Ken Hoexter - Merrill Lynch Art Hatfield - Morgan Keegan Jon Langenfeld - Robert W. Baird Tom Wadewitz – JP Morgan William Greene - Morgan Stanley Donald Broughton - A.G. Edwards Edward Wolfe - Bear Stearns Scott Flower - Banc of America Securities Gary Chase - Lehman Brothers Jason Seidl - Credit Suisse David Ross - Stifel Nicolaus

Good day everyone and welcome to the FedEx Corporation first quarter earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mickey Foster, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to the FedEx Corporation first quarter earnings conference call. The earnings release and stat book are on our website at fedex.com. This call is being broadcast from our website, and the replay will be available for approximately one year. Joining us on the call today are also members of the media. During the Q&A session callers will be limited to one question and a follow-up, so we can accommodate all those who would like to participate. I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call may be considered forward-looking statements, such as statements relating to management's views with respect to future events and financial performance. Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. For additional information on these factors, please refer to FedEx Corporation's and its subsidiaries' press releases and filings with the SEC. To the extent we disclose any non-GAAP financial measures on this call, please refer to the investor relations portion of our website at Fedex.com for a reconciliation of such measures to the most directly comparable GAAP measures. Joining us on the call today are Fred Smith, Chairman, President and CEO; Alan Graf, Executive Vice President and CFO; Mike Glenn, Executive Vice President, Market Development and Corporate Communications; Chris Richards, Executive Vice President, General Counsel, and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO; Dave Bronczek President and CEO of FedEx Express; Dave Rebholz, President and CEO of FedEx Ground; and Doug Duncan, President and CEO of FedEx Freight. Now our Chairman, Fred Smith, will share his views on the quarter, followed by Alan Graf. After Alan, we will have Q&A. Did the analysts get it right?: It’s up 60%:

Good morning, ladies and gentlemen. Thank you for joining our conference call highlighting FedEx’s financial performance during the first quarter of fiscal year '08. As you saw from the release, FedEx increased revenue and earnings despite a US economy that is slowed by a sharp correction in the housing market, financial volatility and high energy costs. Outside the United States, the global economy is performing solidly, with some signs of strengths in major emerging markets and most industrialized countries. We remain upbeat about long-term economic trends. FedEx is a true global company, with a presence in more than 220 countries and territories. We understand that our business is ultimately driven by long-term macroeconomic trends such as deepening trade and the broadening of global integration. In the long run, we believe FedEx is well positioned to benefit from these developments. In the first quarter of FY08, total average daily package volume at FedEx Express and FedEx Ground grew 8% year over year. Volume increases were helped by growth in international domestic Express shipments as a result of recent acquisitions in the United Kingdom, China and India. Now as we have said before, we intend to continue to expand and strengthen the FedEx portfolio of services, giving more options to our customers and more opportunities to FedEx. In that regard, we recently launched a dedicated direct FedEx Express flight between Manchester in the United Kingdom -- the fastest growing region in the United Kingdom -- and the US. FedEx Express will fly a wide-body MD-11 freighter daily Monday through Thursday between Manchester International Airport and our super hub here in Memphis, Tennessee. The flight, originating at the FedEx European hub in Paris, will increase FedEx daily capacity on the important UK to US route by up to 50% and increase daily capacity…

Thank you very much, Fred. Good morning, everyone. We are very pleased with our first quarter results of $1.58 per share versus $1.53 a year ago in the midst of what is a sluggish US economy, as Fred mentioned. Our performance was led by improved performance at Express and Ground. At Express, International Priority package revenue grew by 9% as volume was up 6% and yield up 3%. That is our strongest volume performance in some time. Volume growth in Asia Pacific was a strong double-digit and US outbound and EMEA also had strong growth. Productivity at Express continues to improve as technology and new efficiency programs are working very effectively. My partner, Dave Bronczek, will have more to say on that later in the meeting. Ground's volume growth of 10% is again leading the industry. Margins improved in this segment by 50 basis points as improved productivity and revenue growth more than offset increases in legal and settlement fees. SmartPost performance was up sharply as well. In the Freight segment, revenues increased 22% during the first quarter as a result of the inclusion of the results of FedEx National LTL. The inclusion of FedEx National LTL led to an increase in average daily LTL shipments of 13% and contributed significantly to the LTL yield increase of 8%. However, average daily LTL shipments excluding FedEx National declined slightly in the first quarter as demand for services in the entire LTL sector has been significantly restrained by the slowing US economy. Freight segment operating income decreased 30%, reflecting operating losses at National and slower year-over-year growth in regional LTL yields. Operating losses at National continue to be driven by softening volumes due to the slower US economy. FedEx Services segment revenues, which now include the operations of FedEx Kinko's as well…

Your first question comes from Ken Hoexter - Merrill Lynch.

