FedEx Freight caught a lot of flak when it suspended service to hundreds of accounts without notice in June, leaving shipments stranded and customers scrambling to find alternative transport in an extremely tight market.
The less-than-truckload carrier aimed the embargo on pickups at shippers with more costly freight in areas of the country with dense shipment flows. By imposing volume controls, management hoped to preserve capacity for core customers.
The company’s response to mounting congestion in its terminal network was certainly ham-fisted, but the need for carriers across all modes to exert better control of their capacity in the face of an onslaught of shipping demand is not unique. LTL, truckload, ocean, air and rail carriers are all culling customers to allocate limited resources to their most profitable accounts. The difference is that many of them use less heavy-handed methods of cutting off shippers while giving them time to make other arrangements.
It’s convenient to bash FedEx Freight for its treatment of customers, but without aggressive measures to maintain network fluidity service levels deteriorate for everyone.
FedEx’s LTL division was trying to avoid the type of situation major U.S. airlines are facing this summer. Carriers such as American (NASDAQ: AAL), Southwest (NYSE: LUV) and Spirit (NYSE: SAVE) have canceled and delayed thousands of flights because they don’t have enough pilots, flight attendants and airport personnel to handle the surge in travel demand as we come out of our collective COVID hibernation. Many pilots retired or were furloughed when airlines cutback operations last year and airlines haven’t been able to get pilots retrained fast enough for ongoing qualification standards. Scheduling too many flights before all the necessary resources were in place caused operational problems that upset customers.
Or consider that regional parcel delivery carrier OnTrac, which serves eight western states, confirmed Wednesday it will not take on any new fourth-quarter business after Sept. 1. OnTrac effectively reached peak fourth-quarter capacity earlier this month and won’t be able to handle new customers. OnTrac is also capping volumes of existing customers largely due to an ongoing driver shortage that has severely constrained its capacity.
FedEx got a black eye for the speed and apparent insensitivity in which it cut off customers, not the decision itself, burning bridges in the process that might never be repaired. FedEx (NYSE: FDX) officials realized that shippers with bruised feelings could impact future sales at some point, so they pivoted within a week to more carefully target which accounts and locations would get service embargoed.
In normal business periods, it’s usually cargo owners that pick carriers. But supply chains are so choked with international and domestic shipments that carriers are the ones being selective about freight they accept, prioritizing customers willing to pay a premium or demonstrate long-term commitments.
Most LTL carriers are turning away new customers and bookings where origin-destination lanes are imbalanced, pruning shippers that make truck drivers wait at their docks or exhibit other bad habits that drive up costs, and using price hikes to weed out unfavorable accounts.
Favoring profitable customers
The same thing is happening in ocean freight. When a carrier recently quoted a $32,000 rate to move a container from China to Los Angeles the message was clear: We don’t have any spare capacity, so go away.
Earlier this year, many shippers accused carriers of not honoring annual contracts — canceling bookings or rolling cargo to a later vessel schedule — to take advantage of higher rates on the spot market. But some carriers are taking a longer-term view, knowing that more ships are being built for 2023 and beyond and that market leverage can change.
Maersk, the largest container line in the world, is being conservative about adding new service contracts this year due to space concerns. “Our strategy is to focus on long term commitments with contract customers instead of playing market rates with higher profit margins,” North American media manager Thomas Boyd told me. “We knew we had a high percentage of service contract business that we needed to protect with vessel space as part of the contractual commitment – so we were careful to not overcommit and add a lot of new business.”
The harsh reality is that carriers, especially trucking companies, generally are not bound to the fixed price in a contract. It’s a commitment, not a guarantee. They intend to honor those rates as long as market conditions are stable, but if carriers don’t like the rate, or have better options, they can refuse a load. And with demand so high, they have lots of options.
The situation is similar in ocean transactions, although terms can be tighter in some cases.
Don’t forget, during times of overcapacity it’s the shippers that often don’t honor volume commitments and shop for the lowest rate.
We’re also seeing this dynamic play out with freight rail. The Union Pacific and BNSF Railway both stopped service from certain West Coast ports to Chicago for one to two weeks to relieve congestion at destination terminals and improve cargo flow in the face of record import volumes.
And taking advantage of higher margin opportunities isn’t exclusive to the transport sector. Dealer lots are nearly empty because the chip shortage is keeping down auto production. When vehicles show up they are snapped up by anxious buyers. No wonder 40% of buyers are willing to pay 12% over the manufacturer’s suggested retail price – about $5,000 for the average new car – according to a Cox Automotive survey. Some dealers are marking up popular models by $10,000 to $20,000 – because they can.
Anecdotal accounts suggest some retailers are canceling orders for certain items, like appliances, and forcing consumers to buy at a new higher price.
FedEx Freight may have gotten a black eye for ditching customers in a cold-hearted manner, but don’t think other carriers aren’t stiff-arming low-margin freight too. They just have a softer touch. 2021 will go down as the year of the service embargo and FedEx Freight is not the bogeyman.