FedEx at the 2011 J.P. Morgan Aviation, Transportation & Defense Conference
Tom Wadewitz
Analyst, J.P. Morgan
All right, we're going to go ahead and get going with the afternoon presentations. It is a real pleasure for us to have FedEx here. This is the first time that we've had FedEx, I guess, in the — since I've been at J.P. Morgan. Typically, the timing's a little tough, and we'd been earlier in March, but this year we've been — the timing's worked, and we're fortunate to have FedEx participating in our conference.
We have Steve Hughes and Mickey Foster in the front here, and the speaker's going to be Alan Graf. He has been the CFO of FedEx ever since I've known him, well, back from, kind of, 1999, but he's been at the Company 31 years and just a wealth of experience at FedEx.
So, Alan, if you want to come up and share your presentation, and then we will have some time for questions at the end.
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Okay. Thank you, Tom. Thanks, everybody, for being here. After lunch is always the wrong time for me. I'm usually much better after dinner when you've had a couple glasses of wine, and myself included. But we'll try to have a little fun, anyway, and answer your questions.
I've got a few prepared overheads. You don't need to take any notes, because Steve has got copies for you made by FedEx Office that we have to share with you afterwards. I should've been in sales, everybody tells me that, but in any event...
Also, besides Mickey and Steve, we have — with us is Bob Henning, who's our Corporate Vice President of Strategic Finance. And at FedEx, that means he's got the business plan and financial planning and corporate development. So, he's not allowed to talk because he knows too much. But, again, thanks for being here.
Safe Harbor. Enough said. A lot of you I know and recognize a lot of faces. Some I don't. I don't know how well you know FedEx but, essentially, we're a -—on our way to $35 billion or so global company with — we operate in four segments.
You're all very familiar with the FedEx Express I'm sure. Ground, maybe not so much Freight and, of course, FedEx Office, which is a company that's held within our Services division, which also holds all of our IT, sales and marketing professionals. FedEx Office is really a retail outlet for our transportation companies, but we also like you to go make some color copies from time to time. We'd really appreciate it, because that business is pretty tough right now.
I always start with our long-term financial goals. We want to grow revenue, we want to grow revenue double-digits ever year. Want to achieve a 10% operating margin. We got very close to that in 2007 before the recession hit. Would've been well over that. We've been recovering ever since, but we'll get back to it. Not going to predict to you when. I'm just going to tell you we're going to make a lot of progress here, in our fourth quarter, which ends May 31 and into fiscal '12, which starts June 1st. We'll have a chance to talk about that.
Obviously, we want to improve our EPS and improve our cash flows and also improve our ROIC. Although, for us, when you buy 50-year assets like 777’s, ROIC is hard to generate in any one particular year because the denominator gets so big. But, the earnings capability of the assets that we're putting on will provide improved cash flow for our shareholders and increase value for the Company.
We are the world's largest time-definite express shipper by a very large factor. Probably 50% larger than UPS. We're the leading exporter in various parts of the world, as you can see. Most importantly, Asia Pacific, which is where the bulk of our growth is and will be for the foreseeable future, although we are expanding everywhere.
Our international revenues, now, are over $10 billion. They're 45% of FedEx Express's revenues, and they will cross over in the next 18 months or so and become the significantly dominant part of FedEx Express, as the world's fastest economy is global trade, growing faster than anything else.
You can see how important that is as you read and learn about the Japan supply chain initiatives and problems as a result of the earthquake and tsunami and the lack of parts coming out of Japan for companies operating in the United States who are shutting plants down waiting for those parts. And I guarantee you, most of those parts are going to be on our MD11s and 777s coming out of Asia.
Here's the definition of how we look at the world's largest all-cargo carrier. You can see we're significantly bigger than the other players and growing very rapidly and intend to continue to do that. Our number one value proposition for FedEx these days is the growth of our international franchise. It would be both global trade as well as notable areas of domestic.
You saw recently where we closed our acquisition of AFL in India. We're also, of course, in the UK, China, Canada and soon to be in Mexico, if we get that closed before the end of the year. Very excited about our domestic businesses going forward as, literally, billions of people come up to — out of poverty and into the lower and middle-class and want things that aren't made where they live and rely on companies like FedEx to get them — get it to them.