In your outlook what kind of level of Express growth have you built in? If we go back to fiscal '01, '02, we saw Express volumes down about 7%. How deep do you anticipate this housing credit crunch, looking into the volumes and impacting the results? Last quarter we saw you set a target that was probably a little bit better than people thought. Now it is coming back down to below that $7 range on the lower end. Just want to see what you're building in as far as the weakness, as you commented, on the GDP.

I think the news there, Ken, is we are going to probably see more of the same for the rest of the year that we saw in the first quarter. We are anticipating continued, very solid International Priority growth and yields. Obviously we are benefiting some from exchange rate on the yield side, and that is helpful as well. The domestic Express market, with the very high surcharges as a result of the high fuel price, is probably going to remain flat. I will let Mike expand on that a bit.

Ken, that has been our position for some time, that the US domestic Express market will remain relatively flat to slightly declining. We see that continuing into the future, although clearly if you look at our network on a global basis we do have significant growth opportunities outside the US.

Let me just add a little bit more to that. The comments that Alan made in his opening remarks are important. We obviously have managed our business, as Mike Glenn just pointed out, on a domestic Express volume and revenue basis, to the point where we are very pleased with our cost controls and our overall productivity. In fact, if you look at our system-wide productivity, our costs grew only half that of our revenue around the world, excluding acquisitions.

If I can get my follow-up on the Ground side, very solid volume in yields; but it looks like costs crept up aside from fuel; it looks like the purchase transportation costs. This whole incentive or pressure on the single-route drivers, is that part of the purchase transportation costs? Where there other legal fees thrown in here? Are we going to continue to see that climb until you convert those single-route drivers? Can you detail what kind of incentives or pressure are on those single-route drivers to now sell the routes or form multiple routes?

In the first quarter, as I mentioned, we had a number of legal settlement charges that impacted Ground's expense structure. But even with that we still had a 50 basis point improvement in the margins. Again, that is based on strong growth, volume growth of 10%, industry leading by far, good yield management and really great productivity, the same as we are seeing at Express. I will turn it over to Dave for the rest of that question.

Alan pointed out the high-level points. If you look at all the fundamentals of our business outside of the legal settlements, we are hitting with all eight cylinders. Volume growth is great, revenue growth is great. On a go-forward basis, he already mentioned the fact that it is immaterial in terms of what the expense associated with the California conversion is but to give you a sense of it, we have just simply offered choice to our contractors that allow them to pick one of five different options. Our interest is not elimination. Our interest is compliance in dealing with this ambiguous situation; which, by the way, our contractors are frustrated with as much as we are. So we have simply made a decision to help facilitate a move-forward direction within California. We are still very strong and committed to the contractor model. While it is immaterial, rather than going through the details of the options, I would love to have the opportunity to express the options today to my contractors. But again, it is all about choice. It is not to drive them out the door, and it is not a material financial implication. Behind that, nationally we are very committed to facilitating what we call the multi-work area model, which is contractors that have employees working for them. We find that there are both quantitative efficiencies associated with that model and there are qualitative aspects that allow that model to just really provide the kind of experience we are looking for, for our customers. So while we support the single-work area contractor model, California simply puts itself in a position where we had to make a choice; and this is the choice we made, because we support the contractor model.

Your next question comes from Art Hatfield, Morgan Keegan.

Alan, a quick question on the guidance you gave. Looking at the results in Q1 and midpoint of the range for Q2, looking out for the rest of the year, getting to the midpoint would assume somewhat of a little bit of a year-over-year pickup in earnings growth. Can you address that a little bit? What your expectations are for the economy. I know you mentioned GDP growth expectations, but what your expectations are for industrial production growth and other factors that can impact your business over the next couple quarters.

I will start and then I will have Mike elaborate. Really the issue that we are dealing with versus our previous guidance is Freight. As you well know, the LTL and trucking business in general is in disarray. Tonnage is down year over year. We are holding or increasing our market share; but we are nowhere near the volumes that we had planned for. So we have unbelievably stringent cost controls and capital reductions going in there, because we don't think we're going to see the growth that we had originally thought we were going to see. That is having an impact on this particular year's earnings. If we get any sort of better pickup than what I outlined to you, and growth kicks up a bit, we will be very well positioned to benefit from that. But we frankly just don't see it. I will let Mike and Doug add to that.

Art, on just industrial production numbers, what we see looking at calendar quarters here, in the fourth quarter we see a decline from the position of third quarter somewhere in the neighborhood of 3.2%, again, quarter over quarter, and the first quarter of '08 dropping below 3%. Then in Q2, which would be roughly equivalent of our fourth fiscal quarter, right around 3%. So certainly not an increasing trend. Consumer spending, again, less than 2.5% in the next couple of quarters, right around there on an average basis, picking up maybe a little bit in the second quarter of '08. So clearly not a strong outlook, not as strong as we would like.

We can track most of our softness to the durable goods sector, which is heavily influenced by housing which I don't think is going to get better quickly. But having said that, we still have 60% of the market where we can go chase that is growing and we do have a value proposition that is superior to our competition. So we can begin to take market share in some of those other segments. Of course as Fred mentioned, having the reengineering now completed in National we have a whole new market that we can chase. We do have a superior value proposition with reliability and the low-cost producer in that market. So we will be certainly be turning up the steam on that one.

Alan, just so I understand the new reporting. From the reportable segment standpoint, Services you are going to report a revenue number; but the net will be allocated to the different transportation units?

Precisely.

Your next question comes from Jon Langenfeld - Robert W. Baird.

First on the CapEx outlook, what sort of magnitude do you think is a possible revision range? When will you determine that?

Well, two or three buckets there to talk about, Jon. One, we are going to be very aggressive in International. We are not going to back off that any. That is the best value-adding proposition we have for our shareholders and our customers. So at Express those plans are going to remain intact. In fact, if we have an opportunity to accelerate, we will. The Manchester route is one of the best-performing we have ever put in; accretive within six months as opposed to the normal 18 to 24 months to get to profitability. So I think we are in great shape there. Same with Ground. 10% year-over-year growth is a lot of packages. It requires a lot of sort capability, and we are going to continue to expand that network as we continue to grow that volume. As I mentioned, we are going to back way off of the Freight and slow down the addition of doors and some other things until we see that growth get back on the plane. But that is just short term. In the long run, we are still very confident in those networks and think they are going to provide a significant return. So I don't think we will spend the $3.5 billion this year. We will just have to see how it goes. But right now it is just mainly focused in the Freight area; and that is not as significant of a capital expenditure as is International Express.

Then on the guidance side, the outlook that everyone has given here, not expecting much of a pickup here in the near term and yet relative to what you are going to come in on the second quarter, it looks like the second half you are still expecting double-digit earnings growth. How reasonable is that, given that the outlook from the segment leaders here still appears to be pretty benign?

Well, I think it is extremely reasonable. Our first-quarter performance at Express and Ground we believe is going to continue. As I said, the real reason that we took the range down is just because of the freight market, not our company's performance. It is the market in general. So we have a very good comfortable feeling with this, and I think it is extremely reasonable.

Fuel, that is a modest impact in the second quarter, it looks like?

Well, we are chasing it up again. As you know we have a lag in the surcharge to the price. Obviously the weakness of the dollar and who knows what other things are driving up oil prices to record levels so jet fuel cost is going to go up faster than the surcharge. That is going to have a negative impact in the second quarter this year. I would remind everybody in the previous year it had a positive impact in the second quarter. So that is just part of the volatility of energy prices. Over the long run, we think they work out to about even; but sometimes we have quarter-over-quarter differences.

Your next question comes from Tom Wadewitz – JP Morgan. Tom Wadewitz – JP Morgan: I know you have had a couple of questions on the fiscal second quarter. I was wondering if you could give us a little more sense on that guidance implying worse performance than in the rest of the year and a bigger reduction versus where the expectations were. Is LTL going to have a further sequential significant lag down, and that is where we should really model it? Where Express and Ground performance isn't going to be a lot different? Maybe a few further comments on how we should think about that.

