FedEx Execs Discuss Aggressive Expansion Strategy in China

From FedEx's (FDX) fiscal Q4 2007 earnings conference call earlier today:

Fred Smith - Chairman, President and CEO

FedEx is the leader in express transportation in China. We also lead in revenue in Hong Kong, Taiwan, Japan and Malaysia.

We launched domestic express service last month in China, the world's fastest growing economy. We'll spend a considerable amount to build our new intra-China network and add to our intercontinental network. FedEx now offers end-of-business day cut-off times with next day, early morning deliveries in 19 cities in China and that will be expanded shortly. We've created day-definite service, with 24-hour and 48-hour services to more than 90% of China's GDP. FedEx has a sizable advantage over the competition in China for several reasons.

First of all, we have been in China for more than 20 years. FedEx has 30 weekly US to China air frequencies, more frequencies than any other US cargo carrier. We believe we have a strategic advantage with plans to locate our new $150 million Asia-Pacific hub in Guangzhou, the heart of the Pearl River Delta, where more than 40% of China's exports are generated.

Ken Hoexter - Analyst, Merrill Lynch

Can you talk about the scale of the China expenses on the roll out of the domestic network? I guess what we might see over the next four quarters that we've seen the peak in this fourth quarter should peak out in the first or second quarters? And then also can you tell us what the benefit in Express this quarter, was from the A380 sale or elimination contract.

Alan Graf - EVP and CFO

Alright. Well in China, we have very aggressive plans Ken, and we are already providing two days service to over 200 cities. We are going to be moving very quickly to add cities to our time definite next-morning service; we hope to get by the next month up to 28. Time-definite next day service to more than 50 cities, and you might guess we are picking the largest ones, and they have the most people and we are talking about significant amount of opportunity here.

So, I think that the plan that we have is about as aggressive as we can possibly do it. So, that means that we're going to continue with the sort of losses in the first couple of quarters here of '08 that we had in the fourth quarter of '07. Expect those to start narrowing in the second half and frankly don't see any reason at all why we won't have some profit in domestic China in FY '09.

Dave Bronczek - President and CEO of Federal Express

Let me add. This is Dave Bronczek. Let me just add that the business plan was outstanding. Eddy Chan and his team in China and there in Shanghai did a great job. Alan is right, its 28 cities that will be time-definite, 200 cities day-definite they called on thousands and thousands of potential new customers for this service and we are very, very excited about the upside going forward.

Scott Flower - Analyst, Banc of America Securities

Okay. And then the other question is, I am just wondering on China and I think you alluded to this in the analyst meeting in Memphis. Obviously, you had different scenarios and I guess from the context of the comments you made today, as well as some of the CapEx, it sounds like you are going after this as hard as you can in terms of the ramp and to the extent that the growth there. The hockey stick or the ramp later or sooner and faster, is that a fair way of thinking about how you are approaching the China network situation?

Dave Bronczek - President and CEO of Federal Express

I can say that we are going in to the China market very aggressively. We have the lot of good feedback from our customers that want this product and service offering and we are optimistic. So, yes, I would say that we are going into the market as we had planned, but it is aggressive.

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