaseCommitments**

As of May 31, 2005, wewere committed to purchase one MD11, four A300s, two A310s, nine ATR-72s andten Airbus A380s (a new high-capacity, long-range aircraft). The MD11, theA300s, one A310 and the ATR-72s are expected to be delivered in 2006, and theother A310 is expected to be delivered in 2007. FedEx Express expects to takedelivery of three of the ten A380 aircraft in each of 2009, 2010 and 2011 andthe remaining one in 2012. We also hold options for ten additional A380aircraft. Deposits and progress payments of $29 million have been made towardthese purchases and other planned aircraft-related transactions. Also see Note14 of the accompanying consolidated financial statements for more informationabout our purchase commitments.

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**Sorting and HandlingFacilities**

At May 31,2005, we operated the following sorting and handling facilities:
| **Location**              | ** ** | ** ** | ** ** | **Acres** | ** ** | **Square  Feet** | ** ** | **Sorting  Capacity  (per hour)**(1) | ** ** | ** ** | **Lessor** | ** **                                                 | ** ** | **Lease  Expiration  Year** | ** ** |
|---------------------------|------------|------------|------------|-----------|------------|------------------|------------|-------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|-----------------------------|------------|
| ***National***            |       |       |       |      |       |             |       |                                      |       |       |       |                                                       |       |                        |       |   |   |
| Memphis, Tennessee        |       |       | 525        |      |       | 3,074,000        |       |                                      | 465,000    |       |       | Memphis-Shelby County Airport Authority                    |       |                        | 2012       |   |   |
| Indianapolis, Indiana     |       |       | 215        |      |       | 1,895,000        |       |                                      | 191,000    |       |       | Indianapolis Airport Authority                             |       |                        | 2016       |   |   |
| ***Regional***            |       |       |       |      |       |             |       |                                      |       |       |       |                                                       |       |                        |       |   |   |
| Fort Worth, Texas         |       |       | 168        |      |       | 977,000          |       |                                      | 76,000     |       |       | Fort Worth Alliance Airport Authority                      |       |                        | 2014       |   |   |
| Newark, New Jersey        |       |       | 64         |      |       | 595,000          |       |                                      | 154,000    |       |       | Port Authority of New York and New Jersey                  |       |                        | 2010       |   |   |
| Oakland, California       |       |       | 66         |      |       | 320,000          |       |                                      | 53,000     |       |       | City of Oakland                                            |       |                        | 2011       |   |   |
| ***Metropolitan***        |       |       |       |      |       |             |       |                                      |       |       |       |                                                       |       |                        |       |   |   |
| Los Angeles, California   |       |       | 23         |      |       | 305,000          |       |                                      | 57,000     |       |       | City of Los Angeles                                        |       |                        | 2009       |   |   |
| Chicago, Illinois         |       |       | 51         |      |       | 419,000          |       |                                      | 52,000     |       |       | City of Chicago                                            |       |                        | 2018       |   |   |
| ***International***       |       |       |       |      |       |             |       |                                      |       |       |       |                                                       |       |                        |       |   |   |
| Anchorage, Alaska(2)      |       |       | 62         |      |       | 258,000          |       |                                      | 17,000     |       |       | Alaska Department of Transportation and Public  Facilities |       |                        | 2023       |   |   |
| Subic Bay, Philippines(3) |       |       | 18         |      |       | 316,000          |       |                                      | 22,000     |       |       | Subic Bay Metropolitan Authority                           |       |                        | 2010       |   |   |
| Paris, France(4)          |       |       | 87         |      |       | 861,000          |       |                                      | 48,000     |       |       | Aeroports de Paris                                         |       |                        | 2029       |   |   |

 

(1)    Documents and packages.

(2)    Handles international express package andfreight shipments to and from Asia, Europe and North America.

(3)    Handles intra-Asia express package andfreight shipments, as well as international express package and freightshipments to and from Asia.

(4)    Handles intra-Europe express package andfreight shipments, as well as international express package and freightshipments to and from Europe.

Our facilities at the Memphis International Airportalso include aircraft maintenance hangars, flight training and fuel facilities,administrative offices and warehouse space. We lease these facilities from theMemphis-Shelby County Airport Authority (the “Authority”) under several leases.The leases cover land, administrative and sorting buildings, other facilities,ramps and certain related equipment. We have the option to purchase certainequipment (but not buildings or improvements to real estate) leased under suchleases at the end of the lease term for a nominal sum. The leases obligate usto maintain and insure the leased property and to pay all related taxes,assessments and other charges. The leases are subordinate to, and our rightsthereunder could be affected by, any future lease or agreement between theAuthority and the U.S. Government.

We have major internationalsorting and freight handling facilities located at Narita Airport in Tokyo,Japan, Stansted Airport outside London, England and Pearson Airport in Toronto,Canada. We also have a substantial presence at Chek Lap Kok Airport in HongKong, CKS International Airport in Taiwan, Dubai, United Arab Emirates,Frankfurt, Germany and Miami International Airport.

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**Administrative andOther Properties and Facilities**

Our world headquarters are located in southeasternShelby County, Tennessee. The headquarters campus, which comprises eightseparate buildings with more than 1.1 million square feet of space, housesapproximately 1,800 employees. We also have facilities housing administrativeand technical operations on approximately 200 acres adjacent to the MemphisInternational Airport. Of the eight buildings located on this site, four aresubject to long-term leases and the other four are owned by us. We also leaseapproximately 30 facilities in the Memphis area for administrative offices andwarehouses.

We lease state-of-the-art technology centers inCollierville, Tennessee, Irving, Texas, Colorado Springs, Colorado, andOrlando, Florida. These facilities house our personnel and FedEx Services’personnel responsible for strategic software development and other functionsthat support FedEx’s technology and e-commerce solutions.

We own or lease 673 facilities for city stationoperations in the United States. In addition, 226 city stations are owned orleased throughout our international network. The majority of these leases arefor terms of five to ten years. City stations serve as the sorting anddistribution center for a particular city or region. We believe that suitablealternative facilities are available in each locale on satisfactory terms, ifnecessary.

As of May 31, 2005, wehad approximately 40,100 Drop Boxes, including 5,000 Drop Boxes outside U.S.Post Offices. As of May 31, 2005, we also had approximately 8,900 FedExAuthorized ShipCenters and FedEx ShipSites, which are drop-off locationssituated within certain retailers, such as OfficeMax, Staples and FedEx Kinko’s.Internationally, we have approximately 2,900 drop-off locations.

**ITEM 3.   LEGALPROCEEDINGS**

FedEx Express and itssubsidiaries are subject to legal proceedings and claims that arise in theordinary course of their business. For a description of material pending legalproceedings, see Note 15 of the accompanying consolidated financialstatements.

**ITEM 4.   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

Omitted under the reduced disclosure format permittedby General Instruction I(2)(c) of Form 10-K.

14

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**PART II**

**ITEM 5.   MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER**MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES

FedEx Express is a whollyowned subsidiary of FedEx, and there is no market for FedEx Express’scommon stock.

**ITEM 6.   SELECTED FINANCIAL DATA**

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(a) of Form 10-K.

**ITEM 7.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND**FINANCIAL CONDITION

Management’s discussion andanalysis of results of operations and financial condition is presented on pages 21through 27 of this Annual Report on Form 10-K.

**ITEM 7A.   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

Quantitative and qualitativeinformation about market risk is presented on page 56 of this AnnualReport on Form 10-K.

**ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

FedEx Express’s consolidatedfinancial statements, together with the notes thereto and the report of Ernst &Young LLP dated July 12, 2005 thereon, are presented on pages 31 through55 of this Annual Report on Form 10-K.

**ITEM 9.**   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE

None.

**ITEM 9A.   CONTROLS AND PROCEDURES**

**Management’s Evaluationof Disclosure Controls and Procedures**

Our management, with theparticipation of our principal executive and financial officers, has evaluatedthe effectiveness of our disclosure controls and procedures in ensuring thatthe information required to be disclosed in our filings under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms, including ensuring that such information is accumulated and communicatedto management as appropriate to allow timely decisions regarding requireddisclosure. Based on such evaluation, our principal executive and financialofficers have concluded that such disclosure controls and procedures wereeffective, as of May 31, 2005 (the end of the period covered by thisAnnual Report on Form 10-K).

**Assessment of InternalControl Over Financial Reporting**

Management’s report on ourinternal control over financial reporting is presented on page 28 of thisAnnual Report on Form 10-K. The report of Ernst & Young LLP withrespect to management’s assessment of internal control over financial reportingis presented on pages 29 through 30 of this Annual Report on Form 10-K.

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**Changes in InternalControl Over Financial Reporting**

During our fiscal quarterended May 31, 2005, no change occurred in our internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**ITEM 9B.   OTHERINFORMATION**

None.

**PART III**

**ITEM 10.   DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

**ITEM 11.   EXECUTIVECOMPENSATION**

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

**ITEM 12.   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND**MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

**ITEM 13.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

**ITEM 14.   PRINCIPALACCOUNTING FEES AND SERVICES**

Of thefees Ernst & Young LLP billed FedEx for services provided during 2005and 2004, we estimate that the following amounts were for services related toFedEx Express. These amounts (in thousands) represent the fees that Ernst &Young LLP directly billed to FedEx Express, as well as that portion of Ernst &Young LLP’s fees that FedEx allocated to FedEx Express through management fees.
| ** **         | ** ** | **2005** | ** **  | **2004** | ** ** |
|--------------------|------------|----------|-------------|----------|------------|
| Audit fees         |       | $        | 9,426  |     | $          | 5,282 |   |
| Audit-related fees |       | 289      |        | 273      |       |
| Tax fees           |       | 1,010    |        | 965      |       |
| All other fees     |       | 20       |        | 14       |       |
| Total              |       | $        | 10,745      |     | $          | 6,534 |   |

 

·       *Audit Fees.  *Represents fees forprofessional services provided for the audit of FedEx Express’s annualfinancial statements and review of FedEx Express’s quarterly financialstatements, for the audit of FedEx Express’s internal control over financialreporting and for audit services provided in connection with other statutory orregulatory filings.

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·       *Audit-Related Fees.  *Represents feesfor assurance and other services related to the audit of FedEx Express’sfinancial statements. The amounts shown for 2005 and 2004 include feesprimarily for benefit plan audits.

·       *Tax Fees.  *Represents fees for professional servicesprovided primarily for domestic and international compliance and tax advice. Taxcompliance and preparation fees totaled $238,000 and $436,000 in 2005 and 2004,respectively. While not required, FedEx Express has transitioned from Ernst &Young LLP as its primary tax services provider to PricewaterhouseCoopers LLP. Thetransition began during 2004 and was completed in 2005.

·       *All Other Fees.  *Represents fees forproducts and services not otherwise included in the categories above. Theamounts shown for 2005 and 2004 include fees for online technical resources. Theamount shown for 2005 also includes fees for international operational auditservices.

To help ensure theindependence of our independent registered public accounting firm, the AuditCommittee of the Board of Directors of FedEx has adopted a Policy on Engagementof Independent Auditor, which is available on FedEx’s Web site at *http://ir.fedex.com/governance/Auditor_Policy.cfm*.

Pursuant to the Policy onEngagement of Independent Auditor, the Audit Committee is directly responsiblefor the appointment, compensation and oversight of the independent registeredpublic accounting firm. The Audit Committee preapproves all audit services andnon-audit services to be provided by the firm. The Audit Committee may delegateto one or more of its members the authority to grant the required approvals, providedthat any exercise of such authority is presented at the next Audit Committeemeeting.

Each audit or non-auditservice that is approved by the Audit Committee (excluding tax servicesperformed in the ordinary course of our business) will be reflected in awritten engagement letter or writing specifying the services to be performedand the cost of such services, which will be signed by either a member of theAudit Committee or by an officer of FedEx authorized by the Audit Committee tosign on behalf of FedEx.

The Audit Committee will notapprove any prohibited non-audit service or any non-audit service thatindividually or in the aggregate may impair, in the Audit Committee’s opinion,the independence of our independent registered public accounting firm.

In addition, our independentregistered public accounting firm may not provide any services to FedExofficers or Audit Committee members, including financial counseling and taxservices.

**PART IV**

**ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

**(a)(1) and (2) Financial Statements;Financial Statement Schedules**

FedEx Express’s consolidatedfinancial statements, together with the notes thereto and the report of Ernst &Young LLP dated July 12, 2005 thereon, are listed on page 20 andpresented on pages 31 through 55 of this Annual Report on Form 10-K.FedEx Express’s “Schedule II — Valuation and Qualifying Accounts,”together with the report of Ernst & Young LLP dated July 12, 2005thereon, is presented on pages 57 through 58 of this Annual Report on Form 10-K.All other financial statement schedules have been omitted because they are notapplicable or the required information is included in FedEx Express’sconsolidated financial statements or the notes thereto.

**(a)(3) Exhibits**

See the Exhibit Index on pages E-1through E-7 for a list of the exhibits being filed or furnished with orincorporated by reference into this Annual Report on Form 10-K.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, as amended, the Registrant has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized.
|                           | FEDERAL EXPRESS CORPORATION |
|---------------------------|-----------------------------|
| Dated: July 14, 2005 | By:                         | /s/ DAVID J. BRONCZEK |
|                      |                        | David J. Bronczek |
|                      |                        | President and Chief  Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisReport has been signed below by the following persons on behalf of theRegistrant in the capacities and on the dates indicated.
| **Signature**           | ** ** | ** **                                          | ** ** | **Capacity**       | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|--------------------|------------|------------|------------|----------|------------|------------|
| /s/ DAVID J. BRONCZEK   | * *   | President, Chief Executive                          |       | July 14, 2005 |
| David J. Bronczek       |       | Officer and Director*(Principal Executive Officer)* |       |               |
| /s/ CATHY D. ROSS       | * *   | Senior Vice President and  Chief                    |       | July 14, 2005 |
| Cathy D. Ross           |       | Financial Officer*(Principal Financial Officer)*    |       |               |
| /s/ JAY L. COFIELD      | * *   | Vice President and Worldwide                        |       | July 14, 2005 |
| Jay L. Cofield          |       | Controller*(Principal Accounting Officer)*          |       |               |
| /s/ FREDERICK W. SMITH* |       | Chairman of the Board of  Directors                 |       | July 14, 2005 |
| Frederick W. Smith      |       |                                                |       |               |
| /s/ ROBERT B. CARTER*   |       | Director                                            |       | July 14, 2005 |
| Robert B. Carter        |       |                                                |       |               |
| /s/ MICHAEL L. DUCKER*  |       | Executive Vice President —                     |       | July 14, 2005 |
| Michael L. Ducker       |       | International and Director                          |       |               |
| /s/ T. MICHAEL GLENN*   |       | Director                                            |       | July 14, 2005 |
| T. Michael Glenn        |       |                                                |       |               |
| /s/ ALAN B. GRAF, JR.*  |       | Director                                            |       | July 14, 2005 |
| Alan B. Graf, Jr.  |       |                                                |       |               |
| /s/ DAVID F. REBHOLZ*   |       | Executive Vice President —                     |       | July 14, 2005 |
| David F. Rebholz        |       | Operations and Systems  Support and Director        |       |               |

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| /s/ CHRISTINE P. RICHARDS* |                             | Director |   | July 14, 2005 |
|----------------------------|----------------------------------|----------|--------|--------------------|
| Christine P. Richards      |                             |     |   |               |
| *By:                       | /s/ JAY L. COFIELD               |     |   |               | July 14, 2005 |
|                       | Jay L. Cofield  Attorney-in-Fact |     |   |               |   |

 

 

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**FINANCIAL SECTION TABLE OF CONTENTS:**
|                                                                                                                                   | Page       |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| **Management’s Discussion and  Analysis**                                                                                    | ** ** |
| Overview  of Financial Section                                                                                                    | 21         |
| New  Accounting Pronouncements                                                                                                    | 22         |
| Results of  Operations                                                                                                            | 22         |
| Forward-Looking  Statements                                                                                                       | 26         |
| **Consolidated Financial  Statements**                                                                                            | ** ** |
| Management’s  Report on Internal Control over Financial Reporting                                                            | 28         |
| Reports  of Independent Registered Public Accounting Firm                                                                         | 29         |
| Consolidated  Balance Sheets  May 31, 2005 and 2004                                                                          | 32         |
| Consolidated  Statements of Income  Years Ended May 31, 2005, 2004 and 2003                                                  | 34         |
| Consolidated  Statements of Cash Flows  Years Ended May 31, 2005, 2004 and 2003                                              | 35         |
| Consolidated  Statements of Changes in Owner’s Equity and Comprehensive Income  Years Ended May 31, 2005, 2004 and 2003 | 36         |
| Notes to Consolidated Financial Statements                                                                                        | 37         |
| **Other Financial Information**                                                                                                   | ** ** |
| Quantitative  and Qualitative Disclosures about Market Risk                                                                       | 56         |
| Report  of Independent Registered Public Accounting Firm                                                                          | 57         |
| Schedule  II — Valuation and Qualifying Accounts                                                                             | 58         |
| Computation  of Ratio of Earnings to Fixed Charges                                                                                | 59         |

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITION**

**OVERVIEW OF FINANCIALSECTION**

The financial section of theFedEx Express Annual Report on Form 10-K (“Annual Report”), consists ofthis Management’s Discussion and Analysis of Results of Operations andFinancial Condition (“MD&A”), the Consolidated Financial Statements and thenotes to the Consolidated Financial Statements, and Other FinancialInformation, which include information about our significant accountingpolicies, practices and the transactions that underlie our financial results. Thefollowing MD&A, which describes the principal factors affecting the resultsof operations and financial condition of FedEx Express, is abbreviated pursuantto General Instruction I(2)(a) of Form 10-K. Results of Operationsincludes an overview of consolidated 2005 results compared to 2004. Thissection also includes a discussion of key actions and events that impacted ourresults, as well as a discussion of our outlook for 2006. For additionalinformation, including a discussion of liquidity, capital resources andcontractual cash obligations, as well as our critical accounting policies andestimates, see the Annual Report on Form 10-K for the fiscal year ended May 31,2005 of our parent company, FedEx. The discussion in the financial sectionshould be read in conjunction with the other sections of this Annual Report,particularly “Item 1: Business.”