Definitely continuing to see weakness in Ground, particularly versus the previous year. Express has been restrained a bit in the second quarter by the fuel price increase. There are a few other odds and ends, but that is the majority of it.

Weakness in Freight.

Continued weakness in Freight, yes. I'm sorry. I said Ground. I didn't mean Ground. I meant Freight. My apologies. Tom Wadewitz – JP Morgan: In terms off the fuel surcharge reduction at Freight, which I think equated to about a 4% price decrease, is that just not having the impact you thought it would in terms of the volumes picking up? Is it something where you think instead of a quick impact it will take a couple of quarters to really market that to the customers? What is going on with that fuel surcharge reduction at LTL and the impact from it?

The purpose of the fuel surcharge reduction was really to reach our small and medium-sized customers to make us more competitive in that space. With the large customers, we already negotiate fuel surcharges individually in our contracts. But the fuel surcharge reduction was to really reach out to a couple hundred thousand small and medium-sized customers that we don't have a salesperson calling on every week, as a way to become more competitive and help us grow in that space. It takes longer to get to those customers, so the customer response has been phenomenally positive to our fuel surcharge reduction. But the activation rates have been a little slower than we anticipated. But we still believe we will get the benefit of this, but it takes longer to get to those small and medium-sized customers than it does the large ones that we call on every week. Tom Wadewitz – JP Morgan: So you still think you will see it, but it is just pushed out a few quarters?

We still think that was the right move to make. It really set us apart in the industry and really nobody has matched this. So that has really given us a real positive to market in the small and medium customer segment.

Your next question comes from William Greene - Morgan Stanley.

Alan, I am wondering if you can talk a little bit about what percent of your expenses at Express and at Ground would be considered fixed in the short term? So that if we did see a reduction in the growth rate in volumes or revenues, how quickly could you adjust the expenses?

Well, we are adjusting very rapidly. I will let Dave and Dave both describe what is going on. It is very good news.

I mentioned this earlier, but I think it is worth repeating. Our revenue around the globe excluding acquisitions is growing twice as fast as our expenses are. As Alan pointed out, we are very fluid on this. We can ratchet down our expenses in a number of different areas. We are working on a lot of productivity initiatives. We are very optimistic about that program going forward for Express.

And on Ground?

Part of the contractor model value is based around this whole issue of volume flexibility. When contractors contract with FedEx Ground, they assume a level of risk and benefit. Now, we don't expect volume to go down but in any different area or under any different circumstances, that directly rolls back to the contractor. So in fact the contractor has a vested interest to maintain and grow the relationship with the customer, because it is directly impacting them. So therefore we don't have the normal volatility that happens with a fixed structure. Having said that, our overhead structure is nominal outside of our capital investments which we try to time very effectively against this volume growth. Again, we are expecting to continue to grow.

On the Ground yields. Can you estimate how much of that came from the change to DIM weight? The growth that is.

At this point, no. In fact I couldn't give you an exact number.

It had a positive impact and helped us out on a year-over-year basis. So did rate increases and so did higher delivery surcharges; offset somewhat by a little bit of decline in weight.

Alan, is it safe to say all of those were sort of about the same in terms of percentages or was one a big driver versus the other?

Well, I think that is the kind of information that I would like to keep in-house.

Your next question comes from Donald Broughton - A.G. Edwards.

Good morning, everybody. I noticed that the average pounds per package in Express keep going up. In previous cycles and previous slowdowns, usually the average pounds per package fall off a little bit as people are more reluctant to pay higher express package prices on the more heavy packages. The slowdown in the economy happening and yet your pounds per package keeps going up in Express -- what is driving that today?

Our International Priority pounds of course keep going up; and of course we are focused very heavily on certain segments of the market. Of course in the United States it would be the bigger boxes, and that has been a lot of our strategy for the last several years. So yes, you are right. But a lot of it has been driven by our International Priority package weight growing.

Your next question comes from Edward Wolfe - Bear Stearns.

I hate to beat a dead horse, but just more clarification on the guidance. I don't think the issue, at least for me, is that you are taking guidance down. You said you expect the economy is not great. What I am surprised is you reported earnings that is up 3% year-over-year this quarter; you have given guidance at the midrange next quarter that is down 11%. Then if you back out those two numbers, you get positive 12% for guidance at the midpoint for the next two quarters. What is it that is driving you so hard down in this next quarter, and then you think is going to bounce up? Is it legal fees related to this case? Is it comparisons? What makes for the difference here? I mean, why do you go from positive 3% now to minus 11% at the midpoint, and then spike up to positive 12% in the back end for expectations?

