FedEx Freight is immediately cutting service to about 1,400 less-than-truckload customers, affecting thousands of locations, in an effort to reduce terminal bottlenecks and shipping delays as unprecedented amounts of tonnage pour into the sector.
The heavy trucking division of FedEx Corp. (NYSE: FDX) began notifying select manufacturers, retailers and logistics companies on Friday that it will stop picking up their goods as of Monday, leaving them virtually no time to make alternative shipping arrangements. Other LTL carriers are also operating at maximum capacity and may not be able to absorb more freight in the near-term.
“Starting June 14, 2021, and until further notice, FedEx Freight will begin implementing customer specific actions to control capacity and avoid backlogs in the most capacity constrained freight service centers,” the company told Trividia Health, a medical device manufacture in Fort Lauderdale, Florida, in a suspension notice that was obtained by FreightWaves.
A top executive and consultant with years of LTL experience, speaking on condition of anonymity, told FreightWaves that FedEx Freight is suspending outbound shipping to thousands of facilities operated by 1,400 customers in regions experiencing the most congestion.
Other companies on the termination list include Invacare Corp., a maker of medical equipment based in Elyria, Ohio; Sports South, a firearms and ammunition distributor in Shreveport, Louisiana; and Airgas, a supplier of medical and industrial gases as well as welding equipment, supplies and safety products headquartered in Radnor Township, Pennsylvania.
Messages were left with each of the companies, but none responded by press time.
North America’s largest LTL carrier by revenue confirmed it was paring customer rolls because it has more freight than it can handle, but didn’t say how many companies were involved.
“FedEx continues to keep commerce moving and deliver critical shipments during the COVID-19 pandemic. The impact of the virus has generated elevated volumes, and we continue to experience high demand for capacity and increased operating costs across our network,” FedEx spokesperson Jim Masilak said in a statement to FreightWaves. “As a result . . . FedEx Freight will begin implementing certain volume control actions to help balance capacity with demand” in areas with the highest shipping density.
The decision appears to impact Economy and Priority shipments, but FedEx likely is focusing on the latter because they are more difficult to service and more costly.
It’s common for trucking companies to cull accounts that represent less profit or make trucks wait for loads, to restore network fluidity during busy periods, but the FedEx move stands out for being applied with extremely short notice — less than one business day — heading into a weekend.
“Shipper memories are like elephant memories. People don’t forget,” the source said. “You’re setting yourself up for future angst. All it takes is a seven-day notice, not a 24-hour notice.”
For shippers getting the sudden news “it’s mass panic because there’s no available capacity to service them to begin with,” the executive said. As shipments pile up, it will become more difficult to manage work flows in distribution centers and truck yards.
Weeding out customers follows last week’s public announcement that FedEx Freight is adding a new surcharge to high-density areas, something parcel carriers frequently do to deal with volume issues.
A flood of industrial and retail shipments is inundating less-than-truckload networks.
With LTL, customers only pay for the space that their freight takes up compared to truckload, in which they are responsible for the entire trailer regardless of how much is shipped. Freight is picked up and taken to a local terminal where it is mixed and put on another truck heading towards the final destination, often stopping at multiple terminals until it reaches the final hub, which puts it on a local truck for final delivery.
Both LTL and truckload companies have been operating at near-peak season levels since last summer. Analysts see no relief in sight with companies still working to restock depleted inventories, robust manufacturing growth, strong home sales leading people to purchase goods for their new living spaces, and a spike in consumer savings that means more room to spend on products as COVID restrictions dissipate and the economy reopens.
There hasn’t been a new asset-based LTL carrier since 1984 because the large amount of infrastructure needed is a barrier to entry. With little new capacity in the market, LTL carriers are experiencing their best pricing environment in more than 20 years.
Old Dominion (NASDAQ: ODFL) for example, said year-over-year tonnage increased 31% and 28% in the first two months of the second quarter, respectively, with May revenue per day up 47.6%. Yield was up 15.3%.
ArcBest (NASDAQ: ARCB) reported the increase in yield between April and May and sequential revenue growth was its best in 10 years, driven by higher prices. Tonnage jumped 29% and 21% each of the previous two months. Saia (NASDAQ: SAIA) said tonnage per day was up 30.5% in April and 22.5% in May.
“I’ve never seen the LTL networks in general like they are today. Never. Not even one-time spikes,” the consultant said.
With so much volume crossing their docks, LTL carriers have become increasingly selective in accepting business to make sure they can maintain service levels. The pruning typically occurs on imbalanced traffic lanes where shipments tend to move in one direction, with little booked on the return leg. Running empty significantly increases the cost of operating a round trip.
Savvy carriers typically use price hikes to rid themselves of unfavorable accounts, which gives customers more time to find alternative transport providers.
FedEx is reacting abruptly because of the intense volume pressure and to catch up with peers that were quicker to make strategic pricing changes to improve yield, the industry source suggested.
The volume controls are similar to the shipping caps parcel carriers placed on certain retailers during the holiday shopping season to help manage flow and prevent network jams. The allocations were intended to force shippers to do a better job planning demand rather than dumping extra packages in the system at the last minute.
“That’s a reasonable, strategic program. This program is the same thing at the barrel of a shotgun,” the consultant said.