FedEx Freight rolls out 4.5 percent rate increase for non-contractual freight

Following the lead of some of its biggest competitors, FedEx Freight, the less-than-truckload (LTL) subsidiary of FedEx Freight, said this week it is raising rates for non-contractual freight in the form of GRI (general rates increases) by 4.5 percent effective, July 1.

FedEx said that this increase applies to eligible FedEx Freight shipments within the U.S. (including Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands), between the contiguous U.S. and Canada, within Canada, between the contiguous U.S. and Mexico, and within Mexico. And the largest LTL carrier by revenue added that the increase applies to shipments covered by the FXF 1000, FXF 501 and other related series base rates, with additional changes including absolute minimum charges and accessorial rates and charges.

The carrier’s fuel surcharge will not change, and company officials noted that the published fuel surcharge rates of the next six largest LTL carriers are at least 29 percent higher than FedEx Freight’s fuel surcharge rates as of May 27.

In recent weeks, LTL carriers UPS Freight, the LTL subsidiary of transportation and logistics bellwether UPS, ABF Freight System, the LTL subsidiary of Arkansas Best Corp., and YRC Freight each announced the following rate hikes:

• UPS Freight rolled out a GRI increase of 5.9 percent for non-contractual shipments in the United States, Canada, and Mexico, which went into effect on June 10. The company set this increase applies to minimum charge LTL and truckload rates and accessorial charges;
• ABF said that it is revising its general rates and charges for its freight division, with rates increasing by about 5.9 percent, effective May 28, noting that the effect on specific lanes and shipments will vary. Company officials said the new rates can be viewed at http://www.abf.com; and
• YRC Freight rate increased kicked in June 3 at 5.9 percent for all non-contractual shipments in the United States, domestic and cross-border Canada, and Mexico, with the company explaining that the GRI will offset cost pressures for things like driver shortages and also to allow for investment in technologies and processes for compliance with new hours of service legislation and CSA safety initiatives.

While UPS Freight, ABF and YRC Freight each came in with identical 5.9 percent increases, FedEx Freight is 1 percent less than each carrier with its 4.9 percent GRI.

These rate increases come at a time when the LTL sector continues to see improvements to varying degrees for price and volume, especially when compared to 2009, when it made up significant ground from the depths of the Great Recession. This is due, in part, to tighter capacity and steady rate gains since 2010.

And as LM has reported, there are many drivers contributing to the turnaround occurring in the LTL sector, including a sharp focus on yield management and contractual relationships, coupled with an ongoing commitment to service reliability. But even with this positive momentum, it is clear challenges still remain as volumes and the general economy remain below or near pre-recession levels seen in 2007 and earlier.

That situation, though, could also be changing, with the housing and automotive sectors showing signs of improvement, with consumer confidence also hitting higher levels, too.

A recent research note from Wolfe Trahan noted that while some LTL carriers have been asking for up to 6 percent rate increases, a shipper told the Wall Street firm that on average the increases have been closer to 2-3 percent year-to-date, due to the shipper’s consistent volumes, history with carriers, and her company’s short payment history.

Many LTL executives have told LM they view the current rate environment as “rational,” especially when compared to 2009-2010, when they were doing whatever they could to hold onto business while sacrificing price for volume to keep freight moving in their costly fixed network operations.

Satish Jindel, president of Pittsbugh-based SJ Consulting, explained in a recent interview that while truckload and parcel carriers often see double-digit margins, LTL carriers are typically at the other end of the spectrum with low, single-digit margins.

“This is not because LTLs have a bad cost structure or because they are all bad operators,” said Jindel. “It is just that the industry has slacked some pricing discipline, and shippers have been able to leverage the multiple carriers they use in a way where they have been able to get lower pricing. Shippers may not like to hear this, but they don’t benefit from unprofitable carriers no matter which segment of the industry they are in.”

The reason for this, he explained, is that unprofitable carriers cannot make the needed investments into their people, technology, networks, and equipment and subsequently fall behind as a result and are unable to bring added value to shippers.

Jindel also observed that in LTL, a much smaller percentage number of customers are experience these rate increases as LTLs have to cover the higher costs of supporting all their customers from a smaller group of customers while the LTL industry as a whole struggles with getting a return on its operations.

What’s more, many LTL carriers are basing pricing needs on the current capacity environment.  While some LTL carriers have excess capacity in their networks, they are not interested in putting it to work at yields that are not generating the types of returns that are needed.

And while the LTL sector is recovering despite the uneven economy, it is not really back to where returns justify reinvesting in the business.

“At this point, the focus is on the recovery of rates in the market and that is limiting capacity,” said Rick O’Dell, president and CEO of LTL carrier Saia in a 2012 interview. “There was a time when everyone was after growth and expansion, with the thought that if you got the density the margins would come through efficiencies and then you find that at a certain price that does not work. We have gone through a bad period and learned through the downturn you cannot cut price to chase volume, because it does not work out well. You end up running a lot of miles and burning out equipment for no return. You are now seeing a rationalization with that, and it is creating more tightness.”

Industry analysts have frequently stated that LTL GRI typically impact 20-40 percent of LTL business.