Ed, Alan here. Number one reason is fuel price increases and jet fuel costs at Express particularly versus we had the reverse a year ago, and continued weakness in Freight. We start to lap the National acquisition; Freight gets a little better in the second half. IP growth continues. And we are expecting fuel to level off. So it is a timing issue more than anything else.

What I heard from that was fuel leveling off is one of the expectations and the expectation to see some benefits from the LTL acquisition?

Right. Remember a year ago in the third quarter we absolutely got hammered by fuel.

As a follow-up on Ground, Dave, can you talk a little bit about your volumes increased in the quarter in terms of 10% versus where you have been at 8% and 9% the past two quarters. Is that market share or is that something you guys are doing? Or is it the overall market stabilized or improved? Also operating margin, you have been all over the place lately with 50 basis points improvement this quarter; 240 year-over-year last quarter and minus 80 two quarters ago. How should we think about modeling margin as we go out?

Ed, first of all the market itself, volume has been extremely strong in the retail sector. We have gained share in a number of cases. We have certainly seen some of our large non-retail customers' volumes go down through this economic situation but retail has been extremely strong for us. The value proposition we have in our home delivery market is attracting customers. So that is clearly one of the advantages we have. I think that the timing relationship on the quarter-to-quarter performance has been related to some one-time issues. You mentioned the legal fees type situation and some of the very strong volatility, not to the extent that Express is, but where we have picked up some very good gains on certain quarters that have just not washed out simply on a year-over-year basis. But consistently 10% has been between 1 and 2 points, and then a couple of one-off nuances. I want to remind you and I know you watch this closely, we also do capital investments for this growth and they are timed to happen on particular quarters to handle that volume. We do a terrific job of bringing on numerous projects that both from a capital and operating expense standpoint, are timed to minimize the capital expense and maximize the efficiency we get from the growing volume. So you can see that as one of the spikes that occur on a quarter-over-quarter basis as well.

I think you know we have been taking share in this market since we went to market as FedEx Ground and rebranded the former RPS under the FedEx brand. That is due to two primary reasons. One is we made tremendous investments in the Ground value proposition, speeding up the network, improving information and reliability, and really positioning Ground as part of a broader FedEx portfolio. Our sales team has done a great job at helping our customers understand the significant improvements we have made in our Ground service. So while we did see a little bit of rebound in market performance in the overall Ground segment, we continue to grow much faster than the market.

Your next question comes from Scott Flower - Banc of America Securities.

I know there are a lot of moving parts and pieces in Express relative to some of the incremental acquisitions you all made. Obviously the performance; and Dave Bronczek pointed out on the cost side, ex-acquisitions. But could you give us some sense on International Priority what the organic volume growth was? Obviously we have got the total, so we can do the math after that.

The IP growth at the moment is still all organic. The acquisitions that we made, FedEx UK for example, we simply replaced our old service provider with our own people for IP pickup and delivery and we are penetrating the market better, since we have more control but we are early on in those stages. I expect to see that growth over time accelerate. The same thing with China. We have been in China for a very long time with IP. The domestic business is in the startup phase right now. We are picking up a few additional IP packages as a result of being in the domestic China. But at this point it is not material; but it will be going forward.

So the acquisitions all impacted the domestic international component?

Yes. I should say that we are very pleased with what is happening at FedEx UK: strong volume and yield performance, great profitability, ahead of plan. Rebranding is going great, and it is an outstanding performance by our European management team.

It is all organic growth in the IP product, and it is growing exceptionally well. Alan pointed out it is many, many quarters now this is the highest growth rate we have had there. I should point out that it is growing all around the world. Every region of the world has grown year-over-year in the first quarter including Canada, Latin America, of course, EMEA, and US outbound, and led by Asia-Pacific.

Obviously again, the results speak for themselves. But I am just wondering, SmartPost is growing so nicely; and yet I just noticed recently that some of your US freight, which obviously a decent component of that is the wholesale arrangement with the Postal Service. Is SmartPost taking share from the Postal Service's offering, be it Priority Mail or otherwise?

