“You have to put the right volume into the right network at the right rate.”
With $5.4 billion in revenue in its latest fiscal year, FedEx Freight is the largest LTL carrier. In 2010, FedEx Freight merged with FedEx National LTL, the former Watkins Motor Lines, which it acquired for $780 million in 2006. The carrier not only restructured its network by closing about 100 terminals, it reinvented its “value proposition,” replacing long-haul and short-haul networks with one network handling “priority” and “economy” shipments in all lanes. The merger and corporate “reboot,” completed in 2011, represents the largest recent consolidation within LTL.
JOC: First off, does the LTL sector need to see more consolidation for its carriers to improve density, profit margins, operating ratios? Would more consolidation, on top of what we’ve already seen since 2006, help or hurt the LTL trucking industry?
Logue: We support a healthy consolidation environment, one that benefits the customers and brings value to the marketplace. I use our consolidation as an example of that. We consolidated our two companies, but we did it by bringing a significant change and new value proposition to our customers. The value of consolidation to the customer base is important. By itself, consolidation doesn’t guarantee success. Growth is important for a carrier. Through consolidation you may improve efficiencies and freight density, but it’s important to get good quality growth, through good yield management and the network design of your business. It’s not just growth; it has to be good growth at the right yield, and you have to put the right volume into the right network at the right rate. All three legs of that stool have to be standing firm when you’re going through a consolidation.
JOC: What makes a merger successful — and when should consolidation be avoided?
Logue: It’s really specific to each individual company. What do I need? How can I improve my business? It’s about how consolidation will help individual carriers. You can’t talk about consolidation for consolidation’s sake. It has to be about improving the value proposition you bring to market. How do I bring a value proposition to the market once I consolidate that my customers will see as benefiting them? With our Priority and Economy offerings, we brought a unique value to the business.
JOC: Are there other ways carriers can get the improvements they need — better density and more sustainable profitability — without acquisitions or consolidation?
Logue: There are other opportunities out there. There are opportunities to improve trucking productivity, for example, going from 28-foot pup trailers to 33-foot trailers. That’s the kind of thing that would help an industry that’s still in recovery mode from the 2008-2009 time frame. But consolidation could be a good thing for you if you have a good plan of how you’re going to improve service in the marketplace.
JOC: Are there more opportunities for consolidation?
Logue: You look at the LTL industry and it’s fragmented. As you consolidate, you have to ask how it changes your operation. It’s really about positioning your business for future growth. You need a proposition the customers will rally around. That’s important for anyone considering consolidation.
JOC: What were your goals — how did you arrive at that “proposition”?
Logue: When I joined (FedEx Freight) in 2009, we needed to find a way to make our business long-term sustainable. Coming out of the 2008-2009 period ... Obviously, it was a challenging time. I wanted to make sure we had a value proposition that could withstand a strong economic recovery or a modest recovery. Cycles happen. They come and go. We need to make sure our value proposition can withstand a strong recovery or a downturn. That’s why we developed our Priority and Economy service model. We put together a value proposition that lets a customer stay within our network and go either fast or deferred, so we can react to any economic condition.
One of the challenges for all the LTL carriers in this recovery is that we have modest economic growth. It’s not robust. A lot of the work you’re doing coming out of this recovery is based on improving your efficiencies and your own business. You don’t have a lot of volume coming in, so you have to be really good at what you do in today’s business. It’s modest growth, and you have to be really good at how you engineer your own business to improve your efficiencies. We built the network so we could withstand upswings or downswings and sustain profitability.
JOC: How do you see the state of the LTL industry today?
Logue: It’s a stable environment, with modest growth. Each company is continuing to tweak and adjust its business. But we need more volume. We need yield. We need to improve networks.
JOC: You reported $1.39 billion in revenue in your last fiscal quarter (which ended May 31), a 1 percent drop from a year ago. Your adjusted operating income was $81 million, the same as a year ago. What’s your perspective on the quarter?
Logue: I was pleased with our performance. We matched the previous year in our base business, with a 5.8 percent operating margin. We had a good quarter from that perspective. We continue to improve on a year-over-year basis. We had a few challenges bringing our LTL customers onto our enterprise platform. Some customers had experience issues that our teams really focused on and worked through. That’s a really important objective, to bring our FedEx Freight customers onto the FedEx enterprise platform, which will give them access to all the FedEx companies.
JOC: We’ve talked before about automation — what are your goals in the area of technology and automation of LTL processes?
Logue: Automating our LTL business is really important to our strategic objectives. For one, the number of customers using manual billing has to change dramatically. Automation is an advantage for both the carrier and customer. The customer gets data and gives us data that will help us get out of this paper-intensive business that we’re in. Our ability to take that data and enhance your business will increase. We’re building out our internal system that allows us to more efficiently run our docks. If you feed all the shipment data into that system, it makes the system that more robust. The customer really needs to see the value of doing that. You’ve got small and medium-sized customers that don’t necessarily have a traffic department, or knowledge about a complicated LTL industry or time to learn. They expect that experience and knowledge from FedEx, and we’re working hard to deliver that.
JOC: What opportunity do you see for LTL, not just FedEx Freight but the entire sector, to grow? It represents about 5 percent of total trucking revenue today.
Logue: Over time, it’s going to grow, alongside economic output. Truck tonnage is going to grow dramatically over the next 20 years. The more we can run an efficient network and give our customers opportunities, they better they can grow their businesses and LTL carriers will grow with them. Economic conditions will drive LTL freight volume, just the sheer growth of commerce will drive it. But no matter what the growth conditions are you need to find ways to improve your business.
Introducing intermodal rail into our business as part of our Economy service is a good example. That was a process change and it’s worked out very well for us.
William Logue will be a speaker on the “Trucking Renaissance” panel at the JOC Inland Distribution Conference in Kansas City, Mo., Sept. 18-19.
For more information on the FedEx Freight reorganization, see: