International Monetary Relations Memphis-Based FedEx

International Monetary Relations

Memphis-based FedEx operates globally, especially its Express division, which has operations in over 100 countries. Most of FedEx's major costs are priced in U.S. dollars. This includes major cost drivers such as aircraft and jet fuel. The company is able to price these in U.S. dollars because they negotiate their aircraft leases in the United States. This is the case with the subsidiary in this study, FedEx Express Canada. Jet fuel is often priced locally, so for planes not based in the U.S. The cost would technically be in foreign currency, but is based on global fuel prices and jet fuel prices, both of which are priced in U.S. dollars on world markets. Other costs -- labor, gasoline, facilities, and vehicles -- are typically priced in local currency, including Canadian dollars. As a general rule, FedEx Express has natural operating hedges for these costs. They price their services in local currency, which is then used to offset the local currency costs. Profits are often reinvested into growth of international operations -- even mature markets like Canada are subject to this treatment. The company does, however, still face translation risk on its income statement as a result of its foreign operations.

It is difficult to hedge translation risk, but the company does employ means to hedge against transaction risk. FedEx takes two key steps. The first is that the company utilizes operating hedges to offset foreign currency expenses. The money that it spends on its operations in foreign countries directly supports revenue-generating activities in those countries. This spending is, except during the startup phase, generally proportional with the revenues generated in the country. The company also relies on geographic diversification in order to offset the impacts of global foreign exchange fluctuation (2009 FedEx Annual Report). The company therefore accepts that in general, foreign exchange gains in some countries will be offset by foreign exchange losses in others. The firm therefore accepts that it is subject to a certain degree of foreign exchange rate risk that will remain unhedged.

One element of the company's foreign exchange rate risk is that of jet fuel prices. In many countries, FedEx Express charges a fuel surcharge. In foreign countries, an increase in the value of the U.S. dollar is inherently built into the price of jet fuel, or even into the price of gasoline. As such, a fuel surcharge helps to offset the currency impact on the local price of jet fuel. The result is that it serves as something of a hedge, pushing this particular risk at least in part onto its customers.

FedEx Express conducts as much of its business as possible in U.S. dollars. In particular, the company's major cost drivers in U.S. dollars. The foreign currency that is not reinvested into foreign subsidiaries may be repatriated to the U.S., or invested in other areas of the world. Despite its global footprint, FedEx Express therefore is well-hedged operationally against fluctuations in the U.S. dollar. Canadian dollar surpluses, for example, have been used to make fleet and facility upgrades in that country -- a new plant was opened in Ontario last year for example (FedEx Canada, 2009).