Fitch Rates FedEx's $1B Senior Unsecured Notes 'BBB'.

NEW YORK -- Fitch Ratings has assigned a 'BBB' rating to FedEx Corp.'s (NYSE:FDX) $1 billion in new unsecured notes issued today. The new notes are comprised of the following:

-- $500 million floating-rate notes due 2007;

-- $500 million 5.5% notes due 2009.

Proceeds from the new notes will be used for general corporate purposes and to help fund FedEx's acquisitions of Watkins Motor Lines and Tianjin Datian W. Group Co., Ltd. (FedEx-DTW). FedEx's Rating Outlook is Stable.

FedEx's ratings reflect the freight and express delivery company's relatively strong operating performance, improving margins, consistent free cash flow generation and manageable cash obligations. Volume growth is expected to remain solid in the FedEx Ground and FedEx Freight segments, as well as in FedEx Express' international operations, despite slowing growth in FedEx Express' U.S. delivery volumes. Pricing remains strong, reflecting robust demand. Outside of the transportation segments, FedEx Kinko's performance is lagging, largely due to waning demand for its copying and printing services. FedEx Kinko's is small relative to the other FedEx segments, however, limiting its effect on FedEx's consolidated results.

FedEx is focused on growing its international presence, in addition to strengthening FedEx Ground and FedEx Freight in North America. Among its international initiatives, FedEx plans to spend $400 million to purchase 50% of FedEx-DTW, a Chinese express delivery joint venture, making that company wholly owned by FedEx Express. In the U.S., FedEx plans to purchase less-than-truckload (LTL) operator Watkins Motor Lines for $780 million, bolstering the service offerings of FedEx Freight. In addition to these acquisitions, FedEx expects to spend $2.9 billion on capital expenditures in fiscal 2007, 75% of which is targeted toward growth initiatives.

FedEx has a strong liquidity position, including $1.94 billion in cash on hand at May 31 and access to a $1 billion revolving credit facility. The proceeds from today's notes offering further bolster the company's liquidity. Fitch expects operating cash flow to remain robust in fiscal 2007, due to continued favorable pricing and the company's focus on improving productivity. However, heavy capital spending and acquisition expenses, along with $850 million in debt maturities and higher dividend payments mean calls on operating cash flow will be significant.

Fitch's primary concerns regarding FedEx center on the cyclical nature of the transportation industry, the company's penchant for making acquisitions and potential labor issues at FedEx Express and FedEx Ground. The cyclical effect could be mitigated somewhat by secular changes, such as the increasingly global scope of the company's operations, rising consumer use online retail websites versus brick-and-mortar shopping and recent consolidation within the LTL trucking industry. Acquisition risk will likely remain an issue, although FedEx's past acquisitions have generally performed well once fully-integrated with the rest of the company.

The labor issues concern FedEx Express' contract negotiations with its pilots and lawsuits filed against FedEx Ground regarding the classification of owner-operators as independent contractors. It is likely that pilot labor costs will increase once a new agreement is in place with that labor group, driving up a portion of FedEx Express' costs. The ultimate outcome of the FedEx Ground cases could have larger ramifications for the company. If the courts rule against FedEx in those cases, not only would labor costs likely increase at FedEx Ground, but the International Brotherhood of Teamsters (IBT) has stated its intention to use a judgment against the company as a springboard to attempt to organize employees across the various FedEx units. It is notable, however, that with the exception of ALPA, past efforts to organize FedEx's employees have generally been unsuccessful.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.