FedEx Freight customer dump shows LTL carriers in driver’s seat
Hundreds of shippers, including ones that supply big-box retailers like Home Depot and Lowe’s, are scrambling for transportation after FedEx Freight (NYSE: FDX) on Monday abruptly stopped truck pickups at many locations to help overwhelmed terminals restore productivity levels.
The snap decision to jettison thousands of customer sites from its network was an aggressive response to unprecedented volumes and capacity constraints, but FedEx is not alone among less-than-truckload companies in prioritizing freight. Industry representatives say carriers are extremely selective in the shipments they accept from new, and existing, customers and use pricing power to manage capacity.
“We’re careful to take in freight that fits our network, but we’re taking it at a very healthy price too,” said a high-level executive for one of the nation’s largest LTL carriers who is not authorized to speak publicly.
And FedEx Freight’s move just pushed the pricing needle higher, he added.
Industry experts say they’ve never seen the current market conditions before, with demand far in excess of capacity. The supply imbalance is expected to continue unabated, without normal seasonal valleys, well into next year. Other transport modes — parcel, truckload, ocean, rail and even air — are also struggling to keep up with an avalanche of goods from a fast-growing global economy.
The trucking squeeze has many components. Consumers, feeling wealthier from savings and government aid during the pandemic, are buying goods for at-home work and recreation. Companies are unable to rebuild depleted inventories even with extra orders. Industrial manufacturing, LTL’s core customer sector, is rapidly growing, while e-commerce is booming and pushing small packages into LTL. Shipments are also spilling over from the saturated truckload market. And ports are choking on imports.
Meanwhile, the number of available truck drivers is very limited. Some fear returning to the job and contracting COVID. For others, enhanced weekly unemployment benefits and an extension of regular benefits until September are a work disincentive. Also, a new federal Drug & Alcohol Clearinghouse has knocked out about 70,000 commercial truck drivers, most of whom have not tried to be reinstated.
There are no quick solutions. Adding LTL capacity is more difficult than in truckload because the hub-and-spoke networks require many facilities to mix freight. By contrast, anyone with a truck can go into business moving full loads point to point for a single customer.
Late shipment? No problem
Transportation strategist Satish Jindel said almost all LTL carriers have seen on-time performance fall 2% to 4% below regular levels, although none besides FedEx Freight have publicly acknowledged any degradation in service.
Under the circumstances, shippers are lowering expectations.
“Shippers would rather get their capacity needs met over getting a higher on-time performance. It’s the same thing in parcel and truckload,” said Jindel, the founder and president of parcel transport consultancy ShipMatrix Inc.
But nearly 1,400 FedEx Freight customers didn’t get the opportunity to accept slower service after receiving notice Friday that trucks wouldn’t show up at their docks starting this past Monday. The largest LTL provider by revenue said the decision to embargo thousands of customer locations was necessary to improve network fluidity and reduce rising operating costs at its most capacity-constrained service centers.
FedEx Freight was more aggressive in weeding out unattractive accounts because it likely is using quite a bit of capacity to support the corporation’s Ground and Express parcel units by taking some of their heavier big and bulky shipments, Jindel said. And extra volume from former UPS Freight (NYSE: UPS) customers may be trying to find its way into the FedEx network after UPS recently sold off its LTL division to TFI International Inc. (NYSE TFII), the unnamed LTL executive added.
“FedEx Freight always ran capacity tighter than any other carrier, which resulted in some of the best profits in the industry, but no ability to handle unplanned growth. With the economy on fire, they had no capacity to pick up the extra business so they had to fire the customers with the ugliest freight,” said Dean Maciuba, who worked at FedEx in multiple roles for 25 years and now is managing partner for North America at Last Mile Experts.
Among the companies targeted by FedEx Freight was Invacare Corp., a medical equipment manufacturer.
“We are disappointed that FedEx decided to unilaterally stop LTL pick up service to our Elyria, Ohio, facility on very short notice,” said Lois Lee, director of investor relations and corporate communications, in a statement to FreightWaves. “We are working hard to arrange alternative transportation solutions to minimize disruption to the patients who rely on our essential medical devices for daily care, including our respiratory products which are used to help those impacted by the pandemic.”
FedEx’s decision also impacts big-box retailers because some suppliers that were axed ship freight collect, with payment made by the receiver, according to Ed Caruso, president of Lakeshore Logistics, a supply chain management company based in Cleveland.
