News / Headed for independence, FedEx Freight is rolling into a cloudy future

The outlook for FedEx Freight, the LTL arm of FedEx that is headed for a spin-off on 1 June, was lowered again, this time in response to declines in shipments and revenues in the quarter that ended on 28 February as well as in the face of a challenging environment.

For the current quarter to 31 May FedEx now expects LTL revenue to be flat or down slightly as a result of a mid-single-digit decline in shipments offsetting improved yield. For the full fiscal year ending on 31 May, FedEx Freight is expected to post a low single-digit percentage decline in revenue.

In the past quarter revenue dropped 4.7% as shipments were down 5.7% and tonnage shrank 4.8%. Management’s pursuit of higher yielding traffic was stymied by market headwinds. It attributed the results to macroeconomic conditions – namely weak industrial production, trade policy uncertainty and excess capacity in the LTL market.

The LTL sector has rolled through the past years in much better shape than the truckload industry, which observers attribute largely to better pricing discipline in a market that has relatively high entry barriers, which keeps a lid on competition. Somewhat ironically, it is struggling at a time when the truckload sector is seeing signs of rates finally rising again as a result of capacity shrinkage caused by soaring costs and Washington’s moves to decimate the pool of non-domiciled drivers and those with insufficient knowledge of English.

Recent results of LTL operators and comments from their boards show a “tepid” market wrestling with low demand, little or no growth in volume. Arguably the brightest aspect at the moment is the possibility of some truckload traffic spilling over as a result of capacity contraction.

The skyrocketing fuel cost triggered by the war in the Middle East could accelerate such a development, remarked industry consultant Satish Jindel, founder and president of SJ Consulting and ShipMatrix.

On the other hand, these cost pressures could hit yields.

“The big question mark is if shippers will look for cheaper alternatives. This could divert shippers from high-service carriers to lower-cost options that deliver one day later,” he said.

He agrees that the LTL market is hamstrung with excess capacity at the moment, but argues that the industry only has itself to blame for this. The surplus capacity is self-inflicted, the result of existing operators buying up the shuttered terminals of defunct Yellow Freight, he remarked.

These acquisitions made sense in part to forestall a move by a new entrant, partly in preparation for future demand growth, but the new owners should not have opened them before demand growth manifests itself, he said.

One item on the FedEx Freight balance sheet that raised some eyebrows was $195m in costs related to the approaching spin-off, which whittled the division’s operating income in the quarter down to $8m from $261m a year ago. According to Mr Jindel, the charge is justified, though, given the magnitude of the separation and the fact that administrative and accounting functions carried out by the parent company resulted in some $400m in intra-company charges.

He agrees that FedEx Freight is moving to independence in a challenging market environment but warned that it should not be judged until at least two or three quarters after the spin-off. He expects the independent company to consolidate its product portfolio, which should reduce operating cost without hurting revenue.

He also sees potential for FedEx Freight to blaze new trails for the industry, given its size.

“They have leverage to push a big button,” he said, pointing to the existing pricing system in the LTL sector, which he calls outdated – “synonymous with using a rotary phone” in today’s environment.