FedEx Freight Will Return to Profitability Through LTL Restructuring, Logue Says

This story appears in the Oct. 4 print edition of Transport Topics.

The impending combination of FedEx Corp.’s two less-than-truckload networks is a “game-changing growth strategy” that will return FedEx Freight to profitability while maintaining volume in a slimmed-down LTL operation, the company’s top executive said last week.

Combining FedEx Freight and FedEx National LTL “reinvents the LTL customer experience” and “does not reduce our ability to serve any market we serve today,” said William Logue, president of FedEx Freight.

Logue spoke Sept. 29 during FedEx’s annual investor and analyst meeting at the company’s corporate headquarters in Memphis, Tenn. FedEx Corp. said its LTL units will impose a 6.9% general rate increase, effective Nov. 1.

The consolidated FedEx Freight will offer priority and economy LTL service over any length of haul and process longhaul and regional freight through a single network.

Priority service would move a cross-country shipment in four days and the economy service in five, FedEx said.

Two-tiered delivery speed in a single LTL network will make the reconfigured carrier — to be branded “FedEx Freight” — a standout in the U.S. LTL market.

Other single-network LTL carriers don’t have “a ‘basic’ product and a ‘normal’ product,” said analyst David Ross, who follows LTL stocks for Stifel, Nicolaus & Co. in Baltimore. With those carriers, “if you want their service, it’s their service.”

Existing single-network carriers include LTL heavyweights Con-way Freight, ABF Freight System and Old Dominion Freight Line, as well as others. YRC Worldwide is the largest carrier with separate longhaul and regional LTL networks.

After the consolidation at FedEx, the company’s LTL shippers will gain a single point of contact for all shipments and a single pickup-and-delivery driver. Previously, the company said, many customers dealt with separate account managers and drivers to move freight through both FedEx Freight’s regional LTL network and its longhaul national network.

FedEx has not publicly disclosed which terminals will close, but it has said it will trim 100 terminals and 1,300 employees from its LTL business — reductions of 20% and 5%, respectively. The consolidation goes into effect Jan. 31.

Of the FedEx Freight terminals that remain open after the consolidation, 10 will become “dual utilization” facilities, the company said. During the night, those terminals will sort premium LTL freight for expedited delivery. During the day, the same terminal will sort freight for slower LTL moves.

FedEx has said it will recoup the estimated $150 million to $200 million cost of the integration in its 2012 fiscal year, which begins next June, and that the consolidation alone will be enough to bring FedEx Freight’s operations back into the black.

The LTL consolidation was announced in September. Logue said Freight itself was the crucible of what will be the most significant reshaping of FedEx’s LTL business since it entered the longhaul market in 2006 with the purchase of Watkins Motor Lines.

The consolidation “was FedEx Freight proposing a solution,” Logue told Transport Topics Sept. 23 in Washington.

The consolidation will be Logue’s first major managerial imprint upon FedEx Freight since replacing Douglas Duncan last year as head of Freight.

Financial analysts have generally interpreted the consolidation as a positive development for both FedEx Freight and the broader LTL industry.

“Taking 20% of their terminals out of the network is a good thing for the industry, as it does reduce capacity,” said Ross of Stifel Nicolaus. He added that the network integration means that some LTL capacity “is going be taken out permanently.”

Analyst Thomas Wadewitz, who follows FedEx for J.P. Morgan, said that the integration would reduce the company’s LTL capacity by about 5% — which by Wadewitz’s estimation would translate to about a 1% reduction in total U.S. LTL capacity.

The company, for its part, has said the consolidation will do more to reduce FedEx Freight’s costs than to reduce LTL capacity industrywide.

One industry watcher said he was “100% convinced” that the LTL consolidation will make FedEx Freight profitable again.

“I am 100% convinced they will be profitable on this strength alone,” shipping consultant Satish Jindel of SJ Consulting told TT. The consolidation will “reduce the number of pickup-and-delivery routes [and] the fixed costs of the terminals won’t be as high,” he said.

Meanwhile, FedEx Freight has moved aggressively to avoid service disruptions during the consolidation that might prompt customers to divert shipments to other carriers. The company said during last week’s investor meeting it already had told thousands of customers about the transition to a single network.

Analysts reached by TT said that they nevertheless foresee some service disruptions during the massive reengineering of the FedEx Freight network.

“It’s not going to go as well as they think,” Ross told TT. “I’ve never seen a network integration at an LTL go without a hiccup.”

Senior Reporter Sean McNally contributed to this report.