LTL news: FedEx Freight lowers fuel surcharge by 25 percent

Jeff Berman, Senior Editor and John D. Schulz Contributing Editor -- Logistics Management, 7/23/2007

MEMPHIS, Tenn.—With its eye on improving market share and staying ahead of the pack in a crowded less-than-truckload (LTL) marketplace, FedEx Freight said today it has reduced its standard LTL fuel surcharge by 25%.

The company added that FedEx National LTL, its newly-formed long-haul LTL unit (as a result of FedEx’ acquisition of Watkins Lines in 2006) will also reduce its standard LTL fuel surcharge to levels commensurate with FedEx Freight.

Douglas G. Duncan, president and CEO of FedEx Freight Corporation, told Logistics Management in an exclusive interview today that this fuel surcharge reduction is an absolute first. He added that when the tragic events of Hurricane Katrina drove up oil prices so high in 2005 that FedEx capped the price after two months, but that FedEx has never cut its fuel surcharges in this manner before.

“Since we have grown over the years by increasing market share and improving efficiencies—both in fuel and other areas—we really have the capacity to do this and help [shippers] and hopefully drive a little more market share,” said Duncan. “And we figured the best place to do it was in the fuel surcharge area.”

Another reason for this decision, Duncan said, is that many shippers are claiming that energy prices are hurting business, and fuel surcharges continue to get steeper. “We felt this was the best place to give back to the customer.”

This decision, he added, reflects how FedEx has continued to make investments in its value proposition to drive market share growth. An example of this, Duncan said, is that FedEx was the first company to introduce a money-back guarantee, which was investment-driven.

“Anytime you make a market initiative, it requires an investment or order to grow and this is no different than that,” said Duncan.

FedEx’ money-back guarantee initiative was initially introduced by FedEx Express, when it first rolled out its new air service, and when FedExFreight became part of FedEx in 2001, it had the same kind of scheduled network that allowed it to guarantee its service products. Duncan added that in 2003 FedEx Freight was the first company to go out and offer customers a no-fee, money-back guarantee for its LTL service and products.

Aside from increasing its market share, Duncan said today’s news can best be viewed as a product change that can applied to the entire scale of FedEx Freight’s fuel surcharges. And as fuel prices get higher, customers are able to save more in fuel expenses, he said.

“This is a complete reduction that goes up and down the scale and higher,” Duncan. “The trucking economy has not been all that stellar in the last few months, and the imposition of fuel surcharges—as high as they have gotten—have become a real problem for customers trying to run their business and budget to anticipate what is going to happen in the future. As we looked to see where we could have the most impact and offer the most help to our customers, we clearly thought the fuel surcharge was the place to do it.”

With the fuel surcharge being reduced by 25%, the FedEx Freight fuel surcharge has dropped from 19.7% as of Friday, July 20 to 14.8% today.

A financial take on fuel surcharges
A report published today by Bear Stearns said that this fuel surcharge cut will impact both FedEx’ regional and recently-acquired long-haul operations, adding that FedEx Freight’s total LTL revenue of $4.9 billion represents approximately 14% of the total market.

In regards to how the competition may react, the Bear Stearns report said that a “competitive dynamic” in the LTL industry has been accelerating, and this fuel surcharge reduction is the “most overt sign of price competition in the LTL market since the mid 1990’s.” As a result, the report indicated it is likely that other LTL providers may follow FedEx’ lead and subsequently lower fuel surcharges as well. 

An aggressive move in the marketplace
Satish Jindel, principal of SJ Consulting, which tracks the LTL sector, says now is the “best time” for FedEx Freight to be making an aggressive move in the market place. For one thing, contract talks with the major unionized carriers (Yellow, Roadway and ABF Freight System) are under way, and non-union carriers traditionally are more aggressive in the year before the contract expires. The National Master Freight Agreement expires next March 31.

“The unionized carriers are dealing with a cost structure that makes FedEx National more attractive,” Jindel said. “FedEx is giving shippers a chance in August to switch over business away from the unionized carriers now. In the process, FedEx can reduce its costs even further and increase density.”

Jindel estimates that if all shippers are paying the full FedEx fuel surcharge, it would cost the carrier about 3.8 percent of revenue. But some large shippers have caps on their surcharges. So more realistically, the reduction mans about 2 percent reduction in revenue.

“If FedEx can reduce its costs by 2 percent through higher density and end up with more market share, they achieve a more balanced expectation of margin improvement,” Jindel said.

The move also is aimed at UPS Freight (formerly Overnite), which recently reported a 12 percent increase in shipments during its most recent quarter. FedEx Freight’s reduced surcharge could likely be aimed at some UPS Freight shippers as well as the unionized competition, Jindel said.