Large retailers, including Walmart (NYSE: WMT), Target (NYSE: TGT) and Menards often control inbound shipping by instructing smaller suppliers to use specific carriers and send products as “collect upon arrival” so they can leverage their size to get better transportation rates. Some retailers also provide routing guides with specific origin-destination pairs they want used.
“We have a large, diverse group of carriers that we work with across all modes of transportation, which is why one carrier making a change doesn’t impact us,” Home Depot spokesperson Margaret Smith said. . That may be true for any direct denial of service, but logistics experts say the company could feel the ripple effects in pockets if vendors can’t get merchandise delivered.
“Clout doesn’t help much in today’s environment,” Caruso said, adding that Home Depot and Lowe’s need to provide their vendors with a secondary carrier to use.
Finding alternative transport won’t be easy.
Several multiload carriers are not even responding to shippers’ proposal requests to handle their business because “they are fully committed with their capacity to handle the volume increases of their existing customers,” Jindel said.
And even existing customers are finding it difficult to increase shipment amounts with trucking contractors as their business grows.
“At this point, you really have to pick and choose,” the LTL executive said. “If you’re out of my network, I’m not going to do business with you.”
When a pickup or delivery destination is outside a carrier’s regular network, it typically has to purchase transportation from a third party, increasing the transaction cost. That’s particularly problematic now because the sport market is so strong and carriers could end up losing money on certain moves.
A carrier may be able to profitably handle a move from Chicago to Dallas because it has many trucks moving in that direction on a regular basis, but going to Sioux Falls, South Dakota, may require extra time and resources.
“To FedEx’s credit, maybe they realized they took on too much freight and said, ‘Whoa, we got to slow down,’” the LTL executive said.
Pay up or sit
His company might take a load going to an irregular location from a valuable customer, “but we’d make sure to price it right because we know we have to go and purchase more expensive power,” he said.
In many cases, higher rates are the cure. Carriers try to cull freight that is difficult to handle or not profitable, and better pricing can cover those warts. It’s just a matter of what the shipper is willing to bear.
That hasn’t worked with FedEx Freight. Caruso said many shippers countered by offering to pay a significant premium for service, but FedEx declined.
“It’s apparent the deciding factor was density,” he said. All the impacted shippers he has been in touch with so far ship pallets with lightweight product weighing less than 450 pounds.
LTL carriers are thriving under the current pricing environment. Last week, XPO Logistics (NYSE: XPO) raised its full-year guidance and attributed some of the increase to its LTL division.
This month ArcBest (NASDAQ: ARCB) reported revenue in April increased 6% from March as tonnage increased 5%, the best sequential trends the company has experienced in the past decade. The trend continued into May with revenue up 3%. The increase in yield from April to May was also the best in 10 years, driven by higher prices in its core business, an improved freight mix and higher fuel surcharges. The company is hiring more drivers, dock workers and logistics professionals, purchasing additional equipment and investing in technology that makes it easier to match shipments with available capacity.
Old Dominion Freight Line (NASDAQ: ODFL) also said second-quarter revenue to date is outperforming normal month-over-month results for this time of year, with yield up 15.3%.
Saia Inc. (NASDAQ: SAIA) announced large increases in shipments and tonnage. On Monday, it opened its second terminal in Maryland, in Hagerstown, near the Baltimore-Washington metropolitan area.
An update from Yellow Corp. (NASDAQ: YELL) showed a 16.4% increase in revenue per shipment for the quarter to date compared to 2020.
Yellow and ArcBest increasingly use intermodal transport to help pick up the slack.
FedEx Freight’s decision to turn away business is “good for everyone because these shippers that have to find freight just have to pay more,” the LTL executive said. And TFI is repricing its book of business acquired from UPS, which was partially subsidized by the parcel side of the company, which also adds to the overall industry’s pricing power, he added.
Jindel said cargo owners can do a lot more to make their freight less ugly for carriers.
“There’s not one shipper in LTL or parcel who doesn’t have bad shipping habits that if they got rid of may pay 7% to 10% less per shipment,” he said. Companies, for example, fail to create palletized shipments with the correct dimensions, reduce driver wait times at dock doors or take opportunities to combine smaller shipments into one.
“That creates inefficiency for the carrier and the industry right now needs to operate at full capacity and efficiency. But shippers keep thinking it’s like older times and that they can cover their bad habits by negotiating with the carriers,” Jindel said.
APPS is an active member of the business community with memberships and affiliations with many industry, business and governmental bodies including: