FedEx to combine its LTL freight units

FedEx Corp. said Thursday it will combine its two less-than-truckload (LTL) operations into a single unit effective early next year, the company's most ambitious effort yet to turn around its struggling LTL business amid a difficult operating environment.

The move, which will combine the FedEx Freight regional LTL business with the FedEx National LTL longhaul unit, will result in the elimination of 100 freight terminals, or nearly 20 percent of the facilities in its 470-terminal network, as well as 1,700 jobs. The company's freight division employs about 34,000. Affected employees will be allowed to apply for other positions at the division and across the company, said Jennifer Caccavo, a FedEx spokeswoman.

Most of the reductions are expected to come from the longhaul unit, which had been re-branded Fedex National LTL following FedEx's 2006 acquisition of Watkins Truck Lines. The longhaul operation has struggled with the subpar volumes and cut-throat pricing that have dragged down performance across the entire LTL sector. Regional LTL carriers like FedEx Freight have fared better on a relative basis as their segment is seeing stronger volumes and better overall pricing than its longhaul counterpart.

The integrated division, which will be operational Jan. 30, will have a single point of contact for FedEx heavyweight shippers, and will segment its offerings into priority and economy services, depending on customer need, FedEx said. Caccavo noted that as far as the customer is concerned, "there will be one pickup, one delivery, and one truck" regardless of the service chosen.

Caccavo said there will be reductions in fleet capacity but could not quantify the reductions.

The announcement came as the Memphis-based giant released its fiscal first-quarter results, which showed strength in its primary air express and small package units, but weakness in the freight category. The freight segment's revenues rose 28 percent from the year-earlier period. However, the company posted a $16 million operating loss, compared with $2 million in operating income the year before. It also posted a negative operating margin of 1.3 percent, compared with a positive margin of 0.2 percent in the 2009 quarter.

For 2010's first quarter, FedEx reported total revenue of $9.46 billion, up 18 percent from $8.01 billion the previous year. Operating income was $628 million, up 99 percent from $315 million last year. Net income came in at $380 million, up 110 percent from $181 million a year ago. However, Chairman and CEO Frederick W. Smith told analysts that the company was seeing signs of a cooling economy, remarks that drove the company's shares down more than $3 at the close of trading Sept. 16.

In a sign of the ongoing impact of price wars on the heavy-freight business, yields on average daily shipment volumes fell 3 percent year over year even though volumes rose 29 percent in the same period. FedEx said freight yields in the first quarter rose sequentially by 4 percent as the company took a harder line on price discounting.

Analysts hailed the restructuring, with Thomas R. Wadewitz of JPMorgan Chase calling it "significant and more aggressive than we expected." Wadewitz said the reductions in facilities and staff "should support LTL pricing" and would benefit the "pure play LTL names" like Con-way Inc., Arkansas Best Corp., and Old Dominion Freight Line.