FedEx Freight profit up 10 percent; LTL shipments ‘settle’

FedEx Freight profit up 10 percent; LTL shipments ‘settle’

LTL volumes have slipped at FedEx Freight, but remain higher than in 2015, 2016, and 2017. Photo credit: Shutterstock.com.

With $7.6 billion in revenue in its last fiscal year, FedEx Freight is by far the largest United States trucking company and less-than-truckload (LTL) operator, but it has competition.

“There are other carriers that do better than FedEx [Freight],” FedEx founder, chairman, and CEO Fred Smith told investment analysts during a quarterly earnings call Tuesday. “The better way to put that is there’s one LTL carrier that does better than we do, and that’s Old Dominion [Freight Line], and we’re great admirers of Old Dominion.” 

Admirer or not, Smith, during the call transcribed by Seeking Alpha, stressed that FedEx Freight and ODFL, the second-largest standalone US LTL carrier, are very different companies, with different cost structures.

“Old Dominion operates a network that has I believe 200 and some-odd stations, versus our 360,” Smith said in an exchange with Brandon Oglenski, a senior equity analyst at Barclays. “They don't deliver every day to every part of the United States.” He added ODFL also hauls heavier shipments than FedEx Freight, in a much denser LTL network. 

At the same time, Smith said, “we benchmark them carefully as [we do] our other competitors,” looking for ways to innovate as the LTL trucking business becomes more e-commerce-oriented. “Do we ever think about doing things differently? We think about doing things differently constantly,” he said.

Doing things differently starts with e-commerce. After severing ties with Amazon in August, FedEx is pushing to broaden its e-commerce business across its modes and divisions, including at FedEx Freight. 

One example is FedEx Freight Direct, a service launched earlier this year that delivers bulky, heavy, hard-to-handle items directly to consumers. The new service competes directly with last-mile delivery services offered by competitor XPO Logistics and other companies. 

Profits rise at FedEx Freight

FedEx Freight saw shipment volumes and revenue drop year over year this summer, but increased profits and revenue per hundredweight, or LTL yield. Revenue at FedEx Freight declined 2.8 percent year over year to $1.9 billion in the quarter that ended Aug. 31, the first quarter of FedEx’s 2020 fiscal year. 

Operating profit, however, rose 10.2 percent year over year to $194 million, pushing FedEx Freight’s operating ratio (OR) down to 89.8 percent. In the previous quarter, it increased operating profit 15.5 percent and lowered its OR to 90.1 percent. 

ODFL’s most recent quarterly OR was 77.9 percent, while XPO Logistics drove its second-quarter OR down to 81.8 percent.

FedEx Freight’s shipments per day were down 3.8 percent year over year in the Aug. 31 quarter, and were essentially flat with the preceding quarter. Economy shipment volumes declined 5 percent while priority shipments dropped 3.3 percent.

While volume and revenue both decreased, revenue per shipment rose. The impact of higher LTL pricing at FedEx Freight was evident in a 2.7 percent overall increase in revenue per shipment. Revenue per priority shipment rose 3.5 percent, compared with a 1.2 percent revenue gain for economy shipments.

In terms of profitability, FedEx Freight outperformed its larger sister divisions, FedEx Express and FedEx Ground, both of which saw income decline, leading FedEx to lower its earnings forecast for 2020 amid increased trade tensions and a slower global economy. 

FedEx Ground increased revenue 7.9 percent from a year ago to $5.2 billion, but its operating profit fell 4.7 percent to $644 million. FedEx Express revenue dropped 3 percent to $8.9 billion, while operating profit tumbled 26.5 percent to $285 million. Total FedEx revenue in the quarter was essentially flat at $17 billion while net profit dropped 10.8 percent to $745 million.

Are LTL volumes ‘settling’ rather than ‘slipping’?

Although LTL shipments dropped from year-ago levels, and from a peak in the quarter that ended last Nov. 30, FedEx Freight volumes in 2019 remain higher than three of its past four fiscal years.

LTL shipment volumes last quarter were 5 percent higher than in the same quarter two years ago, 6.2 percent higher than the same period three years ago, and 14.6 percent higher than in the quarter that ended Aug. 31, 2015.

That puts the 3.8 percent slip at FedEx Freight last quarter in a new context. In 2019, LTL volumes have settled after an atypical surge last year and remain at an elevated level compared with previous years. 

That would partly explain why the LTL industry is more stable overall than the truckload sector and planning for greater growth in the second half of 2019 and in 2020.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.