Despite low revenue gains, FedEx Freight posts best fiscal third quarter results in five years

As reported last week, fiscal third quarter earnings for transportation and parcel bellwether FedEx were down overall on an annual basis, with quarterly net income—at $361 million—down 31 percent.

But this decline cannot be attributed to the quarterly performance of FedEx Freight, the company’s less-than-truckload subsidiary.

Revenue at FedEx Freight, its less-than-truckload unit, at $1.24 billion was up 0.8 percent from $1.23 billion last year, with an operating margin of 0.3 percent compared to -0.1 percent a year ago. FedEx Freight had an operating income of $4 million which was ahead of last year’s operating loss of $1 million.

FedEx Freight yield was up 2 percent due to improvements in its FedEx Freight economy yields, and average daily shipments rose 1 percent due to higher customer demand for the FedEx Freight Economy service offering for all lengths of haul. And daily LTL shipments rose 1 percent. Weight per LTL shipment was flat at 1,154 pounds, and composite LTL yield—at $20.03—was up 2.3 percent. The company pointed out that the quarter had two fewer operating days but Freight was still able to have higher operating income and margins due to gains in yield and volume along with operational efficiencies.

The FedEx Freight Economy service is part of FedEx Freight’s 2011 network re-launch, which focused on offering shippers the choice of two levels of service from a single company. Both services, FedEx Freight Priority and FedEx Freight Economy, are designed to meet the needs of today’s LTL shippers, FedEx said when it was introduced.

Prior to the launch of the revamped LTL network, FedEx Freight President and CEO Bill Logue described it as a growth strategy to grow its business profitably for the long-term and a “game changer” designed to simplify what FedEx determined was a too complicated LTL shipping process.

The idea, he said, was to give LTL shippers two options, based on speed of delivery and price. The new FedEx Freight network is comprised of FedEx Freight Priority, a fast-transit choice for reliable, time-sensitive LTL freight delivery, and FedEx Freight Economy, a less costly choice for reliable LTL freight delivery.

While revenue at FedEx Freight in the fiscal third quarter was up less than 1 percent, FedEx Freight President and CEO Bill Logue said on last week’s earnings call that it still represented the unit’s strongest fiscal third quarter in the last five years, even with two less operating days.

“That had a big impact on our numbers,” he said. “From our perspective, we saw volume up, we saw yield up and we saw weight up. And so from that perspective, it was a good quarter. Our business had a healthy Q3. And if you look forward, we saw productivity in the quarter being very strong as well.”

While the fiscal third quarter saw some decent signs of progress, an industry analyst observed there is still room for future improvement.

“Freight is still working its way out of the margin hole it dug for itself when it clogged its network with bad freight in 2009-2010,” wrote David Ross, Stifel Nicolaus analyst. “At some point, we would like to see the company take a leap forward in margins rather than baby steps.”

After being battered by three years of recession that decimated profits in the sector, LTL carriers are focusing more on improving yields and profitability in order to make decent enough returns to recapitalize their businesses and rolling stock, LM reported in its November 2012 Quarterly Transportation Update. And it also cited how improved conditions in the auto and housing sectors are buoying some carriers’ hopes that 2013 could be their best year for profits since 2006.