Network changes on tap for FedEx Freight

On its fiscal first quarter earnings call earlier today, FedEx announced some significant changes for FedEx Freight, its less-than-truckload (LTL) unit.

FedEx said it will combine its FedEx Freight and FedEx National LTL operations, effective January 30, 2011 in an effort to increase efficiencies and reduce operational costs.

Company officials said that this move will provide shippers with a choice of priority of economy less-than-truckload freight services “across all lengths of haul from one integrated company” and will also substantially improve profitability for FedEx Freight in fiscal 2012. FedEx said the estimated costs of this effort is $150-to-$200 million and will include severance costs related to personnel reductions, lease terminations, and certain proceeds from asset sales. Headcount is expected to be reduced by roughly 1,700 employees and about 100 facilities will be closed.

“FedEx Freight’s unmatched…priority and economy LTL services will deliver unique value to customers and make FedEx Freight an even more important element in our unmatched portfolio,” said Frederick W. Smith, FedEx Chairman, President, and CEO, on a conference call earlier today.

This effort, added Smith, surpasses any project the company has ever done, where it has had more extensive operational research modeling and customer focus group research, adding that FedEx is highly confident about its ability to execute on its plan. He said it is a real paradigm change in the LTL market—and may have not been possible a few years back without the advanced IT capabilities that enable FedEx Freight terminals more efficiently. Regional and national networks have been kept separate in the past because the ability to cross-utilize facilities was next to impossible, he said.

In the fiscal first quarter, average daily shipments at FedEx Freight were up 29 percent year-over-year, while yield fell 3 percent, due to what FedEx cited as recent yield management initiatives to improve pricing.

FedEx executive vice president and chief financial officer Alan B. Graf said on the call that the LTL market remains highly competitive due to excess capacity and discounted pricing, which led to quarterly yield declines. But he said FedEx Freight yields were up four percent compared to the fourth quarter of 2010 as a result of the company’s fuel management initiatives, more disciplined contract pricing, and reviews of lower-performing accounts that await adjustments.

Combining the networks will increase efficiency and reduce operational costs, said Graf, although he declined to disclose how it would impact the bottom line for FedEx.

FedEx Freight President Bill Logue said FedEx has been closely examining its LTL network and the LTL market in an effort to determine how to get back to double-digit margins, explaining that FedEx believes it has to “formula” to do that.

“Recent trends showing yield coming up is very good for our business although volumes were flat, as we moved some volume out of our system to improve yield,” said Logue. “I think we are well-positioned. This is really changing our business model and offering [shippers] a choice for every length of haul, which is what customers are asking for. And we are moving our business forward by giving them a choice and reliability. For every length of haul, they will have two choices and two options separated by, on average, a day of transit.”

When asked how combining regional and long-haul LTL networks will impact service, Graf said it will return FedEx Freight to profitability but declined to discuss specifics on yield improvements.

Providing shippers with two levels of service for every length of haul, is also indicative of a larger shift in the LTL market, explained LTL president Logue.

“A lot of long haul carriers are trying to penetrate short haul and [vice-versa] to try to find additional revenue in certain spaces,” he said. “And at the same time customers are looking for that as well as more transit choices between long and short haul within the same network.”

Along with designing a network that run its economy offering, Logue said that Fedex Freight will also capitalize on some intermodal offerings that will help the company on the cost side.

Robert W. Baird analyst Jon Langenfeld wrote in a research note that this restructuring was expected, and he also commented that this is positive news for other LTL carriers, because FedEx Freight is expected to cede share and focus on raising freight rates.