***DESCRIPTION OF BUSINESS***

FedEx Express is the world’slargest express transportation company. FedEx Services provides thecustomer-facing sales, marketing and information technology functions of FedExExpress and our sister company FedEx Ground. The costs for these activities areallocated based on metrics such as relative revenues or estimated servicesprovided. We believe these allocations approximate the cost of providing thesefunctions. The operating expenses line item “Intercompany charges” on thefinancial summary below represents an allocation primarily of salaries andbenefits, depreciation and other costs for the sales, marketing and informationtechnology functions provided to us by FedEx Services. In addition, “Intercompanycharges” also includes allocated charges from our parent for management feesrelated to services received for general corporate oversight, includingexecutive officers and certain legal and finance functions. We believe thetotal amounts allocated reasonably reflect the cost of providing such services.

In addition, certain FedEx operatingcompanies provide transportation and related services for FedEx Express. Billingsfor such services are based on negotiated rates which we believe approximatefair value and are reflected as revenues of the billing company. Suchintercompany revenues and expenses are not separately identified in thefollowing information as the amounts are not material.

The keyindicators necessary to understand our operating results include:

·       theoverall customer demand for our various services;

·       thevolume of shipments transported through our network, as measured by our averagedaily volume and shipment weight;

·       themix of services purchased by our customers;

·       theprices we obtain for our services, as measured by average revenue per packageand pound (yield); and

·       ourability to manage our cost structure for capital expenditures and operatingexpenses such as salaries and benefits, fuel and maintenance and to match suchexpenses to shifting volume levels.

Except as otherwise specified,references to years indicate our fiscal year ended May 31, 2005 or ended May 31of the year referenced and comparisons are to the prior year.

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**NEW ACCOUNTINGPRONOUNCEMENTS**

Our parent company, FedEx,currently applies Accounting Principles Board Opinion No. (“APB”) 25,“Accounting for Stock Issued to Employers,” and its related interpretations tomeasure compensation expense for stock-based compensation plans. On December 16,2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, “Share-BasedPayment.” SFAS 123R is a revision of SFAS 123 and supersedes APB 25. Thenew standard requires companies to record compensation expense for stock-basedawards using a fair value method and is effective for annual periods beginningafter June 15, 2005 (effective in 2007 for FedEx). Compensation expensewill be recorded over the requisite service period, which is typically thevesting period of the award. FedEx plans to adopt this standard using themodified prospective method.

The impact of the adoption ofSFAS 123R cannot be predicted at this time because it will depend on levels ofshare-based payments granted by FedEx in the future, as well as the assumptionsand the fair value model used to value them, and the market value of FedEx’scommon stock. Based on FedEx’s historical experience, we do not expect theimpact of adopting SFAS 123R to be material to our reported consolidatedresults of operations.

**RESULTS OF OPERATIONS**

Thefollowing table compares revenues, operating expenses and operating income andmargin (dollars in millions) for the years ended May 31: 
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **                          | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change**  | ** ** |
| Revenues:                           |       |       |       |       |       |        |       |   |   |
| Package:                            |       |       |       |       |       |        |       |   |   |
| U.S. overnight box                  |       | $          | 5,969      |       | $          | 5,558       |       |   | 7 |   |   |
| U.S. overnight envelope             |       | 1,798      |       | 1,700      |       |        | 6          |   |   |
| U.S. deferred                       |       | 2,799      |       | 2,592      |       |        | 8          |   |   |
| Total U.S. domestic package revenue |       | 10,566     |       | 9,850      |       |        | 7          |   |   |
| International Priority (IP)         |       | 6,134      |       | 5,131      |       |        | 20         |   |   |
| Total package revenue               |       | 16,700     |       | 14,981     |       |        | 11         |   |   |
| Freight:                            |       |       |       |       |       |        |       |   |   |
| U.S.                                |       | 1,854      |       | 1,609      |       |        | 15         |   |   |
| International                       |       | 381        |       | 393        |       |        | (3         | ) |   |
| Total freight revenue               |       | 2,235      |       | 2,002      |       |        | 12         |   |   |
| Other                               |       | 429        |       | 400        |       |        | 7          |   |   |
| Total revenues                      |       | 19,364     |       | 17,383     |       |        | 11         |   |   |
| Operating expenses:                 |       |       |       |       |       |        |       |   |   |
| Salaries and employee benefits      |       | 7,540      |       | 7,245      |       |        | 4          |   |   |
| Purchased transportation            |       | 865        |       | 704        |       |        | 23         |   |   |
| Rentals and landing fees            |       | 1,597      |       | 1,521      |       |        | 5          |   |   |
| Depreciation and amortization       |       | 785        |       | 794        |       |        | (1         | ) |   |
| Fuel                                |       | 2,012      |       | 1,343      |       |        | 50         |   |   |
| Maintenance and repairs             |       | 1,272      |       | 1,189      |       |        | 7          |   |   |
| Business realignment costs          |       | —     |       | 422        |       |        | NM         |   |   |
| Intercompany charges                |       | 1,505      |       | 1,452      |       |        | 4          |   |   |
| Other                               |       | 2,397      |       | 2,085      |       |        | 15         |   |   |
| Total operating expenses            |       | 17,973     |       | 16,755     |       |        | 7          |   |   |
| Operating income                    |       | $          | 1,391      |       | $          | 628         |       |   | 121 |   |   |
| Operating margin                    |       | 7.2        | %          | 3.6        | %          |        |       |   |   |

 

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Thefollowing table compares selected statistics (in thousands, except yieldamounts) for the years ended May 31:
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **                          | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change**  | ** ** |
| Package Statistics                  |       |       |       |       |       |        |       |   |   |
| Average daily package volume (ADV): |       |       |       |       |       |        |       |   |   |
| U.S. overnight box                  |       | 1,184      |       | 1,179      |       |        | —     |   |   |
| U.S. overnight envelope             |       | 680        |       | 667        |       |        | 2          |   |   |
| U.S. deferred                       |       | 958        |       | 925        |       |        | 4          |   |   |
| Total U.S. domestic ADV             |       | 2,822      |       | 2,771      |       |        | 2          |   |   |
| IP                                  |       | 437        |       | 396        |       |        | 10         |   |   |
| Total ADV                           |       | 3,259      |       | 3,167      |       |        | 3          |   |   |
| Revenue per package (yield):        |       |       |       |       |       |        |       |   |   |
| U.S. overnight box                  |       | $          | 19.77      |       | $          | 18.49       |       |   | 7 |   |   |
| U.S. overnight envelope             |       | 10.37      |       | 10.00      |       |        | 4          |   |   |
| U.S. deferred                       |       | 11.46      |       | 10.99      |       |        | 4          |   |   |
| U.S. domestic composite             |       | 14.69      |       | 13.94      |       |        | 5          |   |   |
| IP                                  |       | 55.07      |       | 50.75      |       |        | 9          |   |   |
| Composite package yield             |       | 20.10      |       | 18.55      |       |        | 8          |   |   |
| Freight Statistics                  |       |       |       |       |       |        |       |   |   |
| Average daily freight pounds:       |       |       |       |       |       |        |       |   |   |
| U.S.                                |       | 8,885      |       | 8,519      |       |        | 4          |   |   |
| International                       |       | 1,914      |       | 2,093      |       |        | (9         | ) |   |
| Total average daily freight pounds  |       | 10,799     |       | 10,612     |       |        | 2          |   |   |
| Revenue per pound (yield):          |       |       |       |       |       |        |       |   |   |
| U.S.                                |       | $          | 0.82       |       | $          | 0.74        |       |   | 11 |   |   |
| International                       |       | 0.78       |       | 0.74       |       |        | 5          |   |   |
| Composite freight  yield            |       | 0.81       |       | 0.74       |       |        | 9          |   |   |

 

***Revenues***

Total revenuesincreased in 2005, principally due to higher IP revenues (particularly in Asia,U.S. outbound and Europe) and higher U.S. domestic package revenues. During2005, IP revenues experienced solid growth of 20% on volume growth of 10% and a9% increase in yield. Asia experienced strong average daily volume growthduring 2005 while outbound shipments from the United States, Europe and LatinAmerica continued to improve. IP yield increased across all regions during 2005due to higher fuel surcharge revenue, an increase in international averageweight per package and favorable exchange rate differences, partially offset bya decline in international average rate per pound.

U.S. domestic composite yield increased 5% in 2005,due to higher fuel surcharge revenue and increases in average weight perpackage and average rate per pound. U.S. domestic volumes increased 2% in 2005after several years of flat to negative growth. Freight revenue increasedduring 2005 due to higher yields and growth in U.S. domestic freight volumes,which more than offset the effect of lower international freight volumes. Ascapacity is added to our international network, we may see higher internationalfreight volume until higher yielding IP shipment traffic grows into the addedcapacity. We continue to prioritize sales efforts to fill space oninternational flights with higher yielding IP shipments. In January 2005, weimplemented an average list price increase of 4.6% on U.S. domestic shipmentsand U.S. outbound international shipments, while we lowered our fuel surchargeindex by 2%.

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Fuelsurcharge revenue increased in 2005 primarily due to higher jet fuel prices. Ourfuel surcharge is indexed to the spot price for jet fuel. Using this index, theU.S. domestic and outbound fuel surcharge and the international fuel surchargesranged as follows for the years ended May 31:
| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| U.S. Domestic and  Outbound Fuel Surcharge |       |     |       |     |       |
| Low                                        |       | 6.00     | %          | 3.00     | %          |
| High                                       |       | 13.00    |       | 6.50     |       |
| Average                                    |       | 8.96     |       | 4.38     |       |
| International Fuel Surcharges              |       |     |       |     |       |
| Low                                        |       | 3.00     |       | 2.00     |       |
| High                                       |       | 13.00    |       | 6.50     |       |
| Average                                    |       | 8.60     |       | 3.97     |       |

 

***Operating Income***

Operating income increasedsignificantly during 2005 as we benefited from a full year of savings from ourbusiness realignment programs (versus a half year in 2004.) During 2004,operating income included $422 million of costs related to these programs. Thesavings from these programs were reflected in lower growth of salaries andemployee benefits costs in 2005. During 2005, increases in revenues, savingsfrom our business realignment programs, the timing of adjustments to fuelsurcharges and ongoing cost control efforts more than offset higher fuel costs,incentive compensation, purchased transportation and maintenance costs and anAirline Stabilization Act charge of $48 million (included in other operatingexpenses).

Salaries and benefits werehigher during 2005 due to higher incentive compensation, increased medicalbenefit costs and wage rate increases. The increases in 2005 were partiallyoffset by savings from the business realignment initiatives.

Purchased transportation costsincreased at a greater rate than total revenues in 2005, led by IP volumegrowth requirements and higher utilization of contract pick-up and deliveryservices. Higher fuel costs incurred by these transportation providers werepartially passed through and included as part of purchased transportation costswhich also led to the disproportionate increase in 2005. Higher maintenancecosts during 2005 were driven by higher utilization of aircraft and a higheraverage age of certain types of our aircraft. Other expenses increased due primarilyto the Airline Stabilization Act charge of $48 million, higher aviationinsurance expense and increased expenses to support volume growth. Intercompanycharges increased during 2005 due to higher salaries and benefits andadvertising and promotion expenses at FedEx Services.

During 2005, fuel costs werehigher due to a 47% increase in the average price per gallon of aircraft fuel,while gallons consumed increased 4%. However, fuel surcharge revenue more thanoffset higher jet fuel prices in 2005. Depreciation and amortization expensedecreased in 2005, reflecting lower capital spending over the past severalyears.

***Business Realignment Costs***

During the first half of 2004,voluntary early retirement incentives with enhanced pension and postretirement healthcarebenefits were offered to certain groups of employees who were age 50 or older. Voluntarycash severance incentives were also offered to eligible employees. Theseprograms were limited to eligible U.S. salaried staff employees and managers. Approximately3,600 employees accepted offers under these programs. Costs were also incurredfor the elimination of certain management positions based on the staffreductions from the voluntary programs and other cost reduction initiatives. Costsfor the benefits provided under the voluntary programs were recognized in theperiod that eligible employees accepted the offer. Other costs associated withbusiness realignment activities were recognized in the period incurred.

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We recognized $422 million ofbusiness realignment costs during 2004. No material costs for these programswere incurred in 2005. At May 31, 2004, we had remaining businessrealignment related accruals of $23 million. The remaining accruals relate tomanagement severance agreements, which are payable over future periods. At May 31,2005, these accruals had decreased to $6 million due predominantly to cashpayments made in 2005.

Over the past few years, wehave taken many steps to bring our expense growth in line with revenue growthwhile maintaining our industry-leading service levels. The business realignmentprograms were another step in this ongoing process of reducing our coststructure to increase our competitiveness, meet the future needs of ouremployees and provide the expected financial returns for our shareholder.

***Other Income and Expense and Income Taxes***

Net interest expense decreased$7 million during 2005. The decrease in interest expense was primarily due to areduction in the level of our capital leases and higher capitalized interestdue to an increase in the number of aircraft undergoing modification in 2005.

Our effective tax rate was36.9% in 2005 and 33.5% in 2004. The effective tax rate in 2005 was favorablyimpacted by a lower effective state tax rate. The lower effective rate in 2004was primarily attributable to the favorable decision in the tax case discussedbelow, stronger international results and the results of tax audits during 2004.Our stronger international results, along with other factors, increased ourability to credit income taxes paid to foreign governments on foreign incomeagainst U.S. income taxes on the same income, thereby mitigating the exposureto double taxation. For 2006, we expect the effective tax rate to beapproximately 38%. The actual rate, however, will depend on a number offactors, including the amount and source of operating income.

In February 2005,the Sixth Circuit Court of Appeals reaffirmed the favorable ruling from theU.S. District Court in Memphis regarding the tax treatment of jet engine maintenancecosts, previously received during the first quarter of 2004. The period duringwhich the U.S. Department of Justice could appeal the decision lapsed in May 2005,making the decision final. The district court held that these costs wereordinary and necessary business expenses and properly deductible in our incometax returns. Neither the Sixth Circuit’s decision nor the government’s decisionnot to pursue an appeal had any impact on our financial condition, results ofoperations or tax rate during 2005. As a result of the District Court ruling, werecognized a one-time benefit of $26 million, net of tax, in the first quarterof 2004 primarily related to the reduction of accruals and the recognition ofinterest earned on amounts previously paid to the IRS. These adjustmentsaffected both net interest expense ($30 million pre-tax) and income tax expense($7 million). We expect to receive a refund payment of approximately $80million (before income taxes of approximately $16 million) from the U.S.government in the first quarter of 2006, which is included in currentreceivables.

***Airline Stabilization Act Charge***

During the second quarter of2005, the United States Department of Transportation (“DOT”) issued a finalorder in its administrative review of our claim for compensation under the AirTransportation Safety and System Stabilization Act (“Act”). Under itsinterpretation of the Act, the DOT determined that we were entitled to $72million of compensation, an increase of $3 million from its initialdetermination. Because we had previously received $101 million under the Act,the DOT demanded repayment of $29 million, which was made in December 2004.Because we could no longer conclude that collection of the entire $119 millionof such compensation recorded in 2002 was probable, we recorded a charge of $48million in the second quarter of 2005 ($30 million net of tax), representingthe DOT’s repayment demand of $29 million and the write-off of a $19 millionreceivable. We are vigorously contesting this determination judicially and willcontinue to aggressively pursue our compensation claim. Should any additionalamounts ultimately be recovered on this matter, they will be recognized in theperiod that they are realized.

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***Outlook***

We expect continued revenuegrowth during 2006 in both the domestic and international markets. Revenueincreases will be led by IP, where we expect volume and yield growth,particularly in Asia, U.S. outbound and Europe. We expect slight U.S. domesticrevenue growth, driven by expected increases in U.S. domestic yields.

We expect continued operatingmargin improvement during 2006. We anticipate additional improvement due to IPvolume growth, with solid incremental margins and increased yields benefitingfrom a favorable product mix trend. In addition, programs to improve operationalefficiency are expected to contribute to margin growth, partially offset bycosts associated with international route expansion. Capital expenditures areexpected to be higher in 2006 due to planned aircraft purchases to support IPvolume growth and vehicle replacements.

We recently launched theexpress industry’s first direct flight from mainland China to Europe. Thewestbound around-the-world flight launched in late 2005 was the initial phaseof a plan which extends our global connectivity leadership. We believe theseinvestments will enhance our growth prospects for these highly profitableservices.

