When it comes to delivering freight, speed is important, but in an uncertain economy, money often matters most. Shippers are turning to slower, lower-priced transportation options, both international and domestic, deferring delivery of freight and better managing inventory pipelines to cut transportation costs.
That’s true for trucking as well as international air freight. Not only are shippers moving more over-the-road truckload freight to intermodal rail, but they’re looking for lower-cost options for less-than-truckload freight, too, whether consolidating freight into truckloads or rethinking how they ship freight on pallets and packages.
At FedEx Freight, the trend is evident in strong demand for lower-priced, deferred economy service, which has been growing rapidly during the last several quarters while demand for higher priced priority service declines slowly.
“Most of our business now comes from customers who use both economy and priority,” FedEx Freight President and CEO William J. Logue said in an interview. “Priority is a big part of our business, but in the past year, we’ve seen some good growth in the economy business. Our objective is to make sure that whether a customer picks priority or economy, we’re there with that option.”
After a sweeping re-engineering of its network in 2011, the nation’s largest less-than-truckload carrier now offers two levels of service, priority and economy, on all lanes for all shipments — a strategy modeled on its parent company’s parcel business. And although faster priority freight accounts for 68.7 percent of the $5 billion carrier’s shipments, its economy service is on track for expedited growth.
Although the numbers show priority shipments account for most of FedEx Freight’s volume, the more rapid growth is in economy shipments. The company’s total LTL shipments per day rose 1 percent in the fiscal quarter that ended Feb. 28, but priority shipments dropped 2 percent, while economy shipments surged 8 percent. Revenue per hundredweight — or yield — for priority shipments declined 1 percent to $17.87, but the average economy shipment yield jumped 8 percent to $26.17.
A year ago, economy freight accounted for 27.9 percent of FedEx Freight’s shipments. Today that percentage has risen to 31.3 percent, propelled by volume gains of 10 percent on average over the past three quarters. In comparison, priority shipments were flat in the fiscal quarter that ended last Aug. 30, were down 1 percent in the Nov. 30 quarter and fell 2 percent in the quarter that ended Feb. 28.
Shippers, apparently, are increasingly willing to wait an extra day for delivery to save some cash. According to Logue, economy service typically delivers goods in three to four days, while priority takes two to three days at most.
Those economy trips increasingly include an intermodal rail leg. Two years ago, FedEx Freight put no shipments on the rails. Now the LTL carrier uses trailer-on-flatcar intermodal as a regular alternative to over-the-road line-haul between major cities.
“About 14 percent of the miles we travel are on the rail now,” Logue said. “We will always look at lanes and see what the opportunities are as we grow. If the railroads can hit those delivery parameters, the scheduled times, we’ll talk.”
Some consultants and analysts question whether FedEx Freight isn’t cannibalizing its own earnings potential and slowing its revenue growth by offering economy or priority service for every shipment it handles. The company is sticking with its model, though, insisting the dual approach is a business necessity. “We’re allowing the customers to decide,” Logue said. “They have a choice now.”
And if customers choose a lower-priced option, it can still be a FedEx option.