GENERAL
The following Management's Discussion and Analysis of Results of Operations and Financial Condition describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation ("FedEx"). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2009 ("Annual Report"). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.
We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively under the respected FedEx brand. Our primary operating companies include Federal Express Corporation ("FedEx Express"), the world's largest express transportation company; FedEx Ground Package System, Inc. ("FedEx Ground"), a leading provider of small-package ground delivery services; and FedEx Freight Corporation, a leading U.S. provider of less-than-truckload ("LTL") freight services. Our FedEx Services segment provides customer-facing sales, marketing, information technology and customer service support to our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. ("FedEx Office"). These companies represent our major service lines and form the core of our reportable segments. See "Reportable Segments" for further discussion.
The key indicators necessary to understand our operating results include:
• the overall customer demand for our various services;

• the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight;

• the mix of services purchased by our customers;

• the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per hundredweight for LTL freight shipments);

• our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and

• the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.

The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent with the change in revenues and volume. The following discussion of operating expenses describes the key drivers impacting expense trends beyond changes in revenues and volume.
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2010 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.

RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table compares summary operating results (dollars in millions,
except per share amounts) for the three-month periods ended August 31:

                                                                  Percent
                                          2009        2008        Change
            Revenues                     $ 8,009     $ 9,970           (20 )

            Operating income                 315         630           (50 )

            Operating margin                 3.9 %       6.3 %        (240 ) bp

            Net income                   $   181     $   384           (53 )


            Diluted earnings per share   $  0.58     $  1.23           (53 )

The following table shows changes in revenues and operating income by reportable segment for the three-month periods ended August 31, 2009 compared to August 31, 2008 (dollars in millions):

                                        Revenues                Operating Income
                                  Dollar       Percent       Dollar          Percent
                                  Change       Change        Change          Change

        FedEx Express segment    $ (1,495 )         (23 )   $    (241 )           (70 )
        FedEx Ground segment          (31 )          (2 )          13               7
        FedEx Freight segment        (371 )         (27 )         (87 )           (98 )
        FedEx Services segment        (62 )         (12 )           -               -
        Other and eliminations         (2 )          NM             -               -


                                 $ (1,961 )         (20 )   $    (315 )           (50 )

Overview
Our revenues and earnings decreased significantly in the first quarter of 2010, as weak global economic conditions continued to negatively impact our yields and volumes. By comparison, our results for the first quarter of 2009 reflected better global economic conditions and a significant benefit from rapidly declining fuel prices as a result of the timing lag that exists between when fuel prices change and when our indexed fuel surcharges automatically adjust. For the first quarter of 2010, the indices used to determine the fuel surcharges for our shipping services were significantly lower year over year based on lower fuel prices, which significantly decreased our fuel surcharge levels. The benefits of numerous cost-reduction activities implemented in 2009 (described below) and one additional operating day favorably impacted our results for the first quarter of 2010.

The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group, which comprises the FedEx Freight and FedEx National LTL businesses of FedEx Freight Corporation, show selected volume trends (in thousands) over the five most recent quarters:

(1) Package statistics do not include the operations of FedEx SmartPost.

Operating Income
The following table compares operating expenses expressed as dollar amounts and
as a percent of revenue for the three-month periods ended August 31:

                                            2009 (1)                         2008
                                   Amount       % of Revenue      Amount       % of Revenue
  Operating expenses:
  Salaries and employee benefits   $ 3,377               42.2 %   $ 3,585               36.0 %
  Purchased transportation           1,054               13.2       1,278               12.8
  Rentals and landing fees             578                7.2         617                6.2
  Depreciation and amortization        495                6.2         492                4.9
  Fuel                                 666                8.3       1,528               15.3
  Maintenance and repairs              401                5.0         537                5.4
  Other                              1,123               14.0       1,303               13.1

  Total operating expenses         $ 7,694               96.1     $ 9,340               93.7


  Operating margin                                        3.9 %                          6.3 %

(1) Due to the fixed-cost structure of our transportation networks, the year-over-year comparison of our operating expenses as a percentage of revenue has been affected by a number of factors, including the impact of lower fuel surcharges, significant declines in volume due to economic conditions and our cost-containment activities. Collectively, these factors have distorted the comparability of certain of our operating expense captions on a relative basis.

Operating income and operating margin declined significantly in the first quarter of 2010, as a reduction in fuel surcharges (described below) and a more competitive pricing environment reduced yields. Volume declines at the FedEx Express and FedEx Freight segments as a result of continued weak global economic conditions also contributed to the decrease in operating income and operating margin during the first quarter of 2010. Cost-reduction initiatives implemented during 2009 partially mitigated the negative impact of these factors on our results for the first quarter of 2010. During 2009, in response to weak business conditions, we implemented several actions to lower our cost structure, including base salary reductions for U.S. salaried personnel effective January 1, 2009, a suspension of 401(k) company-matching contributions effective February 1, 2009, and implementation of a hiring freeze. In addition, we further optimized our networks by adjusting routes and equipment types, permanently and temporarily idling certain equipment and consolidating facilities. We continue to exercise stringent control over discretionary spending, such as travel, entertainment and professional fees, and defer capital investments when possible to better match current demand levels.
Salaries and wages declined 6% in the first quarter of 2010, reflecting a strict freeze on hiring, reduced hours and the pay actions described above. Purchased transportation costs decreased 18% in the first quarter of 2010 due to lower volume, which reduced the utilization of contract pickup-and-delivery services, and a lower average price per gallon of fuel. Maintenance and repairs expense decreased 25% in the first quarter of 2010 primarily due to volume-related reductions in flight hours and the grounding of certain aircraft due to excess capacity in the current economic environment.

The following graph for our transportation segments shows our average cost of jet and vehicle fuel per gallon for the five most recent quarters:

We file income tax returns in the U.S. and various U.S. states and foreign jurisdictions. It is reasonably possible that certain U.S. federal, U.S. state and foreign jurisdiction income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. An estimate of the range of the change cannot be made at this time. The expected impact of any changes would not be material to our consolidated financial statements.
Outlook
We expect continued weakness in yields and comparatively soft demand for our services into the second quarter of 2010. Our results for the first half of 2009 reflected the benefits of better global economic conditions and rapidly declining fuel prices, creating difficult year-over-year comparisons. However, we have noted some positive sequential trends in volumes and yields from the fourth quarter of 2009, indicating a possible stabilization of economic conditions. Furthermore, our cost-reduction actions during late 2009 are firmly in place, providing favorable expense comparisons for the remainder of the 2010 fiscal year.
We believe our year-over-year comparisons will be somewhat better by the second half of 2010; however, our expectations assume a modest recovery in global economic conditions, the timing and pace of which is difficult to predict, and fuel prices that remain at current forecasted levels. Further, our current results reflect the suspension of many employee compensation programs (as indicated above) that may be reinstated if our financial results begin to improve, somewhat dampening the near-term earnings potential of an economic recovery. If economic conditions deteriorate further, additional actions will be necessary to reduce the size of our networks. However, we will not compromise our outstanding service levels or take actions that negatively impact the customer experience in exchange for short-term cost reductions. For the remainder of 2010, we will continue to balance the need to control spending with the opportunity to make investments with high returns, such as in substantially more fuel-efficient Boeing 757 ("B757") and Boeing 777 Freighter ("B777F") aircraft. Moreover, we will continue to invest in critical long-term strategic projects focused on enhancing and broadening our service offerings to position us for stronger growth under improved economic conditions. For additional details on key 2010 capital projects, refer to the Liquidity Outlook section of this MD&A.
All of our businesses operate in a competitive pricing environment, exacerbated by continuing volatile fuel prices, which impact our fuel surcharge levels. Historically, our fuel surcharges have largely offset incremental fuel costs; however, volatility in fuel costs may impact earnings because adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, the trailing impact of adjustments to our fuel surcharges can significantly affect our earnings either positively or negatively in the short-term.
As described in Note 9 of the accompanying unaudited condensed consolidated financial statements and the "Independent Contractor Matters" section of our FedEx Ground segment MD&A, we are involved in a number of litigation matters and other proceedings that challenge the status of FedEx Ground's owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its contractors. The nature, timing and amount of any changes are dependent on the outcome of numerous future events. We cannot reasonably estimate the potential impact of any such changes or a meaningful range of potential outcomes, although they could be material. However, we do not believe that any such changes will impair our ability to operate and profitably grow our FedEx Ground business.
See "Forward-Looking Statements" for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.

