FedEx Freight is Upbeat

As was the case from a company perspective, fiscal fourth quarter output for less-than-truckload market leader FedEx Freight was strong, the company reported in its earnings announcement this week.

FedEx Freight revenue saw a 12 percent increase to $1.55 billion, and operating income headed up 51 percent to $122 million. Operating margin at 7.9 percent was up from 5.8 percent a year ago. Average daily shipments—at 95,700—were up 12 percent, with a 14 percent increase in demand for its Priority service and weight per shipment—at 1,200 pounds—was up 2 percent. Revenue per hundredweight was flat at $19.66. Higher average daily shipments and higher weight per shipment, coupled with improved operational efficiencies partially offset by one fewer operating day, were drivers for the solid results.

“FedEx Freight also had an excellent quarter,” said Alan Graf, FedEx executive vice president and chief financial officer, said on the earnings call. “We expect continued revenue and operating income growth at the Freight segment as well in FY ‘15 driven by volume and revenue per share per shipment increases from our differentiated LTL services as well as continued improvement in network and operational optimization. The recent increase to our fuel surcharge rates for certain LTL shipment will also benefit yields in FY ‘15.”

On March 31, FedEx Freight implemented a General Rate Increase (GRI) of 3.9 percent for non-contractual freight, effective March 31, and on June 3 it raised its published fuel surcharge by 3 percent.
Even though FedEx Freight saw strong results, it still is not seeing the operating incomes it generated in 2006 and 2007, nor are most, if any, LTL players, either.

When asked on the earnings call if FedEx Freight is more focused on cost and productivity or growth initiatives at this point, FedEx Freight CEO Bill Logue said that the unit’s chief objective, as it previously stated in 2010 and 2011 is to get Freight back to double-digit margins.

“We have a solid business plan for FY’15,” he explained. “And I would just say that from an overall Freight perspective, our focus is on balance. We’re really going after a good balance between yield and volume for the business. The operating team has done a great job on productivity. So we’ll continue network design, focus on yield and volume growth as we move forward and that will continue as we march towards our objective of double-digit margins.”

Helping to drive the margins is what FedEx CEO Fred Smith described on the call as the customer reaction to the value proposition FedEx Freight has which allows the selection between its Priority and Economy services, which were rolled out as part of the FedEx Freight re-launch in 2011.

FedEx Freight Priority is a fast-transit choice for reliable, time-sensitive LTL freight delivery, and FedEx Freight Economy is a less costly choice for reliable LTL freight delivery.
“[FedEx Freight] is executing to perfection in terms of the strategy that we’ve laid out…it’s allowing us to be very efficient in terms of growing our business with the proper balance between shipment growth and yield improvement to maximize margin,” noted Smith.

On the call, FedEx executives were asked about the possibility of doing away with the LTL classification system for pricing and shifting to dimensional pricing, which is gaining traction in the sector.
T. Michael Glenn, FedEx executive vice president, market development and corporate communications, said that FedEx Freight operates in a very fragmented LTL space and is aware of some of the optional dimensional density-based pricing that is being offered in the segment to some customers.

“We have a clear view of the market conditions and we will consider any opportunities to more efficiently price the LTL service,” said Glenn. “I think it is important to note that the class system that is used today is overly complicated. That doesn’t mean the change occurs quickly. This is a pricing system that has been in place for decades and will take time to modify many customers like it and they don’t want to get rid of it. And some customers are more open to different pricing strategies. So we will continue to evaluate the opportunities and work with customers, but I think it would serve the industry well over the long haul if the LTL pricing environment was simplified.

FedEx Freight CEO Logue added that in Fiscal Year 2015 the unit will be introducing some dimensional capture machines to capture dims on its current business, which will help with classification and current pricing for existing business.

“But also more importantly, it builds up our costing files, we can really see as we go forward with the renegotiations on contracts or so forth to get it better really look at the actual costing,” he said. “So once we build that database, it’s going to help us build and move towards that and will come over a period of time.”

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