FedEx Freight network reconfiguration is in good shape one year later after launch

On its recent third quarter earnings call, FedEx said that FedEx Freight, its less-than-truckload subsidiary, earned $1.23 billion in quarterly revenue, which was up ten percent annually.

FedEx Freight had a quarterly operating loss of $1 million, which was a significant improvement from a $110 million operating loss last year for the same quarter, with an operating margin of –0.1 percent, up from -9.8 percent. $43 million of the $110 million loss in the previous fiscal third quarter was due to a one-time cost related to the integration of FedEx Freight and FedEx National LTL operations.

LTL yield for the quarter was up 6 percent, with the company pointing to higher fuel surcharges and base yield improvement as the main drivers. And it added that average daily shipments rose 2 percent, representing sequential gains throughout the quarter and better weather compared to last year.

“In December, volumes fell off after the holidays and then sequentially improved through the quarter, which we hope to see going forward,” said Bill Logue, CEO of FedEx Freight, on the company’s earnings call. “[This] is always a challenging quarter.”

The end of January marked the one-year mark for FedEx Freight’s new network 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 last year, 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.

On last week’s call, Logue said that this network design provides choice for shippers in all lengths of haul, which is part of the company’s value-add proposition.

“Customers are making choices on all lengths of haul, whether it be short-haul or long-haul, which shows the value proposition we have out there and allow customers to interface with one LTL carrier and have multiple options across all lengths of haul,” he said. “We are seeing a nice uptick in dual users, with customers that were using FedEx National or FedEx Freight before now using both, which was one of our objectives with this initiative. We are very pleased with where it is going…and are focused on being efficient in every length of haul no matter what a customer chooses.”

FedEx Chairman and CEO Fred Smith added on the call that the reason FedEx offers Priority and Economy services in all lengths of haul for its newly engineered network is that the delta in pricing is smaller in the regional area, as opposed to long-haul. But the reason it has both Priority and Economy is that it gives FedEx the ability—if it needs to— roll the Economy shipment and operate with higher load factors.

“It gives customers a choice,” he said. “We can give them overnight service in regional markets with two-day lanes or if they are willing to take the chance that it is a shipment that will be delivered a day later, it allows us to manage load factors. It is very similar to the way we operate in the FedEx Express network. Nobody has ever done it in the LTL business and based on the strength of demand for FedEx Freight at the moment it is very obvious customers like having this option.”

FedEx Freight is currently ranked as the market share leader in the LTL market, according to data from SJ Consulting.

Stifel Nicolaus analyst David Ross wrote in a research note that in his firm’s view FedEx Freight needs to correct its pricing structure, noting that its fuel surcharge is well below industry peers.