I do not see that as part of the portfolio at all. One of the values of SmartPost, as we mentioned at the annual meeting, was for the customer who is trying to find the right solution set at the right cost, SmartPost is a nice opportunity. We see most of the customers we have in the SmartPost environment have a mix of SmartPost Postal Service products and Ground and Express products. We have not seen a unique takeaway from the Post Office whatsoever, from my perspective.

I would add that SmartPost is a complementary service to our Ground offering, and especially obviously home delivery. Traditionally FedEx Home has targeted heavier packages, heavier average weight transactions to move through our network. SmartPost is a nice complement for that, which allows us to meet the customer's entire shipping needs, including the lightweight packages that require residential delivery. So it is more of a complementary service to home delivery.

Your next question comes from Gary Chase - Lehman Brothers.

Could you talk to what is contemplated looking forward in the Freight segment? I know you talked to the fact that that was a driver of a lot of weakness. Just on the cost side, having completed your network reengineering and talking about strict cost controls, does the guidance contemplate some meaningful cost improvement there in the second half of the year?

Gary, I have to talk about the two different networks. The regional network has a very mature value proposition, it is the market leader. It is well in place and they are very good at managing cost at a lower volume. So that sector is running extremely well and performing well. On the National, we got caught reengineering a network during a down economy, which we would have preferred to have been in cost control mode but we didn't slow down. We got through the process. We now have superior service to anybody in the marketplace from a reliability standpoint. The reengineering has also given us productivity levels that will get us to a low-cost position from a low-cost producer standpoint. So we now have a value proposition in the long-haul network where we can go out and get market share. In conjunction with that, we have also had to put the sales forces together so that they could sell the entire portfolio of freight services, as well as collaborate with our package side of the house, so all of that education and realignment is done. All the salespeople are in their territories. All of them are doing maximum call efforts on their territories today. It is also a saturation strategy. We have got more salespeople calling on the same amount of customers. So we get to call on them more often. We get more deeper into their organization. So I think we are in a position where we can really begin to grow market share in that National network, which is our plan all around. It would be better if it was in an upturn in the economy. But I don't think I have to wait for the economy to turn to begin to show market share results in that network.

On the Ground side, just in a similar vein, should we be thinking there was anything unusual? I know you had higher legal costs year on year. Are we at a new run rate? Or should we expect those to tail off as we move through the year?

All other components were absolutely within our plans in terms of productivity, line haul efficiency, density factors on line haul. But I don't anticipate with this growth and the additional capital cost coming on that there is a new run rate at this point.

So we should expect that to come down a little bit?

Are you talking about legal costs?

Yes, legal costs.

Well, it is a fluid situation. I don't know, Chris, if you want to comment.

Dave, why don't I help a little bit with this one? We have seen some variation in legal costs at Ground that are driven by a variety of the litigation matters that we have been addressing. The changes we have seen are nothing that I expect to continue. There will be some swings quarter to quarter that are simply timing. But I think we will see a continuation of our past run rate rather than a change to a higher run rate.

Your next question comes from Jason Seidl - Credit Suisse.

I want to go back to a comment that was made on the Ground side. You mentioned you thought you were gaining some new customers, but you also mentioned that there has been strong performance by the retail sector. Is that the area that you are gaining some customers? Or is retail just strong organically?

I will let Mike comment; but I will simply say that the existing customer base with retail has consistently, throughout this economic change, outperformed other sectors. There is not something uniquely strong in this particular quarter. We have gained a number of customers who have either switched a segment of their business or a certain application that has migrated. So we have been seeing strength in the core of the retail business and some gains on the outside. Mike, do you want to comment beyond that?

Dave, I would just add that our strength has been across a broad customer segment from small customers to mid-size customers to large customers. We have shown strength across the board. As Dave mentioned, a bit stronger in the retail area, but we have had good solid performance across the board.

As a follow-up question, it relates to Freight. How do you see pricing in the freight market? If you break it down national compared to the regional, what are you sign signing contracts at right now?

Well, obviously the 25% reduction in the fuel charge has its impact on our yields. But as you can see from the 8% growth, we are still growing. When you separate National, the long-haul business is helping grow that. Even on the regional side we are showing positive year-over-year yield growth and our contract renewal still shows solid increases. It is a competitive market but we are doing very well on that side of it.

So solid, Doug, for the regional price increases. What about the National?

Well, the National as well. But of course in the National sector I am going to be the low-cost producer so I have a chance there to compete in the marketplace where the pricing is very sensitive and will do so.

Your next question comes from David Ross - Stifel Nicolaus.

You talked about your value proposition helping you really gain share in the Ground side and you continue to grow well in advance of the market. Just wondering if you could talk a little bit more about what that value proposition actually is that allows you to gain share? Whether it is price, better on-time service or transit times to competitor, or other services you may offer the customer.

I will start out. Our Ground operations team has done a wonderful job addressing the number-one issue in the Ground market, and that is speed of the network. We have had a concerted effort over the last several years of taking individual lanes and taking a day out of those. We have the fastest network in the industry. Our salespeople really use that to their advantage in terms of presenting that as part of the total value proposition. Our on-time service levels are extremely strong. Dave can talk more about that. We have opened up the channel. We are addressing more small customer markets. Our home delivery service has a unique value proposition and several services not available from other competitors in the marketplace. So it is a combination of service enhancements and operational excellence that has allowed us to position Ground as really a premier service in the industry.

David, the only thing I would add to Mike's comments, because our performance continues to improve, and on a net service level basis the team has done an incredible job of eliminating exclusions in the normal things that services use to measure their service. We are getting as close to net service to the customer, exclusive of excuses, that you can get at the highest level possible. One thing Mike didn't mention that we did mention, I think, at the annual meeting was our alternate delivery day service which is in the partial market there are unique zip codes throughout the country that have such incredibly low density that the competitors would use additional time. One of the things we did beyond speeding up the lanes was eliminate our own internal excuses so that we would be day specific on the 10% of these zip codes that are out in the hinterlands. That is also having a positive effect in terms of customer selection because of the service commitment we are making.

I also would add that we are now managing our retail network as one, with drop boxes in affiliates and Kinko's and we are seeing very strong growth in Ground as we make it more convenient for small customers through that network; and that is also adding value.

As a follow-up question on that retail network you have and the drop boxes. Out of the 900 million of Ground and Express packages going through FedEx Kinko's, what is the split between Ground packages and Express packages?

The retail business is still heavily weighted towards the Express business in the FedEx network. Having said that, we have a significant share opportunity in the retail network as we expand our network. That was one of the main reasons why we wanted to bring FedEx Kinko's into the Services organization. It allows us to take advantage of that portfolio on a much more aggressive basis, make strategic investments that really will drive our total value proposition, and specifically more retail packages through the FedEx Kinko network and associated network. So it is very important. This move was very important and very strategic to our go-to-market strategy to allow us to take advantage of that share opportunity in the Ground retail market.

Your next question comes from Scott Flower - Banc of America Securities. Scott Flower - Banc of America: I wonder if you can just broadly tell us where the FAA reauthorization bill stands, House and Senate? Obviously there are some implications to labor. You all are close to the specifics of that bill and where it stands in Washington. I just wanted to get a sense.

We anticipate that the House will probably bring the FAA reauthorization bill to the floor this week, either today or tomorrow. It is still in the committee process on the Senate side. We would not expect it to move forward there probably until sometime in October, if it does move forward on that side. The House bill does include language that would change and modify the RLA status of FedEx Express. The Senate bill, as we anticipated, will not. We are confident that ultimately we will be able to have folks listen to the policy arguments and the important impact that Railway Labor Act status can have on major national transportation networks in maintaining access for all customers to a continuous service without being hostage to various kinds of labor disruptions. We feel very confident of our position on this and feel confident that we will be able to see the bill move forward without any labor provisions that are troubling to us. Scott Flower - Banc of America: Have you seen any change in the domestic yield environment relative to the Air Express? Has perhaps DHL been acting any differently than they had if you look back six, 12 months ago?

Pricing has remained relatively constant over the last period. As I mention every call, we see aggressive pricing action on an account by account basis, and that is really nothing new. In some situations you will see more aggressive than you have seen in the past; in others it will be the opposite of that. So it really is an account by account basis. I think that gets back to an individual competitors' capacity in a certain market on certain lane segments. They price into that, and we do see that a lot. But overall no material changes in terms of the pricing environment. Competitive on an account by account basis but if you look at the overall market, fairly consistent with what we have seen in the past.

I think we are coming up on the hour. I want to thank everyone for your participation in our conference call today. Please feel free to call anyone on the IR team if you have any additional questions. Thank you very much. Did the analysts get it right?: It’s up 60%: