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By Keith Schoonmaker, CFA | 11-05-2010 05:45 PM

FedEx: We're Growing Our Leadership in China

FedEx's domestic China express network and later pick-up times should give the firm a competitive advantage in the country, says FedEx's Jeff Smith.

Keith Schoonmaker: Hello, I'm Keith Schoonmaker, Morningstar's Transportation Analyst. We're here today with FedEx Director of Investor Relations, Jeff Smith, to talk about FedEx and its competitive advantages. At Morningstar, we look for businesses that have competitive advantages sufficient to out earn their cost of capital for years into the future.

FedEx has erected a narrow moat surrounding its business, protecting its profit for years to come by erecting a massive network of trucks, sorting facilities, and planes.

Jeff, I wonder if you would mind giving us a quick overview of FedEx, its Express, Ground and Freight operations, so we sort of get the lay of the land for the company?

Jeff Smith: Well, as you said, Keith, we've spent the last 40 years developing this global transportation network and today we have more than 220 countries around the globe that we serve as with our nearly 300,000 employees and contractors around globe. We have unsurpassed air networks around the globe with hubs in the United States, in Asia and in Europe, and we're really at the point where we can really leverage those networks that we've built out over the last 40 years over the next few years to improve margins and returns for our shareholders.

Our Ground business within the United States is a very profitable business and growing rapidly. We have a trucking business within the United States, a less than truck load business that has recently attained market leadership within the United States. And we're really still on the early stages of effectively bundling our trucking business with our package business for small and medium-sized customers around the United States.

Schoonmaker: Jeff, that trucking business is not a trivial business, that's about 12% of consolidated revenue. Is that right?

Smith: It's about a $4 billion business for us today and we certainly expect the ability to grow that business over the next few years will be strong as the LTL market continues to consolidate.

Schoonmaker: Jeff, to continue looking at the size of the whole company, I guess let's frame it as far as percent of revenue: Express still comprises about 62% of total revenue and Freight is about 12%, there's a small amount from services like the former Kinko's business FedEx Office and the rest is Ground. Does that sound about right?

Smith: Yeah. About $22 billion in revenue for Express business, about $7 billion for Ground business, about $4 billion for our Freight business and then about $2 billion in our Services unit, which is primarily our retail network, FedEx Office.

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