Delivering an annual profit this May is the top priority for FedEx Freight, which lost money in its fiscal third quarter ending Feb. 29, its first quarterly loss in a year.
FedEx Freight lost $1 million in the quarter even as revenue jumped 10 percent year-over-year to $1.23 billion. The carrier boosted its freight volume for the first time in five quarters, raising less-than-truckload shipments per day 2 percent.
That increase in volume may indicate FedEx Freight has finished culling most of the lower-priced business the $4.9 billion LTL carrier took on during the recession. FedEx Freight is the nation’s largest LTL carrier, followed by Con-way Freight, which had $3.25 billion in revenue last year, and $3.2 billion YRC Freight.
As the carrier handled more freight, its revenue per hundredweight, or yield, increased at a slower pace during the quarter, rising only 6 percent year-over-year. Yield, a measure reflecting pricing, efficiency and fuel surcharges, increased 8, 11 and 13 percent in the company’s previous three quarters, respectively.
FedEx Freight is taking on more business, but its rates apparently are rising more slowly than in early 2011, when it made larger year-over-year pricing gains from the depths of the recession. The carrier implemented a 6.75 percent general rate increase in September 2011. However, excluding fuel surcharges, FedEx Freight’s yield rose only 2 percent year-over-year in the last quarter, indicating more modest price gains, according to an analysis by Pittsburgh-based SJ Consulting Group.
Lower increases in yield also may reflect a shift of some LTL freight from higher-priced priority to economy service, said Satish Jindel, president of SJ Consulting.
Jindel noted FedEx Freight now pays its parent company more than $400 million a year in annualized intercompany charges for technology, marketing and sales services. “They’ve got a higher overhead than their competitors,” he said. “That gets allocated to the operating company, and cuts into their profit margin.”
Although the quarterly loss was certainly a disappointment for the company, it was an improvement over the $110 million loss FedEx Freight suffered in last year’s third quarter, which capped three years of annual losses totaling $372 million. For the nine months ending Feb. 29, the industrial freight segment of package giant FedEx reported an $81 million operating profit.
“We’re very pleased with our year-over-year improvement,” President and CEO William Logue said during a March 22 conference call with investment analysts. He said the quarter included December, January and February, and because of a post-holiday drop in freight, “the third quarter is always our hardest quarter.”
Its fourth quarter, he said, is typically FedEx Freight’s strongest period. A more active spring shipping season is expected to help drive FedEx Freight back into the black. Investment research firm Stifel Nicolaus forecasts the carrier will have a $53 million fourth quarter operating profit and a $134 million annual profit.
The third quarter loss, however, showed how fragile last year’s gains may be, and where more work must be done. “While we are pleased with the progress (FedEx) Freight is making, we still have work to do to optimize the network, including improving the mix of traffic and strengthening yields,” said Alan B. Graf, CFO of parent FedEx.
FedEx Freight launched a redesigned, streamlined LTL network in February 2011, shifting its focus from regional and national distribution to priority and economy service, regardless of length of haul. That proved popular with shippers, Logue said in a Jan. 30 interview timed to coincide with the anniversary of the new network.
Prior to the integration of one- to two-day FedEx Freight with long-haul FedEx National LTL, the former Watkins, the company had only a small overlap of shippers moving freight through both networks, Logue said. That’s changing. “We’re seeing a nice uptick in our dual users. That’s one of our big objectives,” he said.
But offering priority and economy service on all lengths of haul may be eroding profit, some analysts and consultants argue, as more shippers defer priority freight by one or two days to take advantage of lower economy rates. “I don’t think the cost savings match the reduction in pricing,” Jindel said. In shorter lanes, he said, “It can cost you more to hold a shipment an extra day.”
FedEx founder Frederick W. Smith defended the strategy on March 22 when an analyst questioned whether priority and economy options should be offered universally. “The delta in pricing (between priority and economy) is smaller in regional as opposed to long-haul, but the reason we have both priority and economy (in both segments) is that it gives us the ability, if we need to, to roll the economy shipment and operate with higher load factors,” the chairman, president and CEO of $42 billion FedEx said. In other words, the current setup helps improve utilization.
“So, the customer gets a choice: We can give them absolutely positively overnight service in the regional markets or the two-day lanes, or if they’re willing to take the chance that a shipment will be delivered a day later, it allows us to manage load factors,” Smith said. “It’s very similar to the way we operate (FedEx) Express. Nobody’s ever done it in the LTL business. Based on demand, I think it’s really obvious that the customers like having this option.”
That’s true for Mark Scates, director of corporate logistics and transportation at Cenveo, a $2 billion manufacturer that ships labels, packaging and other goods from 109 U.S. plants. “FedEx realized having two separate trailers showing up at the customer’s dock didn’t work,” Scates said. “Now you get one trailer, and you can choose economy or priority service, which do you want? You just tick a box.”
The economics of utilization also can work in favor of the shipper. “They’re going to fill their trailers up, and if they’ve got space in the line-haul on the priority side, they’ll put economy freight in there,” Scates said. “To me, that’s brilliant.”
Better capacity utilization? Certainly. But it’s also freight shipped priority at an economy price. FedEx will have to balance such shipments carefully in 2012.