NEW ACCOUNTING PRONOUNCEMENTS
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. We believe the following new accounting pronouncements are relevant to the readers of our financial statements.
On June 1, 2008, we adopted Statement of Financial Accounting Standards ("SFAS") 157, "Fair Value Measurements," which provides a common definition of fair value, establishes a uniform framework for measuring fair value and requires expanded disclosures about fair value measurements. On June 1, 2009, we implemented the previously deferred provisions of SFAS 157 for nonfinancial assets and liabilities recorded at fair value, as required. The adoption of SFAS 157 had no impact on our financial statements.
In December 2007, the FASB issued SFAS 141R, "Business Combinations," and SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin ("ARB") No. 51." These new standards significantly change the accounting for and reporting of business combination transactions, including noncontrolling interests (previously referred to as minority interests). For example, these standards require the acquiring entity to recognize the full fair value of assets acquired and liabilities assumed in the transaction and require the expensing of most transaction and restructuring costs. Both standards became effective for us beginning June 1, 2009 and had no impact on our financial statements.
In December 2008, the FASB issued FASB Staff Position ("FSP") 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets." This FSP provides guidance on the objectives an employer should consider when providing detailed disclosures about assets of a defined benefit pension or other postretirement plan, including disclosures about investment policies and strategies, categories of plan assets, significant concentrations of risk and the inputs and valuation techniques used to measure the fair value of plan assets. This FSP will be effective for our fiscal year ending May 31, 2010. In April 2009, the FASB issued FSP No. 107-1 and Accounting Principles Board Opinion ("APB") No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This FSP requires disclosures about the fair value of financial instruments for interim reporting periods in addition to annual reporting periods. This FSP became effective for us beginning with the first quarter of fiscal year 2010.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which establishes general standards for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard requires us to disclose the date through which we have evaluated subsequent events, which for Securities and Exchange Commission ("SEC") registrants is the date we file our financial statements with the SEC. This standard became effective for our first quarter of fiscal year 2010. Events occurring after the date of the condensed consolidated balance sheet but before the issuance of the financial statements included in this filing have been evaluated through the time of this filing.
In June 2009, the FASB issued Statement No. 168, "The FASB Accounting Standards Codification ("Codification") and the Hierarchy of GAAP," ("SFAS 168"), which establishes the Codification as the single source of authoritative U.S. GAAP recognized by the FASB. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective beginning for periods ending after September 15, 2009. As SFAS 168 is not intended to change or alter existing GAAP, it will not impact our results of operations, cash flows or financial position. We will adjust historical GAAP references in our second quarter 2010 Form 10-Q to reflect accounting guidance references included in the Codification.

REPORTABLE SEGMENTS
FedEx Express, FedEx Ground and the FedEx Freight LTL Group represent our major
service lines and, along with FedEx Services, form the core of our reportable
segments. As of August 31, 2009, our reportable segments included the following
businesses:

FedEx Express Segment     FedEx Express (express transportation)
                          FedEx Trade Networks (global trade services)

FedEx Ground Segment      FedEx Ground (small-package ground delivery)
                          FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment     FedEx Freight LTL Group:
                             FedEx Freight (regional LTL freight transportation)
                             FedEx National LTL (long-haul LTL freight transportation)
                          FedEx Custom Critical (time-critical transportation)

FedEx Services Segment    FedEx Services (sales, marketing and information technology
                          functions)
                          FedEx Office (document and business services and package
                          acceptance)
                          FedEx Customer Information Services ("FCIS") (customer
                          service, billings and collections)
                          FedEx Supply Chain Services (logistics services)

FEDEX SERVICES SEGMENT
The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to pursue synergies from the combination of these functions. The FedEx Services segment includes: FedEx Services, which provides sales, marketing and information technology support to our other companies; FCIS, which is responsible for customer service, billings and collections for FedEx Express, FedEx Ground (including FedEx SmartPost), the FedEx Freight LTL Group and FedEx Office U.S. customers; FedEx Supply Chain Services, which provides a range of logistics services to our customers; and FedEx Office, which provides retail access to our customers for our package transportation businesses and an array of document and business services. Effective September 1, 2009, FedEx Supply Chain Services was realigned to become part of the FedEx Express reporting segment.
The FedEx Services segment provides direct and indirect support to our transportation businesses and accordingly we allocate all of the net operating costs of the FedEx Services segment (including the net operating results of FedEx Office) to reflect the full cost of operating our transportation businesses in the results of those segments. Within the FedEx Services segment allocation, the net operating results of FedEx Office are allocated to FedEx Express and FedEx Ground. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services allocations). For the FedEx Services segment, performance is evaluated based on the impact of the total allocated net operating costs of the FedEx Services segment on our transportation segments. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing these functions.

The operating expenses line item "Intercompany charges" on the accompanying . . .