That's kind of a busy thing. That just kind of shows you that we go everywhere all the time serving 220 countries. We go everywhere where we, legally, can go directly and a couple other places that we go indirectly, given the economies of scale.
But, we can find you anywhere on the face of the earth in 48 hours, and — including our non-stop flights from Asia, we can pick things up a couple hours later than any of the competition can, fly directly into Memphis at our night-time sort and have it there for you at 8.00 if you want FedEx priority overnight the next day. So, a very exciting time for us as we go forward.
The way we view the express market is we rank number one everywhere except Europe. You can see where we think UPS and DHL stand. We all look at market share statistics a little bit differently, but we use third parties to help us measure this, and so this is where we are. We have plans to continue to grow organically in our European area, as you saw with the acquisition in India. That was one of our first steps. Hopefully, we'll continue to do that as we go forward.
Our fleet's big. We are doing two things. Number one, we are retiring the older 727s which, with three engines and three pilots and today's fuel prices, are extremely inefficient. We've scheduled to retire almost all of them. We show 65 here, but I promise you that over the next two or three years, we'll have retired all of them.
We're bringing on 757 200s, much more fuel efficient. In today's world, that's vital. You know about the 777s. You can count on us adding a 777 about every other month for the next three or four years as we both expand our reach and increase our volume capabilities internationally and also begin to bring some of the very expensive MD10s back into the domestic service, where they will fly less hours and not be so punitive from a fuel and pilot standpoint.
Over time, well beyond my watch, we will eventually end up with, probably, an all twin fleet. But, that'll take years and years to go, because the MD11s are still very good and very capable airplanes. They will serve international and domestic as we go forward.
We have speed advantages, and not just at Express. You'll see at other places 8:00 a.m. is very important to a lot of people these days. If you're going to use Express and you really got to have it there, sometimes you really got to have it there. And so, we've expanded our 8:00 a.m. delivery reach broadly, and hope to continue to expand it. So, you're coming to a conference, and it starts at 8:30, and you need something at your hotel by 8:00, we're your choice.
We deliver by 10.30 a.m. to more — for more global markets than anyone, by far. As mentioned earlier, we have the scheduled next-day delivery from Asia to Europe now and, of course, the non-stops from Asia to the US, which give us that advantage on pickup time and, believe me, pickup time is important. Every one of our customers wants to be the last pickup stop so that — to the extent that we can add later hours on pickup and then get it there by 8:00, a service advantage for us.
The hub in Guangzhou, if you're ever China and you want to go see it, just call Mickey or Steve. We'll make sure that you do. It's unbelievable. It's fantastic. It replaced the Philippines as our major Asian hub. We do have a very large domestic China business that's growing rapidly, and then we hope to get to profitability in fiscal '12. We're very excited about that, as China, as you well know, is the number two economy in the world, and it probably won't be too long before it'll be the number one. And we have to be there in a big way.
I mentioned already India and Mexico. We call them tuck-in acquisitions. Sort of the definition, for us, is — less than $1 billion a tuck-in. That's just kind of a FedEx-speak. And hopefully we'll have some more of those around the world. Just to answer your question in advance, are we going to continue to make acquisitions? The answer is yes. We don't have to do any of them, but we think we need to do them to continue to expand our service capabilities for our customers.
We are starting to target more of the global freight market. We have a subsidiary at Express called FedEx Trade Networks, which has very busily been opening offices around the world and developed a very, very good book of business already. We're in the initial phases of getting that to profitability, which we expect, again, probably in the next 12 months. It’s a very exciting time for us, and we're looking forward to that.
We also have an international economy product that we fly on our own planes for those that want a little bit more time and little bit less expensive versus our Priority but, of course, much faster than ocean. And that's tapping into that market as well, as we're seeing that pick up considerably. Very, very excited about that.
Our margin focus at Express is really dependent on yields. Our yields, on a base basis, are probably not where they were in 2007. That's how competitive the marketplace has been, and we understand that we have to get paid for what we do, and we are working very hard with unbelievable great sales and marketing team and our pricing folks, and we are driving yields up.
It's the number one focus that we have in FY12. We have to get those yields back up to compensatory rates, and that's across our entire system at Express and Freight, not so much at Ground. And I'll talk about Ground in a second, when I get to it.
You can see the difference in the yields. Of course, obviously, when you're flying very long distances, that's — it's more expensive, but when a package hits the U.S., it goes into our very low cost network, which was built on the domestic express business and continues to function very well.
We've had a lot of headwinds this year. We had a lousy third quarter. I won't say anything other than that. We had everything go wrong that could go wrong, particularly at Express. We also had a restructuring charge at Freight. All those things are behind us. You'll see, in our fourth quarter and, certainly in FY12, that these headwinds will subside a lot, with the exception of fuel. No one really knows where that's going to go. Of course, that's a wild card. I think it was $106.50 a little bit ago when I looked at it.
I should mention that oil prices are up about 21% versus last year, but jet fuel's up 48%. As you know, we have a dynamic fuel surcharge that — we pass that along to our customers, but it has about a six-week lag. So, that's going to have the — a little bit of a drag, here, for us on the fourth quarter, but it was in the guidance that I gave you. I think we're still solidly within that guidance as of today, but who knows? I'm hearing people talk about $120, $150. You get to those levels, all bets are off.
Our pension's very well funded. May 31 will be our date that we peg our fiscal '12 expenses when we mark those to market. Right now, I think we're looking pretty good. If things don't change from where they are, I don't think we're going to have much of an increase, if any, on our expense side, versus what we had to face this year. That's another big positive for us, going forward.
When we talk about Ground, which is a great, just a great story. Continue to take a, a point or so of market share year after year after year. A very low cost, variable-costed network that works exceedingly well. Win a lot of court cases to uphold that model. I'm sure you've read about a lot of that, and settling with a lot of states, which is — a part of the settlement is that they allow us to continue with the model that we're using, with some changes in our contractual arrangements with our independent contractors, but we’re very positive about this.
What's happening in the world, and I know you know this, but I would be remiss if I didn't say it — intermediate distribution is getting skipped. More and more things are going from point of origin from point of consumption directly. That plays right into the wheelhouse of FedEx, both Express, Ground and Freight.
We can take an ocean container in Long Beach and put it into our FedEx Ground network and go directly to the consumer or the retail outlet without an intermediate distribution. And that's what's really fueling our growth. The better we get and the better information that we provide, the faster that's going to continue and the better we're going to do.
Our rate increases are sticking. Our yields are going up. You saw that. We filed our 10Q last Friday. So, you can take a look at that and see for yourself and look in our stat book. Base rates are going up, and they're going up nicely, and we're going to continue to push them.
At Ground, the margin story's fantastic. We're very happy with 14% or 15%. Could we push the margin higher? Yes. I think we'd rather have growth right now and generate more cash flow. That's what we're looking for. We're going to try to grow the revenues double-digit again in FY12 and perhaps increase the margin a bit. But, we're very proud of the operations there and the service that we're providing.
I think, most notably, is how we've been able to speed up the network. Now, this is since our fiscal year 2003. You can see that we're taking a day out of lanes consistently. We sped up almost 82,000 lanes by a full day. Now, we can do that because we're highly automated at Ground, we have a variable cost structure, and we can go point to point and skip intermediate sorting locations better than the competition can. Part of that's because of our smaller size but, also, part of it's the way we're engineered and the automation that we use.
In fact, if you go away with one thing today from here, from me, one thing, this is the one. We are 23% net faster than UPS on all the lanes in the United States of America. That is one heck of a value proposition, and that's why we're continuing to grow our market share and performing so well, because of the speed and the reliability that we're providing, with a great information intensity.
This is something we continue to work on. We're going to speed up more lanes in FY12. There is an investment involved with that, but it's well worth it. Our customers tell us, when they can get the service a full day faster for around the same price, they love us. They love us.
At FedEx Freight, we have had a tough 18 months or so, as have most people in the LTL business. Fact of the matter is, we shot ourselves in the foot. We got too aggressive on yields and thought we could make it up in productivity, and the reality was, we could not. My mistake. Shame on me.
But, going forward, we've now reconfigured it where we're dual-utilizing our hubs. We're providing an Economy and a Priority service. We are seeing our yields go up dramatically. We're seeing our productivity go up dramatically. We will be profitable in the fourth quarter and should have a very nice year in FY12 for FedEx Freight, coming off a couple years of losses.
The cash charges associated with the restructuring are zero, because we sold off a lot of properties that paid for any lease impairment and service costs that we occur — incurred, so an endless ROI on that investment. I wish I had 10 more projects just like it.
Our volumes are down a bit year-over-year, but nowhere near what a lot of people, with the exception of Tom, predicted would happen to FedEx Freight. Our service levels are excellent, and the customer feedback has been outstanding. We're the only people who are doing this, running a regional and national network together and dual-utilizing hubs. And again, our technology is what makes that possible.
And I encourage you to get to one of our FedEx Freight locations and see exactly how this works. I think you'll be very pleased with how we can utilize the property for a lot longer period of time, not get confused about which freight goes where and make sure that we make the service commitments. We're very excited about it.
We did implement a 6.9% rate increase back in November. That has held very firmly. As contracts come up, we continue to renegotiate them to drive those yields up even higher. Again, my fault. I was -- I joined — jumped the fence over to the sales and marketing and said, “Let's go get volume,” and I brought them all back now. I think we're in a lot better condition than we were.
Operating margins. We were — when we were hitting our stride, we would've probably been about 10.5% in '07. Then, the recession hit and, obviously, those haven't been acceptable since. We know that. We're going to drive those back up to double digits. We can't, probably, get there in FY12, but we're going to make a significant, significant headway to doing that while we continue to generate a significant amount of cash flow.
Our CapEx — I want to make sure that everybody understands, so there's no confusion here. We are being very aggressive. The reason we're being very aggressive is because, from last September through the end of this calendar year, we get to expense 100% of the capital that we add. In calendar '11, '12 — calendar '12, we get to expense 50% of it. So, it's an interest-free loan from the government, if you will.
Our cash tax rate in fiscal '11s going to be about 13.5%. So, we have decided to accelerate some plans that might've been out a little bit further, including some replacement of vehicles, some new technology and, of course, our 777s in our international expansion because of the fact — that one fact. That made it a lot less risky for us to do, and we'll be — continue to be aggressive in FY12.
I suspect our FY12 capital will be higher than what we're going to spend in FY11, which is $3.5 billion. Our facing competitor will tell you that their CapEx is a lot lower, and they're buying back shares and increasing their dividend, and that's the choice you have as investors. You can pick an aggressive company that believes that international is the wave of the future and who has strong cash flows and can expand rapidly and take advantage of the situation and get an even bigger lead in terms of market share and size, or not. And I’ll just leave it with that, but that's what we're going to do.
Barring some black swan event that's worse than what we're dealing with now, where the economy — global economy continues to crumble — and if that happens and we don't see the 2% or 3% or 4% growth rates around the world, then we'll stop. We can stop very defensively and very easily by simply putting our MD10s on the ground and flying the newer, more fuel-efficient 777s, which is exactly what we did in FY08, '09 and '10. We could that same thing. We're hoping that we don't need to do that.
Free cash flow has been positive. I think, when I first met Tom — that might've been our first year we ever got to free cash flow positive, because my other career at FedEx was trying to keep up with Fred and raising money and leasing airplanes. Dave knows about that. But, thankfully, those days are behind us. We have zero net debt. We'll have about — somewhere in the neighborhood of $3 billion of cash at end of the year. Very excited about the position that we've got on that.
Here's our fiscal year-to-date numbers. Not where we need to be. We also had the freight combination costs, and we lost the ATA case in Indianapolis, which we're appealing, which hit for $0.34 or, otherwise, we'd be right about where we were a year ago. And I've said we're expecting a very good and strong fourth quarter.
In summary, our service levels are outstanding. Our employees are as engaged and committed as ever, and there's 300,000 of us around the world, and they all deliver the Purple Promise, which — I will make every FedEx experience outstanding, every day. I'm proud to work with them.
Balance sheet's strong, our pension's well funded. We're in very good shape in that regard. It's my pension, too, I tell everybody. It's important — as important as getting my — late stages of my career to have that pension as strong as it can possibly be.
So, with that, I went a little bit longer than 20 minutes time, but happy to take your questions.
Tom Wadewitz
Analyst, J.P. Morgan
Yes, that's great. Thank you very much, Alan. I have two questions, and then I will open to the audience for questions. If you think of your questions and raise your hand when you're ready.
Let's see. First off, I think the greatest leverage point for investors or most compelling aspect for investors in the near term in your story is the margin expansion in fiscal '12. So, I was wondering if you could give us a sense of — setting aside fuel, because I think we recognize that's a source of uncertainty, what do you think our — kind of the key leverage points to realizing that fiscal '12 margin expansion? What are, maybe, the risks that we should consider when we're talking about this fiscal '12 story?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
All right, well, let me tell you about the risks first, because when you're being as aggressive as we are, and you're adding a 777 every other month, and some of them are going into new markets, there's a natural drag on that. I mean, they're not instantly profitable.
For example, our flight to — from Memphis to Korea. It's going to take us a good 12 months to get that thing up to profitability. The risk is is that we don't get the international growth in — economic growth that we see. I think that's probably the most fundamental risk that we have.
Aviation's expensive. I saw the press release that Boeing released that said that we'd bought four more airplanes, which is true. They said the list price was over $1 billion, which is true. We don't pay the list price. I'm not allowed to tell you what we pay, but — by the contract — but significantly less than that. So, I'd say that's the number one risk that we're looking at.
As far as on the up side, we have to start with FedEx Freight. I mean, the restructuring and the productivity we're going to get out of there, I'm looking at a couple hundred million dollars of productivity alone from what we've done. We're seeing it, and we're getting better every day. I mean, we scrambled the egg on February 1st, but the productivity's improving dramatically, and the customers are excited about the service they're getting. My hat's off to that team, because they have done a fantastic job.
The Freight productivity, and then the Freight yields, which are the ones we're raising the most as contracts continue to come up, that's a tremendous leverage point for us in FY12. Very big deal.
At Express, we've just had a lot of bad things happen to us this year. We ran into a very bad pension expense because of last May. Those of you who were in the market last May were all thinking about jumping out the window like I was, and we had to mark to market on May 31. We had a low discount rate, significantly lower than the previous year, and the asset's performance was way down.
That won't happen this year. That was about a $250 million hit to FY11, so it won't be — we’ll have zero in FY12 on a year-over-year basis. That's a big deal.
Our yields are going up at domestic and — at domestic express as well. Base yields are going up. domestic express is not a growth market. Why? Well, ground is so good. You just — you saw me up here put up — [now we're] speeding up the lanes and everything so, if I'm a CFO of one of my customers, I'm going to say, "That ground service is pretty good. I don't need express anymore." We know that. We're diluting ourselves to a certain degree.
As long as we can grow it at 1% or 2% and continue to push yields, the international traffic that flows across the U.S. domestic air network will be very compensatory. So, the third leverage point is international growth. We're very excited. We're starting to see it come back in Asia from Chinese New Year.
The Japan situation's obviously a horrible, terrible tragedy. We've been light out of Japan for a while, but when they turn those factories back on, and they try to catch up with the parts and supplies that everybody needs around the world that they're making only in Japan, they're going to be on FedEx airplanes. So, we'll get some of that back. I can't tell you if it's in the fourth quarter or the first quarter or the second quarter, but we've been talking to our customers over there. I'm very excited we'll get past that pretty quickly, barring something else happening that we don't know about. That's what we see there.
I think, lastly, we continue, like every other company — we have to continue to work on healthcare, we have to continue to share those increasing costs with our employees. We're going to do that. And that should be a lot less of a hit than it was in fiscal '11.
As I look at FY12, and I look back at 2007, which is our record earnings year, they look kind of similar to me in terms of momentum and earnings capability and, certainly, stronger cash flow. Now, I'm not making you an earnings projection here yet, because we're right in the middle of the business plan and Mr. Henning knows better than I where we are right now, but we're feeling pretty confident.
Tom Wadewitz
Analyst, J.P. Morgan
Are things like incentive comp. that you didn't mention — I think that was a bit of a headwind this — probably in the past two years, right, as the business came back. Is that something to consider? Or there other cost items aside from pension and…?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Yes, thanks for mentioning that, Tom. We have fully restored our 401(k), so that's a drag right now, because it started January 1. But, as you get into fiscal '12, a lot of the high paid people will already be fully matched and everything. So it won’t be anywhere near what it — the impact it was in '11.
Tom Wadewitz
Analyst, J.P. Morgan
Right.
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
We are accruing bonuses, because we've had a pretty good year, despite all these other things, compared to what our plan was.
Tom Wadewitz
Analyst, J.P. Morgan
Right.
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
So, we have a baseline amount of variable compensation in '11. Hopefully, we'll pay more than that in '12, but it'll also be because of a significantly higher earnings. I won't see it as a drag, per se. I see it as a opportunity for our folks to excel. And they get it. I mean, they understand that they got to be more productive, and that they're getting merit increases, and that healthcare costs are going up so that they have to be — work smarter and get — be more productive across the board.
We've got a lot of programs underway. In our Air Ops division, we are significantly reducing our maintenance costs in FY12. A lot of that's timing, because we've had a lot of it in '11. But, also, we're just getting more productive and smarter. As we continue to add newer, more fuel-efficient airplanes, we're getting the benefit of that. So, some of those capital returns will start to pay off in '12 as well.
Tom Wadewitz
Analyst, J.P. Morgan
Okay, great. Let's see, do we have any questions at this point in the audience?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
There’s one right here.
Tom Wadewitz
Analyst, J.P. Morgan
Great. Sure.
Unidentified Investor
Thanks. I know you don't have perfect insight into what moves in the boxes, but can you give us a sense for, I guess, in the express and maybe in the ground, too, if it's in — if it's relevant, how much of what's moving is paper, books, documents that, at some point, can get digitized?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Almost nothing. The — those days are over. In our — I like to tell this story. In our Overnight envelopes, people will ship small pigs and anvils if they can get them in there and tape them shut. (Laughter.) The fact of the matter is is that, that stuff has been gone for a very long time.
What you've got in those envelopes is intellectual property, precious photographs, circuit boards, anything that you can think of that will fit in there goes in there. We don't have anymore exposure to the continued digitization. Now, if somebody brings up -— invents a Star Trek matter transformer, we're in big trouble if it's — we're not the ones that do it first. But, that's not an issue for us anymore.
By the way, we do know what's in our packages. Our largest customers are people like Apple and AT&T and Verizon and Amazon. So, we do have books. We also have Kindles and a lot of other things. And you know, Amazon — if you take a look at Amazon, how much they're growing, they love our FedEx Ground SmartPost, where we inject the package into the Direct Delivery unit of the Postal System, which is the last place it goes before your postman gets it and sticks it in your mailbox. That's booming. That's about — we're doing about 1.5 million, 1.6 million packages per day now, just in SmartPost.
While the yields are low, because it's a postal product and it's a — it's got a net yield of — what is it?
Stephen D. Hughes
Staff Director-Investor Relations, FedEx Corp.
$1.75.
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
$1.75 — we make a pretty big margin on that. We've gotten very good at it, and so we love it. We're great partners with the Postal Service. Very exciting.
Tom Wadewitz
Analyst, J.P. Morgan
Other — there's a…
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Have one back here.
Tom Wadewitz
Analyst, J.P. Morgan
…question way in the back.
Unidentified Investor
(Inaudible.)
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
The question was the factors that make us faster than UPS in so many lanes. Well, first of all, part of it is automation. We — our hubs are much more automated. I would invite you to go to see Woodbridge, New Jersey, and see the fact that there are no people in it, basically. That's part of it.
We're smaller, so we're more agile, I think, is also helpful. I think the last one is is that we simply are determined that we've got to provide better speed for our customers, and we're willing to take some risk on some of these lanes and sell into them after we've done it. But, when you call on a customer in a city and tell them, "We've now just changed your days from Chicago from three to two," they light up. They say, "Well, that's great."
So, we do some of it on the come, if you will, to try to drive that additional revenue in there. But, really, the keys are the automation and the way the networks have grown up and the size that we have.
Tom Wadewitz
Analyst, J.P. Morgan
Let me jump in with another question here. How would you characterize the pricing story? I think you've been talking about, and your competitor as well, for probably about a year, maybe a little over a year — and I think it was into calendar '10 for them and, I believe, into fiscal '11 for you, that some of the incentives for the sales force, and so forth, changed.
But, how would you characterize that progression and attraction and how much conviction you have in that, and visibility looking forward? Specifically the express I'm talking about for domestic pricing.
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Right. Well, obviously the pricing environment became much more rational when DHL exited the market. When DHL bought Airborne, I mean it was price, price, price. I think both our major competitor and ourselves kind of went down that rabbit hole a little bit to try to hold on to some volume and some prices that, frankly, weren't compensatory. We're still recovering from that, to a certain degree.
I think, secondarily, the reason the pricing — pricing's more rational is because it's a big and growing market. The ground and express markets — well, the express not so much in the U.S. but, internationally, is just booming. People love the service, so that gives a…
But, third — and I think this is really the key, Tom. When you empower your sales force to actually be able to negotiate and give them the power to be able to get up from the table and leave and say, "We're not going there," it's amazing how well they can sell. I'm just so proud of that team, because they're out there absolutely negotiating very hard and selling a value proposition. And it's an unbelievable value proposition. You think about an average of $7.90 to move a 12 pound box around the United States and it gets there in two or three days — that's really unbelievable, when you think about it. Very reliably, full of information, tracked and traced. It's a heck of a value proposition, too.
We all know that our businesses are capital intensive and that we've got to improve our returns and that we've got to get compensated for it. So, I'd say the pricing environment is more rational than it’s been in a long time. It's not that it's not competitive —it is. But, it's certainly more rational.
Tom Wadewitz
Analyst, J.P. Morgan
Okay, great. I think we have a…
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Have one right here.
Tom Wadewitz
Analyst, J.P. Morgan
Yes. Maybe on the side, and then towards the middle again.
Unidentified Investor
You talk about the growth initiatives as being Asia. What about growing growth in Europe, in particular, given the underpenetration of — in particular, into the retail channel?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
The European market, for parcels, is different than in the United States where, in the United States, it's really a bundled sale. People want to use one carrier for their air and for their ground. That's not the case in Europe.
We do an excellent job on our intercontinental and Express intra-European businesses today. We have a great domestic business in the United Kingdom. What we don't have is a Pan-European ground network. Everybody over two feet tall has been trying to sell me the same three for the last 10 years. Since there's only three of them, you can do that math, I think.
But, the fact of the matter is, we have our own organic plans to develop additional domestic capabilities in certain key countries, and we have been — we have launched those, and I think that's the way we can go. We don't have to make any acquisitions there. We do need to get a little bit broader in our service capabilities, and we'll continue to develop that, but we're going to do it on our own timeframe, because we don't think our Express franchise is under any risk right now from bundling.
And of course, UPS has an outstanding European network. Nothing wrong with giving your competitor a compliment when they do a good job. And we look at that, and we see there's opportunity for us, too.
I think we had one here.
Tom Wadewitz
Analyst, J.P. Morgan
Yes. Question in the middle.
Unidentified Investor
Sort of following up on that last point, you've got a situation now where TNT's express business will be spun off from the mail business, and it's the first time you could buy the express business without having to take on the obligations of the mail business. Maybe you could comment on whether this is something that you guys are looking at or interested in or…?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Well, we look at a lot of things all the time. We do have a corporate development department. We're tracking lots of other companies in our sector. Not just in Europe, but everywhere around the world. That's how we develop these targets, and that's how we developed our one in India, and that's how we developed our one in Mexico. And just say we've got other things underway right now.
How many people in those room own TNT? (No hands are raised.) There's your answer. It's too expensive. It's got more than a strategic premium in it already.
Tom Wadewitz
Analyst, J.P. Morgan
Fair enough.
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
We have one right here.
Tom Wadewitz
Analyst, J.P. Morgan
One more in front here.
Unidentified Investor
Do you have any strategy for the BRIC countries?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Oh, yes.
Unidentified Investor
What about intra-China also?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Well, we do have a domestic China operation. We are restricted, and it can't look like it does in the U.S. For example, envelopes and things have to go through the Chinese Postal Authority. But, we serve 300 and so cities. Steve, is that right?
Stephen D. Hughes
Staff Director-Investor Relations, FedEx Corp.
(Inaudible.)
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Or maybe more in China today, and we're very excited about that.
In the BRIC countries, absolutely. I mean, we've got to be there. Again, anywhere people are moving, having growth, and they're coming up on their standard of living, they're going to want things. There are only a couple ways you can get things around the world. One's on a ship, the other's on an airplane.
And as I said, as things move more directly from point of origin to point of final consumption, that plays right into our wheelhouse. So, you'll see us continue to expand internationally, both in our air network and hopefully in some of the domestic countries as well.
Unidentified Investor
What about Brazil?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Love Brazil. World Cup in ’14, Olympics in ‘16. I'm very excited about it. We're down there right now, and we'll do something there. We've got organic plans as well, and that's very important. We have to — that's high up on our list.
Have time for one more. There it is. I can't hear it.
Unidentified Investor
You talked about the investments (inaudible.) Could you shed some light on the yield benefit you're getting from that investment for having the later cutoff time? And also, what sort of returns you're targeting there?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Well, any time that we buy an airplane, I'm looking for a plus 20% after-tax return, cash-on-cash. I'm not just taking the sales and international forecasting assumptions and saying those are gospel. We work them really hard.
The reason the 777 is such a perfect airplane -- because it can fly with its maximum on-ramp payload all the way from places like Hong Kong and Seoul and others, to Memphis or Indianapolis, direct. That gives us, in some cases, up to three hours later pickup time, which means someone's manufacturing plant can continue to produce for three more hours and still make the same cycle without waiting yet another day.
So, for companies that have these little devices right here that you can't get — by the way, I carry a Verizon BlackBerry and an Apple AT&T iPhone, because they're both big customers, and I use them both all the time. So, if you see them, tell them. They love it. They love that capability, and we sacrifice no payload.
You try to fly a 747 across the ocean non-stop, you've got to put a lot of fuel on there and take a lot of freight off of it. It takes away from its earnings capability. It's just a different viewpoint that we have about it.
It's also a smaller unit of capacity. It can get to profitability faster because it's not as big as a 747. It has to get filled up before you make money. So, smaller unit capacity, very fuel efficient, very long range, later pickup times. It's just — I'm just thrilled with it.
Unidentified Investor
And the three-hour…?
Unidentified Investor
Is China slowing down at all?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
China's slowing down a bit, but it's still booming. I think you had a follow-up.
Unidentified Investor
Just a follow-up. The three-hour later cutoff time, is that leading to a yield benefit? Or is the idea there that you're just taking share?
Alan B. Graf, Jr.
Executive Vice President & CFO, FedEx Corp.
Well, in the case of international, what we really want to move people up is the scale to let them, at the point of manufacturing, determine their distribution rather than putting in a big container and sending it across the ocean or putting in some giant consolidation for a freight forwarder. You can do that with high-value products, machine parts, pharmaceuticals, technology, everything we've been talking about in here.
So, what I really want to do is fill them up first, then we'll work on pushing the yields harder secondarily. But, we have a very high incremental return on each International Priority package we get.
I'm blinking, and I just want to say thank you all for the attention. I really enjoyed it.
Tom Wadewitz
Analyst, J.P. Morgan
Okay, great. Thank you very much, Alan.