FedEx to Overhaul Freight Unit by Combining LTL Operations

This story appears in the Sept. 20 print edition of Transport Topics.

FedEx Corp. last week said it doubled its quarterly profits, largely because of strong international business, and announced a major overhaul of its money-losing domestic less-than-truckload operations.

In a $200 million restructuring of FedEx Freight, regional and national LTL operations will be combined and 100 terminals and 1,700 workers cut from its network.

CEO Fred Smith said during a Sept. 16 conference call that the Memphis, Tenn., company reaped the benefits of “improved global economic conditions” in its fiscal first quarter. He added that while the company expects “somewhat slower economic growth going forward,” the holiday shipping season is likely to be strong.

Earnings more than doubled in the first quarter of FedEx’s 2011 fiscal year, with profits in the period ended Aug. 31 rising to $380 million, or $1.20 a share, from $180 million, or 58 cents a share, in the fiscal 2010 quarter.

Quarterly revenue rose 18% to $9.46 billion, FedEx said, mostly on the strength of the company’s international express business.

The restructuring will be effective Jan. 31, FedEx said, and the reshaped FedEx Freight will have 20% fewer LTL terminals and 5% fewer workers than the business in its current form.

The restructured freight unit will offer two tiers of service over any length of haul through a network that commingles regional and longhaul LTL freight: priority LTL service for time-sensitive shipments, and a slower economy LTL offering.

Intermodal looks to figure into the economy service, said William Logue, president and CEO of FedEx Freight.

Logue, who took over as head of the LTL unit last year, said the cost savings from the consolidation alone would make FedEx Freight profitable, even without the gains anticipated from the carrier’s ongoing plan to boost yields by cutting unprofitable freight.

Smith said the LTL overhaul is perhaps the most exhaustively planned internal initiative undertaken by FedEx in the company’s history.

“I don’t know of a single project that we’ve ever done inside FedEx where we’ve had more extensive operational research modeling and customer focus group research,” Smith said. “It will be a real paradigm change in the LTL market.”

In slimming down the company’s LTL infrastructure, FedEx is betting that its own information technology systems not only can improve productivity and retain volume in a smaller network, but also move and sort regional and longhaul LTL freight using the same terminals.

“Quite frankly, I don’t think this would have been possible a few years ago, absent the IT capabilities that are now available on a full-time basis,” Smith said of the LTL consolidation. “That’s why regional and national networks were separate: The ability to cross-utilize the facilities was next to impossible.”

FedEx Freight has lost money for four consecutive quarters. In the latest, Freight had an operating loss of $16 million, down sharply from a $2 million operating profit a year ago. Cut-rate LTL pricing and a rise in subcontracted transportation costs contributed to the loss, FedEx said.

Quarterly revenue at Freight rose to $1.26 billion from $982 million a year ago.

The LTL division took on a glut of freight in the quarter, with about 91,791 shipments per day on average. Shipments per day averaged 82,290 in FedEx’s 2010 fiscal year, the company said.

Yield, an LTL-pricing indicator, rose slightly to $17.32 in FedEx’s first fiscal quarter. In fiscal 2010, yield averaged $17.07. However, yield is down substantially from an average of $19.07 in fiscal 2009, according to FedEx.

Other FedEx units fared better.

Jet-based FedEx Express had an operating income of $357 million, up from $104 million a year ago. Revenue rose 20% to $5.91 billion, FedEx said.

Growth in emerging markets fed most of FedEx Express’ profit in the quarter.

That growth also has spurred FedEx to pour more money into the Express business, adding more flights to Asia and boosting air-cargo capacity.

At the truck-based FedEx Ground unit, operating income rose 37% to $287 million, as revenue increased 13% to $1.96 billion, FedEx said.

Average daily package volume at Ground rose 7%, while volumes at FedEx SmartPost, which sorts low-weight parcels for drop-off to the U.S. Postal Service, rose 9%.

FedEx Ground’s results include the operations of both the FedEx Ground parcel network and SmartPost.

Meanwhile, FedEx’s general counsel said the company expects Congress once again to delay action on a Federal Aviation Administration reauthorization bill the Senate and House have yet to reconcile.

“I suspect that at this point in time, there will simply be another extension,” said Christine Richards, FedEx’s executive vice president and general counsel.