FedEx Corp. (NYSE: FDX) officials on Thursday said that overflow shipments from a saturated truckload market contributed to record fourth-quarter results for the less-than-truckload unit but blamed a messy service suspension for some customers on rivals’ earlier cancellations that dumped more freight into its system.
FedEx Freight’s average daily shipment volume grew 30% and revenue per shipment increased 6%, resulting in a 16.1% increase in operating margin, the company reported.
Overall, the integrated logistics provider achieved record revenue and quadrupled adjusted operating income.
The fourth-quarter and fiscal-year performance reflect a broader trucking and LTL market that is squeezed by surging volumes and relatively fixed capacity. During the first quarter, the U.S. economy expanded 6.4% and economists anticipate stronger growth in the second quarter, with the manufacturing sector in expansion mode and retailers struggling to keep up with consumer demand for merchandise. Manufacturing and retail are major components of LTL business.
The avalanche of shipments dinged FedEx Freight’s service levels. As FreightWaves first reported, the nation’s largest LTL carrier abruptly terminated pickups at thousands of locations for about 1,400 customers this month in an effort to restore operational quality standards the company views as a differentiator. FedEx rolled back some service cancellations a week later after receiving blowback from customers, including retailers unhappy suppliers could not deliver their products as scheduled.
Another reason for Freight’s high throughput level was extra loads carried on behalf of sister unit FedEx Ground, which experienced more than 20% growth in average daily package volume from the prior quarter. For the year, the Freight segment delivered 1.7 million packages for Ground.
Executives said a lack of labor availability among drivers and dockworkers contributed to late deliveries across all its parcel and trucking units.
The truckload sector is five times larger than LTL so “when they get full, the spillover comes into LTL. As the largest LTL carrier, we get the majority of it,” FedEx Freight CEO Lance Moll said during a call with analysts. “And so, when you have it combined with what the broad actions our competitors have taken to embargo entire sections of the country without any notice, impacting all customers, we decided to take an implemented temporary targeted volume control to drive and minimize the network disruptions and balance capacity to avoid the backlogs across the entire country.
“So with record growth has come some tough but necessary decisions to protect our employees, reduce our backlogs and staff to our business volume. This continues to be the driving force behind our business decisions,” he added.
Analysts and former executives say Freight gets its strong profits by running one of the tightest networks, which doesn’t give it much room to handle an influx of new freight.
While other LTL carriers have used price hikes to get rid of less desirable customers and stopped accepting new tenders in certain traffic lanes, none have been as aggressive as FedEx in weeding out unfriendly freight. Logistics industry representatives say other LTL carriers have temporarily placed embargoes on select terminal service areas since early March, but haven’t put entire geographic regions off limits.
Moll said, “In hindsight, I would not have wanted to make a decision back in the quarter like this, and we’re taking measures to avoid it going forward.” A more targeted approach, the company says, will hopefully provide transparency into why service is discontinued in some situations.
With a strategic focus on only accepting freight that’s easy to handle or fits the network, some shippers will remain in the cold.
CFO Mike Lenz said Freight will continue to improve “revenue quality” and pursue profitable growth strategies.
Meanwhile, Freight intends to grow its share of the residential freight delivery market, said Chief Marketing Officer Brie Carere. FedEx Freight Direct is a service introduced a few years ago to meet growing demand from e-commerce for delivery of heavy, bulky items to homes and businesses.