Our pilots, who represent asmall number of our total employees, are employed under a collective bargainingagreement that became amendable on May 31, 2004. In accordance withapplicable labor law, we will continue to operate under our current agreementwhile we negotiate with our pilots. Negotiations with the pilots’ union beganin March 2004 and are ongoing. We cannot estimate the financial impact, ifany, the results of these negotiations may have on our future results ofoperations.

Increased securityrequirements for air cargo carriers have not had a material impact on ouroperating results for the periods presented. In November 2004, theTransportation Security Administration (“TSA”) proposed new rules enhancingmany of the security requirements for air cargo on both passenger and all-cargoaircraft. Because the TSA’s proposed rules are subject to comment, anyfinal rules may differ significantly from the proposed rules. Accordingly,it is not yet possible to estimate the impact, if any, that the adoption of newrules by the TSA or any other additional security requirements may have onour results of operations. However, it is possible that increased securityrequirements could impose substantial incremental costs on us and ourcompetitors.

Future results will dependupon a number of factors, including U.S. and international economic conditions,the impact from any terrorist activities or international conflicts, ourability to match our cost structure and capacity with shifting volume levels,our ability to effectively leverage our new service and growth initiatives andour ability to successfully conclude contract negotiations with our pilots. Inaddition, adjustments to our fuel surcharges lag changes in actual fuel pricespaid. Therefore, our operating income could be materially affected should theprice of jet fuel suddenly change by a significant amount. See “Forward-LookingStatements” for a more complete discussion of potential risks and uncertaintiesthat could materially affect our future performance.

***Seasonality of Business***

Our business is seasonal innature. Historically, the U.S. express package business experiences an increasein volumes in late November and December. International business,particularly in the Asia to U.S. market, peaks in October and November dueto U.S. holiday sales. Our first and third fiscal quarters, because they aresummer vacation and post winter-holiday seasons, have historically exhibitedlower volumes relative to other periods.

The transportation industry isaffected directly by the state of the overall domestic and internationaleconomies. Seasonal fluctuations affect volumes, revenues and earnings. Shipmentlevels, operating costs and earnings can also be adversely affected byinclement weather.

**FORWARD-LOOKINGSTATEMENTS**

Certain statements in this report, including (but notlimited to) those contained in the “Outlook” section of MD&A and the “EmployeeBenefit Plans” note to the consolidated financial statements, are 

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“forward-looking” statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 with respect to the financialcondition, results of operations, cash flows, plans, objectives, futureperformance and business of FedEx Express. Forward-looking statements includethose 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 statementsinvolve risks and uncertainties. Actual results may differ materially fromthose contemplated (expressed or implied) by such forward-looking statements,because of, among other things, potential risks and uncertainties, such as:

·       economicconditions in the domestic and international markets in which we operate;

·       anyimpacts on our business resulting from new domestic or international governmentregulation, including regulatory actions affecting aviation rights, securityrequirements and labor rules;

·       theimpact of any international conflicts or terrorist activities on the UnitedStates and global economies in general, the transportation industry inparticular, and what effects these events will have on our costs or the demandfor our services;

·       ourability to manage our cost structure for capital expenditures and operatingexpenses and match them, especially those relating to aircraft, vehicle andsort capacity, to shifting customer volume levels;

·       theability of FedEx to effectively operate, integrate and leverage the FedEx Kinko’sbusiness;

·       suddenchanges in fuel prices or currency exchange rates;

·       ourability to maintain or increase our fuel surcharges in response to rising fuelprices due to competitive pressures;

·       significantchanges in the volumes of shipments transported through our network, customerdemand for our various services or the prices we obtain for our services;

·       the outcome of negotiations to reach a newcollective bargaining agreement with the union that represents our pilots;

·       market acceptance of our new service and growthinitiatives;

·       competitionfrom other providers of transportation services, including our ability tocompete with new or improved services offered by our competitors;

·       theimpact of technology developments on our operations and on demand for ourservices;

·       disruptionsto our technology infrastructure, including our computer systems and Web site;

·       ourability to obtain and maintain aviation rights in important internationalmarkets;

·       adverse weather conditions or natural disasters;

·       availability of financing on terms acceptable tous; and

·       otherrisks and uncertainties you can find in the press releases and SEC filings ofFedEx and FedEx Express.

As a result of these and otherfactors, 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 futureevents or circumstances and those future events or circumstances may not occur.You should not place undue reliance on the forward-looking statements, whichspeak only as of the date of this report. We are under no obligation, and weexpressly disclaim any obligation, to update or alter any forward-lookingstatements, whether as a result of new information, future events or otherwise.

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**MANAGEMENT’S REPORT ON INTERNALCONTROL OVER FINANCIAL REPORTING**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,as amended). Our internal control over financial reporting includes, amongother things, defined policies and procedures for conducting and governing ourbusiness, sophisticated information systems for processing transactions and aproperly staffed, professional internal audit department at FedEx. Mechanismsare in place to monitor the effectiveness of our internal control overfinancial reporting and actions are taken to correct deficiencies identified. Ourprocedures for financial reporting include the active involvement of seniormanagement, FedEx’s Audit Committee and a staff of highly qualified financialand legal professionals.

Management, with the participation of our principalexecutive and financial officers, assessed our internal control over financialreporting as of May 31, 2005, the end of our fiscal year. Management basedits assessment on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria).

Based on this assessment, management has concludedthat our internal control over financial reporting was effective as of May 31,2005.

Our independent registered public accounting firm,Ernst & Young LLP, audited management’s assessment and theeffectiveness of our internal control over financial reporting. Ernst &Young has issued their report concurring with management’s assessment, which isincluded in this Annual Report on Form 10-K.

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

TheBoard of Directors and Stockholder

Federal Express Corporation

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that Federal Express Corporation maintained effective internalcontrol over financial reporting as of May 31, 2005, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). FederalExpress Corporation’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that FederalExpress Corporation maintained effective internal control over financialreporting as of May 31, 2005, is fairly stated, in all material respects,based on the COSO criteria. Also, in our opinion, Federal Express Corporationmaintained, in all material respects, effective internal control over financialreporting as of May 31, 2005, based on the COSO criteria.

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We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of FederalExpress Corporation as of May 31, 2005 and 2004 and related consolidatedstatements of income, changes in owner’s equity and comprehensive income, andcash flows for each of the three years in the period ended May 31, 2005 ofFederal Express Corporation and our report dated July 12, 2005 expressedan unqualified opinion thereon.
|                    | /s/ ERNST & YOUNG LLP |
|--------------------|--------------------------------|
| Memphis, Tennessee |
| July 12, 2005 |

 

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**REPORT OF INDEPENDENTREGISTEREDPUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholderFederal Express Corporation

We have audited the accompanying consolidated balancesheets of Federal Express Corporation as of May 31, 2005 and 2004, and therelated consolidated statements of income, changes in owner’s equity andcomprehensive income, and cash flows for each of the three years in the periodended May 31, 2005. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Federal Express Corporation at May 31, 2005 and 2004, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended May 31, 2005, in conformity with U.S. generallyaccepted accounting principles.

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Federal ExpressCorporation’s internal control over financial reporting as of May 31,2005, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated July 12, 2005 expressed an unqualified opinionthereon.
|                    | /s/ ERNST &  YOUNG LLP |
|--------------------|---------------------------------|
| Memphis, Tennessee |                            |
| July 12, 2005 |                            |

 

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**FEDERALEXPRESS CORPORATIONCONSOLIDATED BALANCE SHEETS(IN MILLIONS)**
| ** **                                                       | ** ** | **May 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                       | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **ASSETS**                                                       |       |             |       |   |   |
| CURRENT ASSETS                                                   |       |             |       |   |   |
| Cash and cash equivalents                                        |       | $                | 257        |   | $ | 274 |   |
| Receivables, less allowances of $92 and $119                     |       | 2,703            |       | 2,475 |   |
| Spare parts, supplies and fuel, less allowances of $142 and $124 |       | 204              |       | 205 |   |
| Deferred income taxes                                            |       | 403              |       | 393 |   |
| Prepaid expenses and other                                       |       | 70               |       | 71 |   |
| Total current assets                                             |       | 3,637            |       | 3,418 |   |
| PROPERTY AND  EQUIPMENT, AT COST                                 |       |             |       |   |   |
| Aircraft and related equipment                                   |       | 7,610            |       | 7,001 |   |
| Package handling and ground support equipment                    |       | 2,062            |       | 2,020 |   |
| Vehicles                                                         |       | 1,558            |       | 1,588 |   |
| Computer and electronic equipment                                |       | 703              |       | 673 |   |
| Other                                                            |       | 2,585            |       | 2,567 |   |
|                                                             |       | 14,518           |       | 13,849 |   |
| Less accumulated depreciation and amortization                   |       | 8,310            |       | 7,782 |   |
| Net property and equipment                                       |       | 6,208            |       | 6,067 |   |
| OTHER LONG-TERM  ASSETS                                          |       |             |       |   |   |
| Due from parent company                                          |       | 2,277            |       | 1,961 |   |
| Goodwill                                                         |       | 342              |       | 340 |   |
| Other assets                                                     |       | 629              |       | 419 |   |
| Total other long-term assets                                     |       | 3,248            |       | 2,720 |   |
|                                                             |       | $                | 13,093     |   | $ | 12,205 |   |
|                                                                  |            |                  |            |  |  |  |  |  |  |

 

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

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**FEDERAL EXPRESSCORPORATIONCONSOLIDATED BALANCE SHEETS (Continued)(IN MILLIONS, EXCEPT SHARE DATA)**
| ** **                                                                                              | ** ** | **May 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                              | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **LIABILITIES AND OWNER’S EQUITY**                                                                 |       |             |       |   |   |
| CURRENT LIABILITIES                                                                                     |       |             |       |   |   |
| Current portion of long-term debt                                                                       |       | $                | 109        |   | $ | 133 |   |
| Accrued salaries and employee benefits                                                                  |       | 809              |       | 687 |   |
| Accounts payable                                                                                        |       | 1,171            |       | 1,131 |   |
| Accrued expenses                                                                                        |       | 907              |       | 926 |   |
| Due to parent company and other FedEx subsidiaries                                                      |       | 184              |       | 247 |   |
| Total current liabilities                                                                               |       | 3,180            |       | 3,124 |   |
| LONG-TERM DEBT, LESS CURRENT PORTION                                                                    |       | 974              |       | 1,123 |   |
| OTHER LONG-TERM  LIABILITIES                                                                            |       |             |       |   |   |
| Deferred income taxes                                                                                   |       | 512              |       | 453 |   |
| Pension, postretirement healthcare and other benefit obligations                                        |       | 646              |       | 589 |   |
| Self-insurance accruals                                                                                 |       | 511              |       | 486 |   |
| Deferred lease obligations                                                                              |       | 520              |       | 494 |   |
| Deferred gains, principally related to aircraft transactions                                            |       | 398              |       | 422 |   |
| Other liabilities                                                                                       |       | 33               |       | 36 |   |
| Total other long-term liabilities                                                                       |       | 2,620            |       | 2,480 |   |
| COMMITMENTS AND  CONTINGENCIES                                                                          |       |             |       |   |   |
| OWNER’S EQUITY                                                                                     |       |             |       |   |   |
| Common stock, $0.10 par value; 1,000 shares authorized, issued and  outstanding     |       | —           |       | — |   |
| Additional paid-in capital                                                                              |       | 298              |       | 298 |   |
| Retained earnings                                                                                       |       | 6,036            |       | 5,213 |   |
| Accumulated other comprehensive loss                                                                    |       | (15              | )          | (33 | ) |
| Total owner’s equity                                                                               |       | 6,319            |       | 5,478 |   |
|                                                                                                    |       | $                | 13,093     |   | $ | 12,205 |   |
|                                                                                                         |            |                  |            |  |  |  |  |  |  |

 

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

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**FEDERALEXPRESS CORPORATIONCONSOLIDATED STATEMENTS OF INCOME(IN MILLIONS)**
| ** **                     | ** ** | **Years ended May 31,**                               | ** ** |
|--------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                     | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| REVENUES                       |       |                                                                 | $          | 19,364 |   |   |   | $ | 17,383 |   |   |   | $ | 16,351 |   |   |
| OPERATING EXPENSES:            |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits |       |                                                                 | 7,540      |   |   |   | 7,245 |   |   |   | 6,855 |   |   |
| Purchased transportation       |       |                                                                 | 865        |   |   |   | 704 |   |   |   | 608 |   |   |
| Rentals and landing fees       |       |                                                                 | 1,597      |   |   |   | 1,521 |   |   |   | 1,548 |   |   |
| Depreciation and amortization  |       |                                                                 | 785        |   |   |   | 794 |   |   |   | 801 |   |   |
| Fuel                           |       |                                                                 | 2,012      |   |   |   | 1,343 |   |   |   | 1,231 |   |   |
| Maintenance and repairs        |       |                                                                 | 1,272      |   |   |   | 1,189 |   |   |   | 1,084 |   |   |
| Business realignment costs     |       |                                                                 | —     |   |   |   | 422 |   |   |   | — |   |   |
| Intercompany charges, net      |       |                                                                 | 1,505      |   |   |   | 1,452 |   |   |   | 1,347 |   |   |
| Other                          |       |                                                                 | 2,397      |   |   |   | 2,085 |   |   |   | 2,091 |   |   |
|                           |       |                                                                 | 17,973     |   |   |   | 16,755 |   |   |   | 15,565 |   |   |
| OPERATING INCOME               |       |                                                                 | 1,391      |   |   |   | 628 |   |   |   | 786 |   |   |
| OTHER INCOME  (EXPENSE):       |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense               |       |                                                                 | (73        | ) |   |   | (64 | ) |   |   | (57 | ) |   |
| Interest income                |       |                                                                 | 45         |   |   |   | 29 |   |   |   | 13 |   |   |
| Other, net                     |       |                                                                 | (58        | ) |   |   | (52 | ) |   |   | (53 | ) |   |
|                           |       |                                                                 | (86        | ) |   |   | (87 | ) |   |   | (97 | ) |   |
| INCOME BEFORE INCOME  TAXES    |       |                                                                 | 1,305      |   |   |   | 541 |   |   |   | 689 |   |   |
| PROVISION FOR INCOME TAXES     |       |                                                                 | 482        |   |   |   | 181 |   |   |   | 258 |   |   |
| NET INCOME                     |       |                                                                 | $          | 823 |   |   |   | $ | 360 |   |   |   | $ | 431 |   |   |

 

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

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**FEDERALEXPRESS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(IN MILLIONS)**
| ** **                                                                     | ** ** | **Years ended May 31,**                               | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| OPERATING ACTIVITIES                                                           |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                     |       |                                                                 | $          | 823 |   |   |   | $ | 360 |   |   |   | $ | 431 |   |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                  |       |                                                                 | 785        |   |   |   | 794 |   |   |   | 801 |   |   |
| Provision for uncollectible accounts                                           |       |                                                                 | 68         |   |   |   | 76 |   |   |   | 78 |   |   |
| Deferred income taxes and other noncash items                                  |       |                                                                 | (1         | ) |   |   | (98 | ) |   |   | 204 |   |   |
| Changes in operating  assets and liabilities:                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Receivables                                                                    |       |                                                                 | (204       | ) |   |   | (218 | ) |   |   | (220 | ) |   |
| Other current assets                                                           |       |                                                                 | (15        | ) |   |   | 8 |   |   |   | 10 |   |   |
| Accounts payable and other operating liabilities                               |       |                                                                 | 228        |   |   |   | 628 |   |   |   | 87 |   |   |
| Other, net                                                                     |       |                                                                 | (23        | ) |   |   | (41 | ) |   |   | 3 |   |   |
| Cash provided by  operating activities                                         |       |                                                                 | 1,661      |   |   |   | 1,509 |   |   |   | 1,394 |   |   |
| INVESTING ACTIVITIES                                                           |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                           |       |                                                                 | (1,189     | ) |   |   | (585 | ) |   |   | (903 | ) |   |
| Other, net                                                                     |       |                                                                 | —     |   |   |   | 3 |   |   |   | 3 |   |   |
| Cash used in  investing activities                                             |       |                                                                 | (1,189     | ) |   |   | (582 | ) |   |   | (900 | ) |   |
| FINANCING ACTIVITIES                                                           |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Principal payments on debt                                                     |       |                                                                 | (173       | ) |   |   | (62 | ) |   |   | (9 | ) |   |
| Net payments to parent company                                                 |       |                                                                 | (316       | ) |   |   | (728 | ) |   |   | (464 | ) |   |
| Other, net                                                                     |       |                                                                 | —     |   |   |   | — |   |   |   | (2 | ) |   |
| Cash used in  financing activities                                             |       |                                                                 | (489       | ) |   |   | (790 | ) |   |   | (475 | ) |   |
| CASH AND CASH EQUIVALENTS                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                          |       |                                                                 | (17        | ) |   |   | 137 |   |   |   | 19 |   |   |
| Cash and cash  equivalents at beginning of period                              |       |                                                                 | 274        |   |   |   | 137 |   |   |   | 118 |   |   |
| Cash and cash equivalents at  end of period                                    |       |                                                                 | $          | 257 |   |   |   | $ | 274 |   |   |   | $ | 137 |   |   |

 

 

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

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**FEDERALEXPRESS CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN OWNER’SEQUITY AND COMPREHENSIVE INCOME(IN MILLIONS)**
| ** **                                                               | ** ** | ** **                         | ** ** | ** **     | ** ** | ** **                           | ** ** | **Accumulated**   | ** ** | ** **                   | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------|------------|----------------|------------|--------------------------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                                                               | ** ** | ** **                         | ** ** | **Additional** | ** ** | ** **                           | ** ** | **Other**         | ** ** | ** **                   | ** ** |
| ** **                                                               | ** ** | **  Common  ** | ** ** | **Paid-in**    | ** ** | **  Retained  ** | ** ** | **Comprehensive** | ** ** | **Total**                    | ** ** |
| ** **                                                               | ** ** | **Stock**                          | ** ** | **Capital**    | ** ** | **Earnings**                         | ** ** | **Loss**          | ** ** | **Owner’s Equity** | ** ** |
| BALANCE AT MAY 31,  2002                                            |       |                               | $          | —         |       |                                 |       | $                 | 298        |                         |       |   | $ | 4,422 |   |   |   | $ | (47 | ) |   |   | $ | 4,673 |   |   |
| Net income                                                               |       |                               | —     |           |       |                                 | —     |              |       |                         | 431        |   |   |   | — |   |   |   | 431 |   |   |
| Foreign currency  translation adjustment, net of deferred taxes of $8    |       |                               | —     |           |       |                                 | —     |              |       |                         | —     |   |   |   | 30 |   |   |   | 30 |   |   |
| Minimum pension  liability adjustment, net of deferred tax benefit of $9 |       |                               | —     |           |       |                                 | —     |              |       |                         | —     |   |   |   | (16 | ) |   |   | (16 | ) |   |
| Total comprehensive  income                                              | ** ** |                               |       |           |       |                                 |       |              |       |                         |       |   |   |   |   |   | ** ** | ** ** | **445** |   |   |
| BALANCE AT MAY 31,  2003                                            |       |                               | —     |           |       |                                 | 298        |              |       |                         | 4,853      |   |   |   | (33 | ) |   |   | 5,118 |   |   |
| Net income                                                               |       |                               | —     |           |       |                                 | —     |              |       |                         | 360        |   |   |   | — |   |   |   | 360 |   |   |
| Foreign currency  translation adjustment                                 |       |                               | —     |           |       |                                 | —     |              |       |                         | —     |   |   |   | 1 |   |   |   | 1 |   |   |
| Minimum pension  liability adjustment                                    |       |                               | —     |           |       |                                 | —     |              |       |                         | —     |   |   |   | (1 | ) |   |   | (1 | ) |   |
| Total comprehensive  income                                              | ** ** |                               |       |           |       |                                 |       |              |       |                         |       |   |   |   |   |   | ** ** | ** ** | **360** |   |   |
| BALANCE AT MAY 31,  2004                                            |       |                               | —     |           |       |                                 | 298        |              |       |                         | 5,213      |   |   |   | (33 | ) |   |   | 5,478 |   |   |
| Net income                                                               |       |                               | —     |           |       |                                 | —     |              |       |                         | 823        |   |   |   | — |   |   |   | 823 |   |   |
| Foreign currency  translation adjustment net of deferred taxes of $4     |       |                               | —     |           |       |                                 | —     |              |       |                         | —     |   |   |   | 22 |   |   |   | 22 |   |   |
| Minimum pension  liability adjustment net of deferred tax benefit of $2  |       |                               | —     |           |       |                                 | —     |              |       |                         | —     |   |   |   | (4 | ) |   |   | (4 | ) |   |
| Total comprehensive  income                                              | ** ** |                               |       |           |       |                                 |       |              |       |                         |       |   |   |   |   |   | ** ** | ** ** | **841** |   |   |
| BALANCE AT MAY 31,  2005                                            |       |                               | $          | —         |       |                                 |       | $                 | 298        |                         |       |   | $ | 6,036 |   |   |   | $ | (15 | ) |   |   | $ | 6,319 |   |   |

 

 

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

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**FEDERALEXPRESS CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1:DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*DESCRIPTION OF BUSINESS.  *Federal ExpressCorporation (“FedEx Express”) is the world’s largest express transportationcompany and a wholly owned subsidiary of FedEx Corporation (“FedEx”).

*FISCAL YEARS*.   Exceptas otherwise specified, references to years indicate our fiscal year ended May 31,2005 or ended May 31 of the year referenced.

*PRINCIPLES OF CONSOLIDATION*.   The consolidatedfinancial statements include the accounts of FedEx Express and its subsidiaries.All significant intercompany accounts and transactions have been eliminated.

*RECLASSIFICATIONS*.   Certain reclassificationshave been made to prior year financial statements to conform to the currentyear presentation.

*CREDIT RISK*.   We routinely grant credit to manyof our customers for transportation services without collateral. The risk ofcredit loss in our trade receivables is substantially mitigated by our creditevaluation process, short collection terms and sales to a large number ofcustomers, as well as the low revenue per transaction for most of ourtransportation services. Allowances for potential credit losses are determinedbased on historical experience and current evaluation of the composition ofaccounts receivable. Historically, credit losses have been within management’sexpectations.

*REVENUE RECOGNITION*.   Revenue is recognized upondelivery of shipments. For shipments in transit, revenue is recorded based onthe percentage of service completed at the balance sheet date. Estimates forfuture billing adjustments to revenue and accounts receivable are recognized atthe time of shipment for certain discounts, money-back service guarantees andbilling corrections. Delivery costs are accrued as incurred.

*ADVERTISING*.   Advertising costs are expensed asincurred and are classified in other operating expenses. Advertising expenseswere $76 million, $74 million and $64 million in 2005, 2004 and 2003,respectively. In addition, FedEx Corporate Services, Inc. (“FedEx Services”)performs marketing functions for us and the related charges are allocated to usand are reflected on the line item “Intercompany charges, net” on theconsolidated statements of income. We believe the total amounts allocatedapproximate the costs of providing such services.

*CASH EQUIVALENTS*.   Cash equivalents in excess ofcurrent operating requirements are invested in short-term, interest-bearinginstruments with maturities of three months or less at the date of purchase andare stated at cost, which approximates market value.

*SPARE PARTS, SUPPLIES AND FUEL*.   Spare parts arestated principally at weighted-average cost. Supplies and fuel are statedprincipally at standard cost, which approximates actual cost on a first-in,first-out basis. Allowances for obsolescence are provided, over the estimateduseful life of the related aircraft and engines, for spare parts expected to beon hand at the date the aircraft are retired from service, and for spare partscurrently identified as excess or obsolete. These allowances are based onmanagement estimates, which are subject to change.

*PROPERTY AND EQUIPMENT*.   Expenditures for majoradditions, improvements, flight equipment modifications and certain equipmentoverhaul costs are capitalized when such costs are determined to extend theuseful life of the asset or are part of the cost of acquiring the asset. Maintenanceand 

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repairs are charged to expense as incurred, except forcertain aircraft-related major maintenance costs on one of our aircraft fleettypes, which are capitalized and amortized over their estimated service lives. Thenet book value of these capitalized major maintenance costs at May 31,2005 and 2004 was $60 million and $71 million, respectively. Gains and losseson sales of property used in operations are classified with depreciation andamortization.

Forfinancial reporting purposes, depreciation and amortization of property andequipment are provided on a straight-line basis over the asset’s service lifeor related lease term. For income tax purposes, depreciation is generallycomputed using accelerated methods. The depreciable lives and net book value ofour property and equipment is as follows (dollars in millions):
| ** **                                             | ** ** | ** **     | ** ** | **Net Book Value at May 31,**                           | ** ** |
|--------------------------------------------------------|------------|----------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Range**      | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Wide-body aircraft  and related equipment              |       | 15 to 25 years |       |                                                                             | $          | 3,948 |   |   |   | $ | 3,587 |   |   |
| Narrow-body and feeder  aircraft and related equipment |       | 5 to 15 years  |       |                                                                             | 330        |   |   |   | 332 |   |   |
| Package handling and  ground support equipment         |       | 5 to 30 years  |       |                                                                             | 432        |   |   |   | 496 |   |   |
| Vehicles                                               |       | 5 to 9 years   |       |                                                                             | 382        |   |   |   | 458 |   |   |
| Computer and  electronic equipment                     |       | 3 to 5 years   |       |                                                                             | 114        |   |   |   | 115 |   |   |
| Facilities and other                                   |       | 3 to 30 years  |       |                                                                             | 1,002      |   |   |   | 1,079 |   |   |

 

Substantially all property and equipment have nomaterial residual values. The majority of aircraft costs are depreciated on astraight-line basis over 15 to 18 years. We periodically evaluate the estimatedservice lives and residual values used to depreciate our aircraft and otherequipment. This evaluation may result in changes in the estimated lives andresidual values. Such changes did not materially affect depreciation expense inany period presented. Depreciation expense, excluding gains and losses on salesof property and equipment used in operations, was $783 million, $791 millionand $797 million in 2005, 2004 and 2003, respectively. Depreciation andamortization expense includes amortization of assets under capital lease.

*CAPITALIZED INTEREST*.   Interest on funds used tofinance the acquisition and modification of aircraft and construction ofcertain facilities up to the date the asset is ready for its intended use iscapitalized and included in the cost of the asset. Capitalized interest was $13million in 2005, $7 million in 2004 and $13 million in 2003.

*IMPAIRMENT OF LONG-LIVED ASSETS.  *Long-lived assets are reviewed forimpairment when circumstances indicate the carrying value of an asset may notbe recoverable. For assets that are to be held and used, an impairment isrecognized when the estimated undiscounted cash flows associated with the assetor group of assets are less than their carrying value. If impairment exists, anadjustment is made to write the asset down to its fair value, and a loss isrecorded as the difference between the carrying value and fair value. Fairvalues are determined based on quoted market values, discounted cash flows orinternal and external appraisals, as applicable. Assets to be disposed of arecarried at the lower of carrying value or estimated net realizable value.

*PENSION AND POSTRETIREMENT HEALTHCARE PLANS.  *Thesedefined benefit plans are measured as of the last day of our fiscal thirdquarter of each year using actuarial techniques that reflect estimates formortality, turnover and expected retirement. In addition, management makesassumptions concerning future salary increases, future expected long-termreturns on plan assets and future increases in healthcare costs. Discount ratesare established as of the measurement date using theoretical bond models thatselect high-grade corporate bonds with cash flows that correlate to theexpected payouts of the applicable liabilities. A calculated-value method isemployed for purposes of determining the expected return on the plan assetcomponent of net periodic pension cost for our 

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qualified U.S. pension plans. Generally, we do notfund defined benefit plans when such funding provides no current tax deduction.

*GOODWILL.  *Goodwill is recognized for the excessof the purchase price over the fair value of tangible and identifiableintangible net assets of businesses acquired. Goodwill is reviewed at leastannually for impairment. Unless circumstances otherwise dictate, we perform ourannual impairment testing in the fourth quarter.

*INCOME TAXES*.   Deferred income taxes areprovided for the tax effect of temporary differences between the tax basis ofassets and liabilities and their reported amounts in the financial statements. Theliability method is used to account for income taxes, which requires deferredtaxes to be recorded at the statutory rate in effect when the taxes are paid.

We have not recognized deferred taxes for U.S. federalincome taxes on foreign subsidiaries’ earnings that are deemed to bepermanently reinvested and any related taxes associated with such earnings arenot material. Pretax earnings of foreign operations for 2005, 2004 and 2003were approximately $591 million, $425 million and $145 million, respectively,which represent only a portion of total results associated with internationalshipments.

*SELF-INSURANCE ACCRUALS*.   We are primarilyself-insured for workers’ compensation claims, vehicle accidents and generalliabilities, benefits paid under employee healthcare programs and long-termdisability. Accruals are primarily based on the actuarially estimated,undiscounted cost of claims, which includes incurred-but-not-reported claims. Currentworkers’ compensation claims, vehicle and general liability, employeehealthcare claims and long-term disability are included in accrued expenses. Weself-insure up to certain limits that vary by type of risk. Periodically, weevaluate the level of insurance coverage and adjust insurance levels based onrisk tolerance and premium expense.

*DEFERRED LEASE OBLIGATIONS*.   While certainaircraft and facility leases contain fluctuating or escalating payments, therelated rent expense is recorded on a straight-line basis over the lease term.The deferred lease obligation is the net cumulative excess of rent expense overrent payments.

*DEFERRED GAINS*.   Gains on the sale and leasebackof aircraft and other property and equipment are deferred and amortized ratablyover the life of the lease as a reduction of rent expense. Substantially all ofthese deferred gains were related to aircraft transactions.

*STOCK COMPENSATION.  *Weparticipate in the stock-based compensation plans of our parent, FedEx. AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and its related interpretations are applied by FedEx to measureexpense for stock-based compensation plans. As a result, no compensationexpense is recorded for stock options when the exercise price is equal to orgreater than the market price of our common stock at the date of grant. Forawards by FedEx of restricted stock to our employees, we recognize the fairvalue of the awards ratably over their explicit service period.

*EMPLOYEES UNDER COLLECTIVEBARGAINING ARRANGEMENTS.  *Our pilots, who represent asmall number of our total employees, are employed under a collective bargainingagreement that became amendable on May 31, 2004. In accordance withapplicable labor law, we will continue to operate under our current agreement whilewe negotiate with our pilots.  Contract negotiationswith the pilots’ union began in March 2004 and are ongoing. We cannotestimate the financial impact, if any, the results of these negotiations mayhave on our future results of operations.

*AIRLINE STABILIZATION ACT CHARGE*.   During thesecond quarter of 2005, the United States Department of Transportation (“DOT”)issued a final order in its administrative review of our claim for compensationunder the Air Transportation Safety and System Stabilization Act (“Act”). Underits interpretation of the Act, the DOT determined that we were entitled to $72million of compensation, an 

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increase of $3 million from its initial determination.Because we had previously received $101 million under the Act, the DOT demandedrepayment of $29 million which was made in December 2004. Because we couldno longer conclude that collection of the entire $119 million recorded in 2002was probable, we recorded a charge of $48 million in the second quarter of2005, representing the DOT’s repayment demand of $29 million and the write-offof a $19 million receivable. We are vigorously contesting thisdetermination judicially and will continue to aggressively pursue ourcompensation claim. Should any additional amounts ultimately be recovered by uson this matter, they will be recognized in the period that they are realized.

*FOREIGN CURRENCY TRANSLATION*.   Translation gainsand losses of foreign operations that use local currencies as the functionalcurrency are accumulated and reported, net of applicable deferred income taxes,as a component of accumulated other comprehensive loss within owner’s equity. Transactiongains and losses that arise from exchange rate fluctuations on transactionsdenominated in a currency other than the local currency are included in theresults of operations. Cumulative net foreign currency translation gains and(losses) in accumulated other comprehensive loss were $6 million, ($16) millionand ($17) million at May 31, 2005, 2004 and 2003, respectively.

*USE OF ESTIMATES*.   Thepreparation of our consolidated financial statements requires the use ofestimates and assumptions that affect the reported amounts of assets andliabilities, the reported amounts of revenues and expenses and the disclosureof contingent liabilities. Management makes its best estimate of the ultimateoutcome for these items based on historical trends and other informationavailable when the financial statements are prepared. Changes in estimates arerecognized in accordance with the accounting rules for the estimate, whichis typically in the period when new information becomes available to management.Areas where the nature of the estimate makes it reasonably possible that actualresults could materially differ from amounts estimated include: self-insuranceaccruals; employee retirement plan obligations; income tax liabilities;accounts receivable allowances; obsolescence of spare parts; contingentliabilities; and impairment assessments on long-lived assets (includinggoodwill).

**NOTE 2:RECENT ACCOUNTING PRONOUNCEMENTS**

On December 16, 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS 123R, “Share-Based Payment.”  SFAS 123R is a revision of SFAS 123 andsupersedes APB 25. The new standard requires companies to record compensationexpense for stock-based awards using a fair value method and is effective forannual periods beginning after June 15, 2005 (effective in 2007 for FedEx).Compensation expense will be recorded over the requisite service period, whichis typically the vesting period of the award. FedEx plans to adopt thisstandard using the modified prospective basis.

The impact of the adoption ofSFAS 123R cannot be predicted at this time because it will depend on levels ofshare-based payments granted by FedEx in the future, as well as the assumptionsand the fair value model used to value them, and the market value of FedEx’scommon stock. Based on FedEx’s historical experience, we do not expect theimpact of adopting SFAS 123R to be material to our reported consolidatedresults of operations.

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**NOTE 3: INTANGIBLE ASSETS**

Ourintangible assets, included in other long-term assets on the accompanyingbalance sheets, were as follows (in millions):
| ** **       | ** ** | **May 31, 2005** | ** ** | **May 31, 2004** | ** ** |
|------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Gross Carrying**    | ** ** | **Accumulated**            | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| ** **       | ** ** | **Amount**                 | ** ** | **Amortization**           | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Contract related |       |                       | 73         |                       |       |   | (47 | ) |   |   | 73 |   |   |   | (42 | ) |   |
|                  |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense forintangible assets was $5 million in 2005, 2004 and 2003. Estimated amortizationexpense is $5 million for each of the five succeeding fiscal years.

**NOTE 4: BUSINESS REALIGNMENT COSTS**

During the first half of 2004, voluntary earlyretirement incentives with enhanced pension and postretirement healthcarebenefits were offered to certain groups of our employees who were age 50 orolder. Voluntary cash severance incentives were also offered to eligibleemployees. These programs were limited to eligible U.S. salaried staffemployees and managers. Approximately 3,600 employees accepted offers underthese programs. Costs were also incurred for the elimination of certainmanagement positions, based on the staff reductions from the voluntary programsand other cost reduction initiatives. Costs for the benefits provided under thevoluntary programs were recognized in the period that eligible employees acceptedthe offer. Other costs associated with business realignment activities wererecognized in the period incurred.

Thecomponents of our business realignment costs and changes in the relatedaccruals were as follows for the year ended May 31, 2004 (in millions):
| ** **                                      | ** ** | **Voluntary**  | ** ** | **Voluntary** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                                      | ** ** | **Retirement** | ** ** | **Severance** | ** ** | **Other(1)** | ** ** | **Total**  | ** ** |
| Beginning accrual  balances                     |       |           | $          | —        |       |         |       | $          | —     |   |   |   | $ | — |   |   | $ | — |   |
| Charged to expense                              |       |           | 202        |          |       |         | 158        |       |       |   | 62 |   |   | 422 |   |
| Cash paid                                       |       |           | (8         | )             |       |         | (152       | )          |       |   | (28 | ) |   | (188 | ) |
| Amounts charged to  other assets/liabilities(2) |       |           | (194       | )             |       |         | —     |       |       |   | (17 | ) |   | (211 | ) |
| Ending accrual  balances                        |       |           | $          | —        |       |         |       | $          | 6          |   |   |   | $ | 17 |   |   | $ | 23 |   |

 

(1)    Other includes costs for managementseverance agreements, which are payable over future periods, includingcompensation related to the modification of previously granted stock optionsand incremental pension and healthcare benefits. Other also includesprofessional fees directly associated with the business realignment initiativesand relocation costs.

(2)    Amounts charged to otherassets/liabilities relate primarily to incremental pension and healthcarebenefits.

No material costs related tothese programs were incurred during 2005. At May 31, 2004, we hadremaining business realignment related accruals of $23 million. The remainingaccruals relate to management severance agreements, which are payable overfuture periods. At May 31, 2005, these accruals had decreased to $6million due predominantly to cash payments made during 2005.

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**NOTE 5: SELECTED CURRENT LIABILITIES**

The componentsof selected current liability captions were as follows (in millions):
| ** **                              | ** ** | **May 31,** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Accrued Salaries and  Employee Benefits |       |             |       |   |   |
| Salaries                                |       | $                | 116        |   | $ | 97 |   |
| Employee benefits                       |       | 356              |       | 269 |   |
| Compensated absences                    |       | 337              |       | 321 |   |
|                                    |       | $                | 809        |   | $ | 687 |   |
| Accrued Expenses                        |       |             |       |   |   |
| Self-insurance accruals                 |       | $                | 332        |   | $ | 312 |   |
| Taxes other than income taxes           |       | 239              |       | 241 |   |
| Other                                   |       | 336              |       | 373 |   |
|                                    |       | $                | 907        |   | $ | 926 |   |

 

**NOTE 6:LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS**

Thecomponents of our long-term debt were as follows (in millions):
| ** **                                                      | ** ** | **May 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Senior unsecured debt                                           |       |             |       |   |   |
| Interest rate of 9.65%, due in 2013                             |       | $                | 299        |   | $ | 299 |   |
| Interest rate of 7.60%, due in 2098                             |       | 239              |       | 239 |   |
| Medium term notes                                               |       |             |       |   |   |
| Interest rate of 9.95%, due in 2007                             |       | 19               |       | 19 |   |
|                                                            |       | 557              |       | 557 |   |
| Capital lease  obligations                                      |       | 386              |       | 501 |   |
| Other debt, interest  rates of 2.46% to 9.98%, due through 2008 |       | 140              |       | 198 |   |
|                                                            |       | 1,083            |       | 1,256 |   |
| Less current portion                                            |       | 109              |       | 133 |   |
|                                                            |       | $                | 974        |   | $ | 1,123 |   |

 

Capital lease obligations include certain specialfacility revenue bonds that have been issued by municipalities primarily tofinance the acquisition and construction of various airport facilities andequipment. These bonds require interest payments at least annually, withprincipal payments due at the end of the related lease agreements. In addition,during 2004, we amended two leases for MD11 aircraft which required us torecord $110 million in both fixed assets and long-term liabilities. During2003, we amended four leases for MD11 aircraft, which commit us to firmpurchase obligations for two of these aircraft during both 2005 and 2006. As aresult, these amended leases were accounted for as capital leases, which added$221 million to both fixed assets and long-term liabilities at May 31,2003. Two of these aircraft were paid off in 2005 when the purchase obligationbecame due.

Other long-term debt includes $125 million related totwo leased MD11 aircraft that are consolidated under the provisions ofFinancial Accounting Standards Board Interpretation No. (“FIN”) 46, “Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51.”  The debt requires interest at LIBOR plus amargin and is due in installments through March 30, 2007. See Note 13for further discussion.

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We issue other financial instruments in the normalcourse of business to support our operations. Letters of credit at May 31,2005 were $343 million. These instruments are generally required under certainU.S. self-insurance programs and are used in the normal course of internationaloperations. The underlying liabilities insured by these instruments arereflected in the balance sheet, where applicable. Therefore, no additionalliability is reflected for the letters of credit.

Scheduled annual principalmaturities of debt, exclusive of capital leases, for the five years subsequentto May 31, 2005, are as follows (in millions): 
| 2006 |   | $      | 15         | ** ** |
|------|--------|--------|------------|------------|
| 2007 |   | 144    | ** ** |
| 2008 |   | — | ** ** |
| 2009 |   | — | ** ** |
| 2010 |   | — | ** ** |

 

Long-term debt, exclusive ofcapital leases, had carrying values of $697 million and $755 million at May 31,2005 and 2004, respectively, compared with estimated fair values ofapproximately $851 million and $863 million at those respective dates. Theestimated fair values were determined based on quoted market prices or on thecurrent rates offered for debt with similar terms and maturities.

**NOTE 7: LEASE COMMITMENTS**

We utilize certain aircraft, land, facilities andequipment under capital and operating leases that expire at various datesthrough 2039. In addition, supplemental aircraft are leased under agreements thatgenerally provide for cancelation upon 30 days’ notice.

Thecomponents of property and equipment recorded under capital leases were asfollows (in millions):
| ** **                                     | ** ** | **May 31,** | ** ** |
|------------------------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Aircraft                                       |       | $                | 232        |   | $ | 344 |   |
| Package handling and  ground support equipment |       | 167              |       | 168 |   |
| Vehicles                                       |       | 36               |       | 39 |   |
| Other, principally  facilities                 |       | 134              |       | 133 |   |
|                                           |       | 569              |       | 684 |   |
| Less accumulated amortization                  |       | 314              |       | 305 |   |
|                                           |       | $                | 255        |   | $ | 379 |   |

 

Rentexpense under operating leases was as follows (in millions):
| ** **         | ** ** | **For years ended May 31,** | ** ** |
|--------------------|------------|-------------------------------------------------|------------|
| ** **         | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Minimum rentals    |       | $                                               | 1,206      |   | $ | 1,221 |   | $ | 1,271 |   |
| Contingent rentals |       | 165                                             |       | 120 |   | 107 |   |
|               |       | $                                               | 1,371      |   | $ | 1,341 |   | $ | 1,378 |   |

 

Contingent rentals are based on equipment usage.

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A summaryof future minimum lease payments under capital leases at May 31, 2005 isas follows (in millions):
| 2006                                         |   | $   | 110    |   |
|----------------------------------------------|--------|-----|--------|--------|
| 2007                                         |   | 19  |   |
| 2008                                         |   | 98  |   |
| 2009                                         |   | 10  |   |
| 2010                                         |   | 96  |   |
| Thereafter                                   |   | 130 |   |
|                                         |   | 463 |   |
| Less amount  representing interest           |   | 77  |   |
| Present value of net minimum  lease payments |   | $   | 386    |   |

 

A summaryof future minimum lease payments under noncancelable operating leases(principally aircraft, retail locations and facilities) with an initial orremaining term in excess of one year at May 31, 2005 is as follows (inmillions):
| ** ** | ** ** | **Aircraft and Related** | ** ** | **Facilities and** | ** ** | ** ** | ** ** |
|------------|------------|------------------------------------|------------|-------------------------|------------|------------|------------|
| ** ** | ** ** | **Equipment**                      | ** ** | **Other**               | ** ** | **Total**  | ** ** |
| 2006       |       |                               | $          | 590                     |       |       |       | $ | 600 |   |   | $ | 1,190 |   |
| 2007       |       |                               | 606        |                    |       |       | 546        |   |   | 1,152 |   |
| 2008       |       |                               | 585        |                    |       |       | 501        |   |   | 1,086 |   |
| 2009       |       |                               | 555        |                    |       |       | 419        |   |   | 974 |   |
| 2010       |       |                               | 544        |                    |       |       | 335        |   |   | 879 |   |
| Thereafter |       |                               | 4,460      |                    |       |       | 2,114      |   |   | 6,574 |   |
|       |       |                               | $          | 7,340                   |       |       |       | $ | 4,515 |   |   | $ | 11,855 |   |

 

The weighted average remaining lease term of alloperating leases outstanding at May 31, 2005 was approximately 7 years. Whilecertain of our lease agreements contain covenants governing the use of theleased assets or require us to maintain certain levels of insurance, none of ourlease agreements include material financial covenants or limitations.

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

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**NOTE 8: INCOME TAXES**

Ouroperations are included in the consolidated federal income tax return of FedEx.Our income tax provision approximates the amount which would have been recordedon a separate return basis. The components of the provision for income taxesfor the years ended May 31 were as follows (in millions):
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current provision  (benefit)  |       |     |       |     |       |     |       |
| Domestic:                     |       |     |       |     |       |     |       |
| Federal                       |       | $        | 336        |     | $          | 146      |       | $ | (22 | ) |
| State and local               |       | 24       |       | 24       |       | 10       |       |
| Foreign                       |       | 98       |       | 82       |       | 38       |       |
|                          |       | 458      |       | 252      |       | 26       |       |
| Deferred (benefit)  provision |       |     |       |     |       |     |       |
| Domestic:                     |       |     |       |     |       |     |       |
| Federal                       |       | 30       |       | (61      | )          | 216      |       |
| State and local               |       | (6       | )          | (10      | )          | 16       |       |
| Foreign                       |       | —   |       | —   |       | —   |       |
|                          |       | 24       |       | (71      | )          | 232      |       |
|                          |       | $        | 482        |     | $          | 181      |       | $ | 258 |   |

 

Areconciliation of the statutory federal income tax rate to the effective incometax rate for the years ended May 31 was as follows:
| ** **                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory U.S. income  tax rate                      |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| Increase resulting  from:                            |       |     |       |     |       |     |       |
| State and local income taxes, net of federal benefit |       | 0.9      |       | 1.7      |       | 2.4      |       |
| Foreign operations                                   |       | —   |       | (2.0     | )          | (0.3     | )          |
| Other, net                                           |       | 1.0      |       | (1.2     | )          | 0.4      |       |
| Effective tax rate                                   |       | 36.9     | %          | 33.5     | %          | 37.5     | %          |

 

The 36.9% effective tax rate in 2005 was favorablyimpacted by a lower effective state tax rate. The lower 33.5% effective rate in2004 was primarily attributable to the favorable decision in the tax casediscussed below, stronger than anticipated international results and theresults of tax audits in 2004. Our stronger international results, along withother factors, increased our ability to credit income taxes paid to foreigngovernments on foreign income against U.S. income taxes paid on the sameincome, thereby mitigating the exposure to double taxation.

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Thesignificant components of deferred tax assets and liabilities as of May 31were as follows (in millions):
| ** **                                   | ** ** | **2005**                      | ** ** | **2004**                           | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **Deferred  Tax Assets** | ** ** | **Deferred  Tax Liabilities** | ** ** | **Deferred  Tax Assets** | ** ** | **Deferred  Tax Liabilities** | ** ** |
| Property, equipment, leases  and intangibles |       |                          | $          | 287                                |       |   |   | $ | 902 |   |   |   | $ | 297 |   |   |   | $ | 859 |   |   |
| Employee benefits                            |       |                          | 338        |                               |       |   | 39 |   |   |   | 321 |   |   |   | 40 |   |   |
| Self-insurance  accruals                     |       |                          | 260        |                               |       |   | — |   |   |   | 241 |   |   |   | — |   |   |
| Other                                        |       |                          | 231        |                               |       |   | 284 |   |   |   | 210 |   |   |   | 231 |   |   |
| Net operating  loss/credit carryforwards     |       |                          | 20         |                               |       |   | — |   |   |   | 25 |   |   |   | — |   |   |
| Valuation allowance                          |       |                          | (20        | )                                  |       |   | — |   |   |   | (24 | ) |   |   | — |   |   |
|                                         |       |                          | $          | 1,116                              |       |   |   | $ | 1,225 |   |   |   | $ | 1,070 |   |   |   | $ | 1,130 |   |   |

 

The net deferred tax liability of $109 million for2005 has been classified in the balance sheet as a current deferred tax assetof $403 million and a non-current deferred tax liability of $512 million. In2004, the net deferred tax liability of $60 million is classified in thebalance sheet as a current deferred tax asset of $393 million and a non-currentdeferred tax liability of $453 million.

The valuation allowance represents amounts reservedfor net operating loss and tax credit carryforwards, which expire over varyingperiods starting in 2006. As a result of this and other factors, we believethat substantially all of these deferred assets may not be realized. The netdecrease in the valuation allowance of $4 million was primarily due toadjustments in the operating loss and carryforward items in 2005.

In February 2005, theSixth Circuit Court of Appeals reaffirmed the favorable ruling from the U.S.District Court in Memphis regarding the tax treatment of jet engine maintenancecosts, previously received during the first quarter of 2004. The period duringwhich the U.S. Department of Justice could appeal the decision lapsed in May 2005,making the decision final. The district court held that these costs wereordinary and necessary business expenses and properly deductible in our incometax returns. Neither the Sixth Circuit’s decision nor the government’s decisionnot to pursue an appeal had any impact on our financial condition, results ofoperations or tax rate during 2005. As a result of the District Court ruling, werecognized a one-time benefit of $26 million, net of tax, in the first quarterof 2004, primarily related to the reduction of accruals and the recognition ofinterest earned on amounts previously paid to the IRS. These adjustmentsaffected both net interest expense ($30 million pretax) and income tax expense($7 million). We expect to receive a refund payment of approximately $80million (before income taxes of approximately $16 million) from the U.S.government in the first quarter of 2006, which is included in currentreceivables.

**NOTE 9: EMPLOYEE BENEFIT PLANS**

*BENEFIT PLANS SPONSOREDBY FEDEX*

*PENSION PLANS.  *A majority of our employees arecovered by the FedEx Corporation Employees’ Pension Plan, a defined benefitpension plan sponsored by our parent, FedEx. The plan covers certain U.S.employees age 21 and over with at least one year of service and providesbenefits based on average earnings and years of service. Eligible employees asof May 31, 2003 were given the opportunity to make a one-time election toaccrue future pension benefits under either a new cash balance formula which wecall the Portable Pension Account or a traditional pension benefit formula. Benefitsprovided under the traditional formula are based on average earnings and yearsof service. Under the Portable Pension Account, the retirement benefit isexpressed as a dollar amount in a 

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notional account that grows with annual credits basedon pay, age, and years of credited service, and interest on the notionalaccount balance. In either case, employees retained all benefits previouslyaccrued under the traditional pension benefit formula and continue to receivethe benefit of future salary increases on benefits accrued as of May 31,2003. Eligible employees hired after May 31, 2003 receive benefitsexclusively under the Portable Pension Account.

Ouremployees make up in excess of 80% of the participants in this plan. For moreinformation about this plan and the related accounting assumptions, refer tothe financial statements of FedEx included in its Form 10-K for the yearended May 31, 2005. Information regarding the funded status of the FedExplan was as follows (in millions):
| ** **                      | ** ** | **May 31,** | ** ** |
|---------------------------------|------------|------------------|------------|
| ** **                      | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Projected benefit  obligation   |       | $                | 9,835      |   | $ | 8,192 |   |
| Accumulated benefit  obligation |       | 8,446            |       | 6,998 |   |
| Fair value of plan assets       |       | 8,606            |       | 7,602 |   |
|                                 |            |                  |            |  |  |  |  |

 

Theweighted average actuarial assumptions for the FedEx plan were as follows:
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                   |       | 6.285    | %          | 6.78     | %          | 6.99     | %          |
| Rate of increase in  future compensation levels |       | 3.15     |       | 3.15     |       | 3.15     |       |
| Expected long-term rate of return  on assets    |       | 9.10     |       | 9.10     |       | 10.10    |       |

 

The expected long-term rate ofreturn assumptions for each asset class are selected based on historical relationshipsbetween the asset classes and the economic and capital market environmentsupdated for current conditions.

We incurred a net periodicbenefit cost of $256 million, $250 million and $161 million in 2005, 2004 and2003, respectively, for our participation in the FedEx Corporation Employees’Pension Plan. The increase in our 2004 expense was a result of a lower discountrate, a lower expected long-term rate of return and a reduction in the value ofplan assets. This expense is included in the salaries and employee benefitscaption in the accompanying statements of income.

