FedEx LTL unit driving down rates to strengthen parcel business, analyst says

FedEx Freight, the less-than-truckload (LTL) unit of transport and logistics giant FedEx Corp., is driving down rates as part of a plan to strengthen the parent's core parcel business by offering an attractive package of multiple shipping services to businesses, an analyst yesterday.

David G. Ross, who follows FedEx for Stifel, an investment firm, said in a research note that FedEx uses LTL "as a loss leader" to entice businesses to convert their parcel business to the company, or to retain the parcel traffic the carrier already has. While the strategy may work for FedEx, it has potentially negative consequences for other LTL carriers that don't have multiple lines of business, Ross said.

For now, however, the rest of the industry—including UPS Freight, the LTL unit of UPS Inc.—has stayed disciplined in its pricing strategies, Ross said. Atlanta-based UPS is the only player in the LTL segment whose service offerings match FedEx's.

According to Ross, FedEx Freight's tonnage in its fiscal 2016 quarter rose 4.5 percent year over year, making it the leader in market-share gains. However, Stifel's data showed that the unit's yield on its first-quarter traffic declined 0.6 percent year over year, indicating that it sacrificed pricing power for share gains.

A FedEx Freight spokeswoman declined comment on Ross' remarks. A person familiar with the LTL sector said other carriers have seen similar evidence of FedEx Freight's strategy. Another person said FedEx Freight had been aggressively pricing its business earlier in the year, but that it has backed away from that stance in recent months.

With $6.2 billion in revenue in its 2016 fiscal year, which ended May 31, FedEx Freight is the largest LTL carrier in the U.S. It accounted for about 11 percent of FedEx's annual revenue of more than $50 billion.

FedEx Freight is no stranger to aggressive price-cutting. During the Great Recession, and in its aftermath, FedEx Freight and the former Con-Way Freight, which at the time were the second- and third-largest LTL carriers, led a brutal price war, in part to defend market share in a poor demand environment, and also to force the struggling YRC Worldwide Inc., whose YRC Freight unit was then the largest LTL carrier, out of business. YRC remains very much in the fray, and FedEx executives eventually acknowledged that the effort was a mistake. Con-way Freight's parent, Con-way Inc., was acquired last year by XPO Logistics Inc. for $3 billion.

LTL traffic has been impacted by what has become a 15-month downturn in U.S. industrial production, which is the industry's bread and butter. The weakness shows little sign of abating for the near future. Publicly traded LTL carriers reported a 3.1-percent year-over-year tonnage decline in the second quarter, and third-quarter comparisons are not expected to be much better, Stifel predicted.

Despite that, LTL carriers have repeatedly raised their tariff rates over the past few years, and have held firm in not negotiating away those hikes. Part of that is due to the lack of fragmentation among LTL carriers; according to one estimate, the top 10 LTL carriers control 77 percent of the $35 billion a year market, while the top 25 control 94 percent.

Pricing discipline is also being driven by the industry's desire to avoid a repeat of the rate war that was so destructive to its bottom line.