*DEFINED CONTRIBUTION PLANS*.   Definedcontribution plans are in place covering a majority of U.S. employees. Expenseunder these plans was $32 million, $29 million and $32 million in 2005, 2004and 2003, respectively.

*BENEFIT PLANS SPONSOREDBY FEDERAL EXPRESS*

*PENSION PLANS.  *We also sponsor or participatein nonqualified benefit plans covering certain of our U.S. employee groups andother pension plans covering certain of our international employees. Thenonqualified benefit plans are not funded because such funding provides nocurrent tax benefit. The international defined benefit pension plans providebenefits primarily based on final earnings and years of service and are fundedin accordance with local laws and income tax regulations. For the planssponsored by us, our assets are primarily invested in equities (approximately65%) with the remainder in fixed income and other securities. The actual assetallocations approximate the target allocations.

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Benefitpayments for the plans sponsored by us, which reflect expected future service,are expected to be paid as follows for the years ending May 31 (inmillions):
| 2006      |   | $  | 14     |   |
|-----------|--------|----|--------|--------|
| 2007      |   | 13 |   |
| 2008      |   | 14 |   |
| 2009      |   | 15 |   |
| 2010      |   | 12 |   |
| 2011-2015 |   | 78 |   |

 

These estimates are based on assumptions about futureevents. Actual benefit payments may vary significantly from these estimates.

*POSTRETIREMENT HEALTHCARE PLANS*.   We sponsor aplan offering medical, dental and vision coverage to eligible U.S. retirees andtheir eligible dependents. For Medicare eligible non-pilot eligible retireesand their eligible dependents, we only provide a fixed subsidy toward thepremium payment for an AARP Medigap policy. U.S. employees become eligible forthese benefits at age 55 and older, if they have permanent, continuous serviceof at least 10 years after attainment of age 45 if hired prior to January 1,1988, or at least 20 years after attainment of age 35 if hired on or afterJanuary 1, 1988.

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For theplans currently sponsored by us, the following table provides a reconciliationof the changes in the pension and postretirement healthcare plans’ benefitobligations and fair value of assets over the two-year period ended May 31,2005 and a statement of the funded status as of May 31, 2005 and 2004 (inmillions):
| ** **                                                     | ** ** | **Pension Plans** | ** ** | **Postretirement  Healthcare Plans** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**               | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Accumulated  Benefit Obligation (“ABO”)**          |       | $                      | 249        |                                      | $          | 207 |   |   |   |   |   |
| **Changes  in Projected Benefit Obligation (“PBO”)** |       |                   |       |                                      |       |   |   |   |   |
| Projected benefit  obligation at the beginning of year         |       | $                      | 247        |                                      | $          | 193 |   | $ | 447 |   | $ | 345 |   |
| Service cost                                                   |       | 16                     |       | 15                                        |       | 31 |   | 30 |   |
| Interest cost                                                  |       | 13                     |       | 10                                        |       | 28 |   | 23 |   |
| Actuarial (gain)/loss                                          |       | 24                     |       | 19                                        |       | (1 | ) | 32 |   |
| Transfers of plan to parent                                    |       | —                 |       | —                                    |       | — |   | — |   |
| Benefits paid                                                  |       | (8                     | )          | (7                                        | )          | (35 | ) | (22 | ) |
| Special termination benefits(1)                                |       | —                 |       | —                                    |       | — |   | 38 |   |
| Amendments, benefit enhancements and other                     |       | 9                      |       | 17                                        |       | 8 |   | 1 |   |
| Projected benefit  obligation at the end of year               |       | $                      | 301        |                                      | $          | 247 |   | $ | 478 |   | $ | 447 |   |
| **Change  in Plan Assets**                                     |       |                   |       |                                      |       |   |   |   |   |
| Fair value of plan  assets at beginning of year                |       | $                      | 105        |                                      | $          | 78 |   | $ | — |   | $ | — |   |
| Actual return on plan assets                                   |       | 9                      |       | 16                                        |       | — |   | — |   |
| Company contributions                                          |       | 19                     |       | 10                                        |       | 28 |   | 16 |   |
| Benefits paid                                                  |       | (8                     | )          | (6                                        | )          | (35 | ) | (22 | ) |
| Other                                                          |       | 2                      |       | 7                                         |       | 7 |   | 6 |   |
| Fair value of plan  assets at end of year                      |       | $                      | 127        |                                      | $          | 105 |   | $ | — |   | $ | — |   |
| **Funded Status of the Plans**                                 |       | $                      | (174       | )                                         | $          | (142 | ) | $ | (478 | ) | $ | (447 | ) |
| Unrecognized actuarial loss (gain)                             |       | 57                     |       | 36                                        |       | (5 | ) | (4 | ) |
| Unamortized prior service cost                                 |       | 8                      |       | 7                                         |       | 5 |   | 3 |   |
| Unrecognized transition amount                                 |       | 1                      |       | 2                                         |       | — |   | — |   |
| Accrued benefit cost                                           |       | $                      | (108       | )                                         | $          | (97 | ) | $ | (478 | ) | $ | (448 | ) |
| **Amount  Recognized in the Balance Sheet at May 31:**    |       |                   |       |                                      |       |   |   |   |   |
| Prepaid benefit cost                                           |       | $                      | 16         |                                      | $          | 14 |   | $ | — |   | $ | — |   |
| Accrued benefit liability                                      |       | (124                   | )          | (111                                      | )          | (478 | ) | (448 | ) |
| Minimum pension liability                                      |       | (37                    | )          | (30                                       | )          | — |   | — |   |
| Accumulated other comprehensive income(2)                      |       | 35                     |       | 28                                        |       | — |   | — |   |
| Intangible asset                                               |       | 2                      |       | 2                                         |       | — |   | — |   |
| Accrued benefit cost                                           |       | $                      | (108       | )                                         | $          | (97 | ) | $ | (478 | ) | $ | (448 | ) |

 

(1)    The special termination benefits reflectedin the table above related primarily to early retirement incentives offered tocertain groups of our employees during 2004 (see Note 4 for more information).

(2)    The minimum pension liability component of AccumulatedOther Comprehensive Income is shown in the Statement of Changes in Owner’sEquity and Comprehensive Income, net of deferred taxes.

The projected benefit obligation (“PBO”) is theactuarial present value of benefits attributable to employee service renderedto date, including the effects of estimated future pay increases. Theaccumulated benefit obligation (“ABO”) also reflects the actuarial presentvalue of benefits attributable to employee service rendered to date, but doesnot include the effects of estimated future pay increases. Therefore, the ABOas compared to plan assets is an indication of the assets currently 

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available to fund vested andnonvested benefits accrued through May 31. We currently expect to makecontributions in 2006 at levels comparable to 2005.

Netperiodic benefit cost for the three years ended May 31 was as follows (inmillions) for the plans currently sponsored by us:
| ** **                      | ** ** | **Pension Plans** | ** ** | **Postretirement  Healthcare Plans** | ** ** |
|---------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | ** 2005 **   | ** ** | ** 2004 **                      | ** ** | ** 2003 ** | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** | ** 2003 ** | ** ** |
| Service cost                    |       |                   | $          | 16                                        |       |   |   | $ | 14 |   |   |   | $ | 11 |   |   |   | $ | 31 |   |   |   | $ | 30 |   |   |   | $ | 24 |   |   |
| Interest cost                   |       |                   | 13         |                                      |       |   | 10 |   |   |   | 9 |   |   |   | 28 |   |   |   | 23 |   |   |   | 23 |   |   |
| Expected return on  plan assets |       |                   | (7         | )                                         |       |   | (5 | ) |   |   | (5 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net amortization and  deferral  |       |                   | 2          |                                      |       |   | 2 |   |   |   | (1 | ) |   |   | — |   |   |   | — |   |   |   | (2 | ) |   |
|                            |       |                   | $          | 24                                        |       |   |   | $ | 21 |   |   |   | $ | 14 |   |   |   | $ | 59 |   |   |   | $ | 53 |   |   |   | $ | 45 |   |   |

 

**Weighted-AverageActuarial Assumptions**
| ** **                                       | ** ** | **Pension Plans** | ** ** | **Postretirement  Healthcare Plans** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **2005**               | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                                    |       | 4.98                   | %          | 5.26                                      | %          | 5.09 | % | 6.16 | % | 6.57 | % | 6.75 | % |
| Rate of increase in  future compensation  levels |       | 3.49                   |       | 3.00                                      |       | 3.01 |   | — |   | — |   | — |   |
| Expected long-term rate of  return on assets     |       | 5.89                   |       | 5.62                                      |       | 5.69 |   | — |   | — |   | — |   |

 

Future medical benefit costs are estimated to increaseat an annual rate of 13% during 2006, decreasing to an annual growth rate of 5%in 2019 and thereafter. Future dental benefit costs are estimated to increaseat an annual rate of 6.75% during 2006, decreasing to an annual growth rate of5% in 2013 and thereafter. Our postretirement healthcare cost is capped at 150%of the 1993 employer cost and, therefore, is not subject to medical and dentaltrends after the capped cost is attained. Therefore, a 1% change in theseannual trend rates would not have a significant impact on the accumulatedpostretirement benefit obligation at May 31, 2005, or 2005 benefitexpense.

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**NOTE 10:BUSINESS SEGMENT INFORMATION**

We are in a single line of business and operate in onebusiness segment—the worldwide express transportation and distribution of goodsand documents.

Thefollowing table presents revenue by service type and geographic information forthe years ended or as of May 31 (in millions):
| ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **REVENUE  BY SERVICE TYPE**        |       |     |       |     |       |     |       |
| Package:                            |       |     |       |     |       |     |       |
| U.S. overnight box                  |       | $        | 5,969      |     | $          | 5,558    |       | $ | 5,432 |   |
| U.S. overnight envelope             |       | 1,798    |       | 1,700    |       | 1,715    |       |
| U.S. deferred                       |       | 2,799    |       | 2,592    |       | 2,510    |       |
| Total domestic package revenue      |       | 10,566   |       | 9,850    |       | 9,657    |       |
| International priority              |       | 6,134    |       | 5,131    |       | 4,367    |       |
| Total package revenue               |       | 16,700   |       | 14,981   |       | 14,024   |       |
| Freight:                            |       |     |       |     |       |     |       |
| U.S.                                |       | 1,854    |       | 1,609    |       | 1,564    |       |
| International                       |       | 381      |       | 393      |       | 400      |       |
| Total freight revenue               |       | 2,235    |       | 2,002    |       | 1,964    |       |
| Other                               |       | 429      |       | 400      |       | 363      |       |
|                                |       | $        | 19,364     |     | $          | 17,383   |       | $ | 16,351 |   |
| **GEOGRAPHICAL INFORMATION****(1)** |       |     |       |     |       |     |       |
| Revenues:                           |       |     |       |     |       |     |       |
| U.S.                                |       | $        | 12,436     |     | $          | 11,474   |       | $ | 11,238 |   |
| International                       |       | 6,928    |       | 5,909    |       | 5,113    |       |
|                                |       | $        | 19,364     |     | $          | 17,383   |       | $ | 16,351 |   |
| Noncurrent assets:                  |       |     |       |     |       |     |       |
| U.S.                                |       | $        | 7,405      |     | $          | 7,321    |       | $ | 6,493 |   |
| International                       |       | 2,051    |       | 1,466    |       | 1,512    |       |
|                                |       | $        | 9,456      |     | $          | 8,787    |       | $ | 8,005 |   |

 

(1)    International revenue includes shipmentsthat either originate in or are destined to locations outside the UnitedStates. Noncurrent assets include property and equipment, goodwill and otherlong-term assets. Flight equipment is allocated between geographic areas basedon usage.

**NOTE 11:SUPPLEMENTAL CASH FLOW INFORMATION**

Cash paidfor interest expense and income taxes for the years ended May 31 was asfollows (in millions):
| ** **                              | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Interest (net of  capitalized interest) |       |                             | $          | 74                               |       |                             |       | $ | 82 |   |   |   | $ | 58 |   |   |
| Income taxes                            |       |                             | 461        |                             |       |                             | 213        |   |   |   | 83 |   |   |

 

We amended two leases in 2004 and four leases in 2003for MD11 aircraft, which required us to record $110 million in 2004 and $221million in 2003, in both fixed assets and long-term liabilities.

We consolidated an entity thatowns two MD11 aircraft under the provisions of FIN 46. The consolidation ofthis entity on September 1, 2003 resulted in an increase in our fixedassets and long-term liabilities of approximately $140 million. See Note13.

51

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**NOTE 12:GUARANTEES AND INDEMNIFICATIONS**

We adopted FIN 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others,” during 2003, which required the prospectiverecognition and measurement of certain guarantees and indemnifications. Accordingly,any contractual guarantees or indemnifications we have issued or modifiedsubsequent to December 31, 2002 are subject to evaluation. If required, aliability for the fair value of the obligation undertaken will be recognized.

With the exception of residual value guarantees incertain operating leases, a maximum obligation is generally not specified inour guarantees and indemnifications. As a result, the overall maximum potentialamount of the obligation under such guarantees and indemnifications cannot bereasonably estimated. Historically, we have not been required to make significantpayments under our guarantee or indemnification obligations and no amounts havebeen recognized in our financial statements for the underlying fair value ofthese obligations.

We have guarantees under certain operating leases,amounting to $15 million as of May 31, 2005, for the residual values ofvehicles and facilities at the end of the respective operating lease periods. Underthese leases, if the fair market value of the leased asset at the end of thelease term is less than an agreed-upon value as set forth in the relatedoperating lease agreement, we will be responsible to the lessor for the amountof such deficiency. Based upon our expectation that none of these leased assetswill have a residual value at the end of the lease term that is materially lessthan the value specified in the related operating lease agreement, we do notbelieve it is probable that we will be required to fund any amounts under theterms of these guarantee arrangements. Accordingly, no accruals have beenrecognized for these guarantees.

Certain of our operating leases contain otherindemnification obligations to the lessor, which are considered ordinary andcustomary (e.g., use and environmental indemnifications). The terms of theseobligations range in duration and often are not limited. Such indemnificationobligations continue until and, in many cases, after expiration of therespective lease.

In conjunction with certain transactions, primarilysales or purchases of operating assets or services in the ordinary course ofbusiness, we sometimes provide routine indemnifications (e.g., environmental,tax and software infringement), the terms of which range in duration and oftenare not limited.

We provide guarantees on certain FedEx unsecured debtinstruments aggregating approximately $1.7 billion at May 31, 2005,jointly and severally with other affiliated companies in the FedEx consolidatedgroup. In addition, we guarantee, jointly and severally with other affiliatedcompanies in the FedEx consolidated group, FedEx’s $1 billion revolving creditagreements, which back its commercial paper program. At May 31, 2005, nocommercial paper was outstanding and the entire $1 billion under therevolving credit agreements was available for future borrowings. The guaranteesare full and unconditional and are required by the lenders since FedEx has noindependent assets or operations.

Special facility revenue bondshave been issued by certain municipalities primarily to finance the acquisitionand construction of various airport facilities and equipment. In certain cases,the bond proceeds were loaned to us and are included in long-term debt and inother cases, the facilities were leased to us and are accounted for as eithercapital leases or operating leases. Approximately $760 million inprincipal of these bonds (with total future principal and interest payments ofapproximately $1.3 billion as of May 31, 2005) is unconditionallyguaranteed by us. Of the $760 million bond principal, $204 million was incapital lease obligations at May 31, 2005 and the remainder was inoperating leases.

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**NOTE 13: VARIABLE INTEREST ENTITIES**

We entered into a lease in July 2001 for two MD11aircraft. These assets are held by a separate entity, which was established andis owned by independent third parties who provide financing through debt andequity participation. The original cost of the assets under the lease wasapproximately $150 million.

This lease contains residualvalue guarantees that obligate us, not the third-party owners, to absorb themajority of the losses, if any, of the entity. The lease also provides us withthe right to receive any residual returns of the entity if they occur. At May 31,2005, the residual value guarantee associated with this lease, which representsthe maximum exposure to loss, was $89 million. FIN 46 required us toconsolidate the separate entity that owns the two MD11 aircraft. Since theentity was created before February 1, 2003, we measured the assets andliabilities at their carrying amounts (the amounts at which they would havebeen recorded in the consolidated financial statements if FIN 46 had beeneffective at the inception of the lease). As a result of this consolidation,the accompanying May 31, 2005 balance sheet includes an additional $120million of fixed assets and $125 million of long term liabilities. The May 31,2004 balance sheet includes an additional $126 million of fixed assets and $133million of long-term liabilities.

**NOTE 14: COMMITMENTS**

Annualpurchase commitments under various contracts as of May 31, 2005 were asfollows (in millions):
| ** ** | ** ** | ** **   | ** ** | **Aircraft-**  | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------|------------|--------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** ** | ** ** | **Aircraft** | ** ** | **Related**(1) | ** ** | **Other**(2) | ** ** | **Total**  | ** ** |
| 2006       |       |         | $          | 111            |       |         |       | $          | 237        |   |   |   | $ | 10 |   |   | $ | 358 |   |
| 2007       |       |         | 115        |           |       |         | 91         |       |       |   | 10 |   |   | 216 |   |
| 2008       |       |         | 131        |           |       |         | 74         |       |       |   | 8 |   |   | 213 |   |
| 2009       |       |         | 567        |           |       |         | 61         |       |       |   | 8 |   |   | 636 |   |
| 2010       |       |         | 517        |           |       |         | 56         |       |       |   | 7 |   |   | 580 |   |
| Thereafter |       |         | 625        |           |       |         | 70         |       |       |   | 122 |   |   | 817 |   |
|            |            |              |            |                |            |              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

(1)    Primarily aircraft modifications.

(2)    Primarily advertising and promotioncontracts.

The amounts reflected in the table above for purchasecommitments represent noncancelable agreements to purchase goods or services. Commitmentsto purchase aircraft in passenger configuration do not include the attendantcosts to modify these aircraft for cargo transport. Open purchase orders thatare cancelable are not considered unconditional purchase obligations forfinancial reporting purposes.

Asof May 31, 2005, we are committed to purchase four Airbus A300s,two Airbus A310s, nine ATR-72s, one MD11 and ten Airbus A380s (a newhigh-capacity, long-range aircraft). We expect to take delivery of the MD11,four A300s, all of the ATR-72s and one Airbus A310 in 2006. The remainingAirbus A310 is expected to be delivered in 2007. We expect to take delivery ofthree of the ten A380 aircraft in each of 2009, 2010 and 2011 and the remainingone in 2012. Deposits and progress payments of $29 million have been made towardthese purchases and other planned aircraft-related transactions. In addition,we have committed to modify our DC10 aircraft for passenger-to-freighter andtwo-man cockpit configurations. Payments related to these activities areincluded in the table above. Aircraft and aircraft-related contracts aresubject to price escalations.

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**NOTE 15: CONTINGENCIES**

*Wage-and-Hour.  *We are a defendant in a numberof lawsuits filed in federal or California state courts containing variousclass-action allegations under federal or California wage-and-hour laws. Theplaintiffs in these lawsuits are our employees who allege, among other things,that they were forced to work “off the clock” and were not provided work breaksor other benefits. The plaintiffs generally seek unspecified monetary damages,injunctive relief, or both.

To date, one of these wage-and-hour cases, Foster v.FedEx Express, has been certified as a class action. The plaintiffs represent aclass of hourly FedEx Express employees in California from October 14,1998 to present. The plaintiffs allege that hourly employees are routinelyrequired to work “off the clock” and are not paid for this additional work. Thecourt issued a ruling on December 13, 2004 granting class certification onall issues. The ruling, however, does not address whether we will ultimately beheld liable.

We have denied any liability with respect to theseclaims and intend to vigorously defend ourself in these cases. However, it isreasonably possible that material losses could be incurred on one or more ofthese matters as these cases develop.

*Other.  *Weare subject to other legal proceedings that arise in the ordinary course of ourbusiness. In the opinion of management, the aggregate liability, if any, withrespect to these other actions will not materially adversely affect ourfinancial position, results of operations or cash flows.

**NOTE 16: PARENT/AFFILIATETRANSACTIONS**

Affiliate company balances that are currentlyreceivable or payable relate to charges for services provided by or to otherFedEx affiliates and are settled on a monthly basis. The noncurrentintercompany balance amounts at May 31, 2005 and 2004 primarily representthe net activity from participation in FedEx’s consolidated cash managementprogram. These net amounts are reflected as financing activities on thestatements of cash flows. In addition, we are allocated net interest on theseamounts at market rates. Intercompany transactions are eliminated in theconsolidated financials of FedEx.

The formation of FedEx Services in 2000 representedthe implementation of a business strategy that combined our sales, marketingand information technology functions with those of FedEx Ground Package System, Inc.(“FedEx Ground”) to form a shared services company that supports the packagebusinesses for both of us. FedEx Services provides our customers with a singlepoint of contact for all our services. The line item “Intercompany charges” onthe consolidated statements of income represents an allocation primarily of thecosts of the services that FedEx Services provided for us. The costs for theseactivities are allocated based on metrics such as relative revenues andestimated services provided. We believe the total amounts allocated reasonablyreflect the cost of providing such services.

We also receive allocated charges from our parent formanagement fees related to services received for general corporate oversight,executive officers and certain legal and finance functions. We believe thetotal amounts allocated approximate the cost of providing such services.

In connection with theformation of FedEx Services, certain customers doing business with both us andFedEx Ground are provided the ability to receive a single invoice for theirshipping charges. Revenue is recognized by the operating company performing thetransportation services and the corresponding total receivable is recorded andcollected by us. The net customer balances for transportation servicesperformed by FedEx Ground are reflected in trade receivables on our balancesheet and totaled $383 million at May 31, 2005 and $347 million at May 31,2004.

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**NOTE 17:SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)**
| ** **               | ** ** | **First**  | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **(in millions)**   | ** ** | ** ** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2005                     |       |       |       |        |       |        |       |        |       |
| Revenues                 |       | $          | 4,585      |        | $          | 4,803       |       | $           | 4,885      |   | $ | 5,091 |   |
| Operating income         |       | 303        |       | 327         | (1)        | 338         |       | 423         |       |
| Net income               |       | 169        |       | 189         | (1)        | 198         |       | 267         |       |
| 2004                     |       |       |       |        |       |        |       |        |       |
| Revenues                 |       | $          | 4,109      |        | $          | 4,250       |       | $           | 4,347      |   | $ | 4,677 |   |
| Operating income  (loss) |       | 22         | (2)        | (19)        | (4)        | 223         |       | 402         |       |
| Net income (loss)        |       | 23         | (2)(3)     | (30)        | (4)        | 119         |       | 248         | (5)        |
|                          |            |            |            |             |            |             |            |             |            |  |  |  |  |  |  |

 

(1)    Includes $48 million ($30 million, net oftax) related to an Airline Stabilization Act charge described in Note 1.

(2)    Includes $132 million ($82 million, net oftax) of business realignment costs described in Note 4.

(3)    Includes $26 million, net of tax relatedto a favorable ruling on an IRS case described in Note 8.

(4)    Includes $276 million ($171 million, netof tax) of business realignment costs described in Note 4.

(5)    Includes a $13 million nonrecurringbenefit related to the reduction of our effective tax rate.

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**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

While we currently have market risk sensitiveinstruments related to interest rates, we have no significant exposure tochanging interest rates on our long-term debt because the interest rates are fixedon the majority of our long-term debt. We had approximately $125 million ofoutstanding floating-rate borrowings at May 31, 2005. We have not employedinterest rate hedging to mitigate the risks with respect to these borrowings. Ahypothetical 10% increase in the interest rate on our outstanding floating-rateborrowings would not have a material effect on our results of operations. Asdisclosed in Note 6 to the accompanying consolidated financial statements, wehad outstanding fixed-rate, long-term debt (exclusive of capital leases) ofapproximately $570 million at May 31, 2005 and $625 million at May 31,2004. Market risk for fixed-rate, long-term debt is estimated as the potentialdecrease in fair value resulting from a hypothetical 10% increase in interestrates and amounts to approximately $29 million as of May 31, 2005 and $30million as of May 31, 2004. The underlying fair values of our long-termdebt were estimated based on quoted market prices or on the current ratesoffered for debt with similar terms and maturities.

While we are a global provider of transportationservices, the substantial majority of our transactions are denominated in U.S.dollars. The distribution of our foreign currency denominated transactions issuch that currency declines in some areas of the world are often offset bycurrency gains of equal magnitude in other areas of the world. The principalforeign currency exchange rate risks to which we are exposed are in theJapanese yen, Taiwan dollar, Canadian dollar and euro. During 2005 and 2004, webelieve operating income was positively impacted due to foreign currencyfluctuations. However, favorable foreign currency fluctuations also may havehad an offsetting impact on the price we obtained or the demand for ourservices. At May 31, 2005, the result of a uniform 10% strengthening inthe value of the dollar relative to the currencies in which our transactionsare denominated would result in a decrease in operating income of approximately$118 million for 2006 (the comparable amount in the prior year wasapproximately $80 million). This increase is primarily due to the strong growthof our international operations. This theoretical calculation assumes that eachexchange rate would change in the same direction relative to the U.S. dollar.

In practice, our experience is that exchange rates inthe principal foreign markets where we have foreign currency denominatedtransactions tend to have offsetting fluctuations. Therefore, the calculationabove is not indicative of our actual experience in foreign currencytransactions. In addition to the direct effects of changes in exchange rates,which are a changed dollar value of the resulting reported operating results,changes in exchange rates also affect the volume of sales or the foreigncurrency sales price as competitors’ services become more or less attractive. Thesensitivity analysis of the effects of changes in foreign currency exchangerates does not factor in a potential change in sales levels or local currencyprices.

We have market risk for changes in the price of jet fuel;however, this risk is largely mitigated by revenue from our fuel surcharges. In2002, we implemented new indices for calculating U.S. domestic fuel surcharges,which more closely link the fuel surcharges to prevailing market prices for jetfuel. In 2003, we implemented this methodology for determining a fuel surchargeon international shipments as well. Therefore, a hypothetical 10% change in theprice of jet fuel would not be expected to materially affect our earnings. However,our fuel surcharges have a lag that exists before they are adjusted for changesin jet fuel prices and jet fuel prices can fluctuate within certain rangesbefore resulting in a change in our fuel surcharges. Therefore, our operatingincome may be affected should the spot price of jet fuel suddenly change by asignificant amount or change by amounts that do not result in a change in ourfuel surcharges.

We do not purchase or hold any derivative financialinstruments for trading purposes.

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholderFederal Express Corporation

We have audited the consolidated financial statementsof Federal Express Corporation as of May 31, 2005 and 2004, and for eachof the three years in the period ended May 31, 2005, and have issued ourreport thereon dated July 12, 2005 (included elsewhere in this AnnualReport on Form 10-K). Our audits also included the financialstatement schedule listed in Item 15(a) in this Annual Report on Form 10-K.This schedule is the responsibility of the Company’s management. Ourresponsibility is to express an opinion based on our audits.

In ouropinion, the financial statement schedule referred to above, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.
|                    | /s/ ERNST &  YOUNG LLP |
|--------------------|---------------------------------|
| Memphis, Tennessee |                            |
| July 12, 2005 |                            |

 

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**SCHEDULE II**

**FEDEX EXPRESS CORPORATIONVALUATION AND QUALIFYINGACCOUNTSFOR THE YEARS ENDED MAY 31, 2005, 2004 AND 2003(In millions)**
| ** **                           | ** ** | ** **    | ** ** | **ADDITIONS**              | ** ** | ** **   | ** ** | ** **   | ** ** |
|--------------------------------------|------------|---------------|------------|----------------------------|------------|--------------|------------|--------------|------------|
| ** **                           | ** ** | **BALANCE**   | ** ** | ** **                 | ** ** | **CHARGED**  | ** ** | ** **   | ** ** | **BALANCE** | ** ** |
| ** **                           | ** ** | **AT**        | ** ** | **CHARGED**                | ** ** | **TO**       | ** ** | ** **   | ** ** | **AT** | ** ** |
| ** **                           | ** ** | **BEGINNING** | ** ** | **TO COSTS AND** | ** ** | **OTHER**    | ** ** | ** **   | ** ** | **END OF** | ** ** |
| **DESCRIPTION**                      | ** ** | ** **    | ** ** | **OF YEAR**           | ** ** | **EXPENSES** | ** ** | **ACCOUNTS** | ** ** | **DEDUCTIONS** | ** ** | **YEAR** | ** ** |
| **Accounts Receivable Reserves:**    |       |          |       |                       |       |         |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Allowance  for Doubtful Accounts*   |       |          |       |                       |       |         |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 2005                                 |       |          | $          | 65                         |       |         |       | $            | 68         |   |   |   | $ | 10 | (a) |   |   | $ | 93 | (b) |   |   | $ | 50 |   |   |
| 2004                                 |       |          | $          | 65                         |       |         |       | $            | 76         |   |   |   | $ | 15 | (a) |   |   | $ | 91 | (b) |   |   | $ | 65 |   |   |
| 2003                                 |       |          | $          | 58                         |       |         |       | $            | 78         |   |   |   | $ | 17 | (a) |   |   | $ | 88 | (b) |   |   | $ | 65 |   |   |
| *Allowance  for Revenue Adjustments* |       |          |       |                       |       |         |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 2005                                 |       |          | $          | 54                         |       |         |       | $            | —     |   |   |   | $ | 337 | (c) |   |   | $ | 349 | (d) |   |   | $ | 42 |   |   |
| 2004                                 |       |          | $          | 57                         |       |         |       | $            | —     |   |   |   | $ | 329 | (c) |   |   | $ | 332 | (d) |   |   | $ | 54 |   |   |
| 2003                                 |       |          | $          | 49                         |       |         |       | $            | —     |   |   |   | $ | 304 | (c) |   |   | $ | 296 | (d) |   |   | $ | 57 |   |   |
| **Inventory  Valuation Allowance:**  |       |          |       |                       |       |         |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 2005                                 |       |          | $          | 124                        |       |         |       | $            | 19         |   |   |   | $ | — |   |   |   | $ | 1 |   |   |   | $ | 142 |   |   |
| 2004                                 |       |          | $          | 101                        |       |         |       | $            | 16         |   |   |   | $ | 10 | (e) |   |   | $ | 3 |   |   |   | $ | 124 |   |   |
| 2003                                 |       |          | $          | 91                         |       |         |       | $            | 12         |   |   |   | $ | — |   |   |   | $ | 2 |   |   |   | $ | 101 |   |   |
|                                      |            |               |            |                            |            |              |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(a)    Transfers related to FedEx Groundfactoring agreement.

(b)    Uncollectible accounts written off, net ofrecoveries.

(c)    Principally charged against revenue.

(d)    Service failures, rebills and other.

(e)    Reclassifications.

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**FEDERALEXPRESS CORPORATIONCOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(UNAUDITED)(IN MILLIONS, EXCEPT RATIOS)**
| ** **                                                | ** ** | **Year Ended May 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Earnings:                                                 |       |                                  |       |   |   |   |   |   |   |   |   |
| Income before income taxes                                |       | $                                     | 1,305      |   | $ | 541 |   | $ | 689 |   | $ | 703 |   | $ | 786 |   |
| Add back:                                                 |       |                                  |       |   |   |   |   |   |   |   |   |
| Interest expense, net of capitalized interest             |       | 73                                    |       | 64 |   | 57 |   | 74 |   | 75 |   |
| Amortization of debt issuance costs                       |       | —                                |       | — |   | — |   | 1 |   | 1 |   |
| Portion of rent expense representative of interest factor |       | 600                                   |       | 583 |   | 599 |   | 594 |   | 563 |   |
| Earnings as adjusted                                      |       | $                                     | 1,978      |   | $ | 1,188 |   | $ | 1,345 |   | $ | 1,372 |   | $ | 1,425 |   |
| Fixed Charges:                                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Interest expense, net of capitalized interest             |       | $                                     | 73         |   | $ | 64 |   | $ | 57 |   | $ | 74 |   | $ | 75 |   |
| Capitalized interest                                      |       | 13                                    |       | 7 |   | 13 |   | 23 |   | 23 |   |
| Amortization of debt issuance costs                       |       | —                                |       | — |   | — |   | 1 |   | 1 |   |
| Portion of rent expense representative of interest factor |       | 600                                   |       | 583 |   | 599 |   | 594 |   | 563 |   |
|                                                      |       | $                                     | 686        |   | $ | 654 |   | $ | 669 |   | $ | 692 |   | $ | 662 |   |
| Ratio of Earnings to  Fixed Charges                       |       | 2.9                                   |       | 1.8 |   | 2.0 |   | 2.0 |   | 2.2 |   |

 

59

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**EXHIBIT INDEX**
| Exhibit Number | ** **   | **Description   of Exhibit**                                                                                                                                                                                                                                                                                       | ** ** | ** ** |
|----------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| *** ***   | *** *** | ***Certificate of Incorporation  and Bylaws***                                                                                                                                                                                                                                                                     |
| 3.1            |         | Restated Certificate of  Incorporation of FedEx Express, as amended. (Filed as Exhibit 3.1 to  FedEx Express’s FY98 Third Quarter Report on Form 10-Q, and incorporated  herein by reference.)                                                                                                      |
| 3.2            |         | By-laws of FedEx Express.  (Filed as Exhibit 3.2 to FedEx Express’s FY93 Annual Report on  Form 10-K, and incorporated herein by reference.)                                                                                                                                                        |
| *** ***   | *** *** | ***Facility Lease Agreements***                                                                                                                                                                                                                                                                                    |
| 10.1           |         | Consolidated and Restated  Lease Agreement dated as of August 1, 1979 between the Memphis-Shelby  County Airport Authority (the “Authority”) and FedEx Express. (Filed as  Exhibit 10.12 to FedEx Express’s FY90 Annual Report on Form 10-K,  and incorporated herein by reference.) |
| 10.2           |         | First Supplemental Lease  Agreement dated as of April 1, 1981 between the Authority and FedEx  Express. (Filed as Exhibit 10.13 to FedEx Express’s FY92 Annual Report  on Form 10-K, and incorporated herein by reference.)                                                                    |
| 10.3           |         | Second Supplemental Lease  Agreement dated as of May 1, 1982 between the Authority and FedEx  Express. (Filed as Exhibit 10.14 to FedEx Express’s FY93 Annual Report  on Form 10-K, and incorporated herein by reference.)                                                                     |
| 10.4           |         | Third Supplemental Lease  Agreement dated November 1, 1982 between the Authority and FedEx  Express. (Filed as Exhibit 28.22 to FedEx Express’s FY93 Second Quarter  Report on Form 10-Q, and incorporated herein by reference.)                                                               |
| 10.5           |         | Fourth Supplemental Lease  Agreement dated July 1, 1983 between the Authority and FedEx Express.  (Filed as Exhibit 28.23 to FedEx Express’s FY93 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                                                  |
| 10.6           |         | Fifth Supplemental Lease  Agreement dated February 1, 1984 between the Authority and FedEx  Express. (Filed as Exhibit 28.24 to FedEx Express’s FY93 Second Quarter  Report on Form 10-Q, and incorporated herein by reference.)                                                               |
| 10.7           |         | Sixth Supplemental Lease  Agreement dated April 1, 1984 between the Authority and FedEx Express.  (Filed as Exhibit 28.25 to FedEx Express’s FY93 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                                                  |
| 10.8           |         | Seventh Supplemental Lease  Agreement dated June 1, 1984 between the Authority and FedEx Express.  (Filed as Exhibit 28.26 to FedEx Express’s FY93 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                                                 |
| 10.9           |         | Eighth Supplemental Lease  Agreement dated July 1, 1988 between the Authority and FedEx Express.  (Filed as Exhibit 28.27 to FedEx Express’s FY93 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                                                  |
| 10.10          |         | Ninth Supplemental Lease  Agreement dated July 12, 1989 between the Authority and FedEx Express.  (Filed as Exhibit 28.28 to FedEx Express’s FY93 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                                                  |

E-1

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| 10.11 |   | Tenth Supplemental Lease  Agreement dated October 1, 1991 between the Authority and FedEx Express.  (Filed as Exhibit 28.29 to FedEx Express’s FY93 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)             |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12 |   | Eleventh Supplemental  Lease Agreement dated as of July 1, 1994 between the Authority and FedEx  Express. (Filed as Exhibit 10.21 to FedEx Express’s FY96 Annual Report  on Form 10-K, and incorporated herein by reference.)               |
| 10.13 |   | Twelfth Supplemental Lease  Agreement dated July 1, 1993 between the Authority and FedEx Express.  (Filed as Exhibit 10.23 to FedEx Express’s FY93 Annual Report on  Form 10-K, and incorporated herein by reference.)                      |
| 10.14 |   | Thirteenth Supplemental  Lease Agreement dated as of June 1, 1995 between the Authority and FedEx  Express. (Filed as Exhibit 10.23 to FedEx Express’s FY96 Annual Report  on Form 10-K, and incorporated herein by reference.)             |
| 10.15 |   | Fourteenth Supplemental  Lease Agreement dated as of January 1, 1996 between the Authority and  FedEx Express. (Filed as Exhibit 10.24 to FedEx Express’s FY96 Annual  Report on Form 10-K, and incorporated herein by reference.)          |
| 10.16 |   | Fifteenth Supplemental Lease  Agreement dated as of January 1, 1997 between the Authority and FedEx  Express. (Filed as Exhibit 10.1 to FedEx Express’s FY97 Third Quarter  Report on Form 10-Q, and incorporated herein by reference.)     |
| 10.17 |   | Sixteenth Supplemental Lease  Agreement dated as of April 1, 1997 between the Authority and FedEx  Express (Filed as Exhibit 10.28 to FedEx Express’s FY97 Annual Report on  Form 10-K, and incorporated herein by reference.)              |
| 10.18 |   | Seventeenth Supplemental  Lease Agreement dated as of May 1, 1997 between the Authority and FedEx  Express. (Filed as Exhibit 10.29 to FedEx Express’s FY97 Annual Report  on Form 10-K, and incorporated herein by reference.)             |
| 10.19 |   | Eighteenth Supplemental  Lease Agreement dated as of July 1, 1997 between the Authority and FedEx  Express. (Filed as Exhibit 10.2 to FedEx Express’s FY98 First Quarter  Report on Form 10-Q, and incorporated herein by reference.)       |
| 10.20 |   | Nineteenth Supplemental  Lease Agreement dated as of September 1, 1998 between the Authority and  FedEx Express. (Filed as Exhibit 10.1 to FedEx Express’s FY99 Second  Quarter Report on Form 10-Q, and incorporated herein by reference.) |
| 10.21 |   | Twentieth Supplemental Lease  Agreement dated as of April 1, 2000 between the Authority and FedEx  Express. (Filed as Exhibit 10.21 to FedEx’s FY2000 Annual Report on  Form 10-K, and incorporated herein by reference.)                   |
| 10.22 |   | Twenty-First Supplemental  Lease Agreement dated as of May 15, 2000 between the Authority and FedEx  Express. (Filed as Exhibit 10.22 to FedEx’s FY2000 Annual Report on  Form 10-K, and incorporated herein by reference.)                 |
| 10.23 |   | Twenty-Second Supplemental  Lease Agreement dated as of March 15, 2001 between the Authority and  FedEx Express. (Filed as Exhibit 10.23 to FedEx’s FY01 Annual Report on  Form 10-K, and incorporated herein by reference.)                |
| 10.24 |   | Twenty-Third Supplemental  Lease Agreement dated as of March 1, 2002 between the Authority and  FedEx Express. (Filed as Exhibit 10.1 to FedEx’s FY03 Second Quarter  Report on Form 10-Q, and incorporated herein by reference.)           |

E-2

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| 10.25        |         | Twenty-Fourth Supplemental  Lease Agreement dated as of May 1, 2003 between the Authority and FedEx  Express. (Filed as Exhibit 10.25 to FedEx’s FY03 Annual Report on  Form 10-K, and incorporated herein by reference.)                                                                                                                                                                                                                                                          |
|--------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26        |         | Twenty-Fifth  Supplemental Lease Agreement dated as of April 1, 2005 between the  Authority and FedEx Express. (Filed as Exhibit 10.26 to FedEx’s FY05 Annual  Report on Form 10-K, and incorporated herein by reference.)                                                                                                                                                                                                                                                         |
| 10.27        |         | Second Special Facility  Supplemental Lease Agreement dated as of November 1, 1982 between the  Authority and FedEx Express. (Filed as Exhibit 10.26 to FedEx Express’s  FY93 Annual Report on Form 10-K, and incorporated herein by  reference.)                                                                                                                                                                                                                                  |
| 10.28        |         | Third Special Facility  Supplemental Lease Agreement dated as of December 1, 1984 between the  Authority and FedEx Express. (Filed as Exhibit 10.25 to FedEx Express’s  FY95 Annual Report on Form 10-K, and incorporated herein by reference.)                                                                                                                                                                                                                                    |
| 10.29        |         | Fourth Special Facility  Supplemental Lease Agreement dated as of July 1, 1992 between the  Authority and FedEx Express. (Filed as Exhibit 10.20 to FedEx Express’s  FY92 Annual Report on Form 10-K, and incorporated herein by  reference.)                                                                                                                                                                                                                                      |
| 10.30        |         | Fifth Special Facility  Supplemental Lease Agreement dated as of July 1, 1997 between the  Authority and FedEx Express. (Filed as Exhibit 10.35 to FedEx Express’s  FY97 Annual Report on Form 10-K, and incorporated herein by reference.)                                                                                                                                                                                                                                        |
| 10.31        |         | Sixth Special Facility  Supplemental Lease Agreement dated as of December 1, 2001 between the  Authority and FedEx Express. (Filed as Exhibit 10.28 to FedEx’s FY02  Annual Report on Form 10-K, and incorporated herein by reference.)                                                                                                                                                                                                                                            |
| 10.32        |         | Seventh Special Facility  Supplemental Lease Agreement dated as of June 1, 2002 between the  Authority and FedEx Express. (Filed as Exhibit 10.3 to FedEx’s FY03  First Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                                                                                                                                                                                       |
| 10.33        |         | Special Facility Lease  Agreement dated as of July 1, 1993 between the Authority and FedEx  Express. (Filed as Exhibit 10.29 to FedEx Express’s FY93 Annual Report  on Form 10-K, and incorporated herein by reference.)                                                                                                                                                                                                                                                           |
| 10.34        |         | Special Facility Ground  Lease Agreement dated as of July 1, 1993 between the Authority and FedEx  Express. (Filed as Exhibit 10.30 to FedEx Express’s FY93 Annual Report  on Form 10-K, and incorporated herein by reference.)                                                                                                                                                                                                                                                    |
| *** *** | *** *** | ***Aircraft-Related Agreements***                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.35        |         | Airbus A380-800F Purchase  Agreement dated as of July 12, 2002 between AVSA, S.A.R.L. and FedEx  Express and related agreements, including letter agreements 1 through 21.  Confidential treatment has been granted 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’s FY03  First Quarter Report on Form 10-Q, and incorporated herein by  reference.) |
| 10.36        |         | Amended Section 5.5.2  of Airbus A380-800F Purchase Agreement dated as of July 12, 2002 between  AVSA, S.A.R.L. and FedEx Express. Confidential treatment has been granted for  confidential commercial and financial information, pursuant to  Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed  as Exhibit 10.3 to FedEx’s FY03 Second Quarter Report on Form 10-Q,  and incorporated herein by reference.)                                    |

E-3

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|       | *** *** | ***U.S.  Postal Service Agreement***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.37 |         | Transportation  Agreement dated January 10, 2001 between The United States Postal  Service and FedEx Express. Confidential treatment has been granted 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 Express’s Current Report on Form 8-K dated  January 10, 2001, and incorporated herein by reference.)                                                                                                                                                                       |
| 10.38 |         | Addendum dated  December 13, 2001 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted 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 Express’s Current  Report on Form 8-K dated December 13, 2001, and incorporated herein  by reference.)                                                                                                           |
| 10.39 |         | Amendment dated  December 13, 2001 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.2 to FedEx  Express’s Current Report on Form 8-K dated December 13, 2001, and  incorporated herein by reference.)                                                                                                          |
| 10.40 |         | Letter Amendment dated  September 26, 2001 to the Transportation Agreement dated  January 10, 2001, as amended, between The United States Postal Service  and FedEx Express. Confidential treatment has been granted for confidential  commercial and financial information, pursuant to Rule 24b-2 under the  Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.3 to  FedEx Express’s Current Report on Form 8-K dated December 13, 2001,  and incorporated herein by reference.)                                                                                                  |
| 10.41 |         | Amendment dated  August 31, 2001 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.4 to FedEx  Express’s Current Report on Form 8-K dated December 13, 2001, and  incorporated herein by reference.)                                                                                                            |
| 10.42 |         | Amendment dated  August 28, 2001 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.5 to FedEx  Express’s Current Report on Form 8-K dated December 13, 2001, and  incorporated herein by reference.)                                                                                                            |
| 10.43 |         | First Amendment to Addendum  dated April 3, 2002, Second Amendment to Addendum dated April 26,  2002 and Second Addendum dated August 29, 2002, each amending the  Transportation Agreement dated January 10, 2001, as amended, between The  United States Postal Service and FedEx Express. Confidential treatment has  been granted for confidential commercial and financial information, pursuant  to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.  (Filed as Exhibit 10.2 to FedEx’s FY03 First Quarter Report on  Form 10-Q, and incorporated herein by reference.) |

E-4

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| 10.44 |   | First Amendment to Second  Addendum dated December 4, 2002, amending the Transportation Agreement  dated January 10, 2001, as amended, between The United States Postal  Service and FedEx Express. Confidential treatment has been granted for  confidential commercial and financial information, pursuant to  Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed  as Exhibit 10.2 to FedEx’s FY03 Second Quarter Report on Form 10-Q,  and incorporated herein by reference.)                                                                                                    |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.45 |   | Amendment dated June 12, 2002, Investigative  and Security Procedures Addendum dated January 9, 2003 and Third Addendum  dated January 30, 2003, each amending the Transportation Agreement dated  January 10, 2001, as amended, between The United States Postal Service  and FedEx Express. Confidential treatment has been granted 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’s FY03 Third Quarter Report on Form 10-Q, and incorporated herein  by reference.) |
| 10.46 |   | Amendment dated May 28, 2003 and First  Amendment to Third Addendum dated June 4, 2003, each amending the  Transportation Agreement dated January 10, 2001, as amended, between The  United States Postal Service and FedEx Express. Confidential treatment has  been granted for confidential commercial and financial information, pursuant  to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.  (Filed as Exhibit 10.46 to FedEx’s FY03 Annual Report on Form 10-K,  and incorporated herein by reference.)                                                                     |
| 10.47 |   | Amendment dated November 21, 2003 and Second  Amendment to Third Addendum dated November 21, 2003, each amending the  Transportation Agreement dated January 10, 2001, as amended, between The  United States Postal Service and FedEx Express. Confidential treatment has  been granted 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’s FY04 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                                   |
| 10.48 |   | Third Amendment to Third Addendum dated  December 8, 2003 and Fourth Addendum dated March 16, 2004, each  amending the Transportation Agreement dated January 10, 2001, as  amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted 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’s FY04  Third Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                  |
| 10.49 |   | Amendment dated August 30, 2004 to the  Transportation Agreement dated January 10, 2001, as amended, between The  United States Postal Service and FedEx Express. Confidential treatment has  been granted 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’s FY05 First Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                                                                                                                       |

E-5

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| 10.50        |         | Letter Agreement dated September 22, 2004 and  Fifth Addendum dated November 22, 2004, each amending the Transportation  Agreement dated January 10, 2001, as amended, between The United States  Postal Service and FedEx Express. Confidential treatment has been granted for  confidential commercial and financial information, pursuant to  Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed  as Exhibit 99.1 to FedEx’s Current Report on Form 8-K dated  November 22, 2004, and incorporated herein by reference.) |
|--------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *** *** | *** *** | ***Financing  Agreements***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.51        |         | Five-Year Credit Agreement  dated as of September 28, 2001 among FedEx, JPMorgan Chase Bank  (formerly known as The Chase Manhattan Bank), individually and as  administrative agent, and certain lenders. (Filed as Exhibit 10.1 to  FedEx’s FY02 First Quarter Report on Form 10-Q, and incorporated herein  by reference.)                                                                                                                                                                                                                                         |
| 10.52        |         | First Amendment dated as of  September 27, 2002 to Five-Year Credit Agreement dated as of  September 28, 2001 among FedEx, JPMorgan Chase Bank (formerly known as  The Chase Manhattan Bank), individually and as administrative agent, and  certain lenders. (Filed as Exhibit 10.4 to FedEx’s FY03 First Quarter  Report on Form 10-Q, and incorporated herein by reference.)                                                                                                                                                                                  |
| 10.53        |         | Second Amendment dated as of  January 27, 2004 to Five-Year Credit Agreement dated as of  September 28, 2001 among FedEx, JPMorgan Chase Bank (formerly known as  The Chase Manhattan Bank), individually and as administrative agent, and  certain lenders. (Filed as Exhibit 10.2 to FedEx’s FY04 Third Quarter  Report on Form 10-Q, and incorporated herein by reference.)                                                                                                                                                                                   |
| 10.54        |         | Amended and Restated 364-Day  Credit Agreement dated as of September 27, 2002 among FedEx, JPMorgan  Chase Bank (formerly known as The Chase Manhattan Bank), individually and as  administrative agent, and certain lenders. (Filed as Exhibit 10.5 to  FedEx’s FY03 First Quarter Report on Form 10-Q, and incorporated herein  by reference.)                                                                                                                                                                                                                      |
| 10.55        |         | Extension Agreement dated as  of September 26, 2003 to Amended and Restated 364-Day Credit  Agreement dated as of September 27, 2002 among FedEx, JPMorgan Chase Bank  (formerly known as The Chase Manhattan Bank), individually and as  administrative agent, and certain lenders. (Filed as Exhibit 10.2 to  FedEx’s FY04 Second Quarter Report on Form 10-Q, and incorporated herein  by reference.)                                                                                                                                                         |
| 10.56        |         | First Amendment dated as of  January 27, 2004 to Amended and Restated 364-Day Credit Agreement dated  as of September 27, 2002 among FedEx, JPMorgan Chase Bank (formerly  known as The Chase Manhattan Bank), individually and as administrative agent,  and certain lenders. (Filed as Exhibit 10.3 to FedEx’s FY04 Third  Quarter Report on Form 10-Q, and incorporated herein by reference.)                                                                                                                                                                 |

E-6

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| 10.57        |         | Extension Agreement dated as  of September 23, 2004 to Amended and Restated 364-Day Credit  Agreement dated as of September 27, 2002 among FedEx, JPMorgan Chase  Bank (formerly known as The Chase Manhattan Bank), individually and as  administrative agent, and certain lenders. (Filed as Exhibit 10.2 to  FedEx’s FY05 First Quarter Report on Form 10-Q, and incorporated herein  by reference.)

*FedEx Express is not filing any  other instruments evidencing any indebtedness because the total amount of  securities authorized under any single such instrument does not exceed 10% of  the total assets of FedEx Express and its subsidiaries on a consolidated  basis. Copies of such instruments will be furnished to the Securities and  Exchange Commission upon request.* |
|--------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *** *** | *** *** | ***Other  Exhibits***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *12          |         | Statement re Computation of  Ratio of Earnings to Fixed Charges (presented on page 59 of this Annual  Report on Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *23          |         | Consent of Ernst &  Young LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *24          |         | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

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*  Filed herewith.

E-7

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