Less-than-truckload carriers have quietly been using a high-demand, tight capacity environment to cull less profitable freight from their networks for months now. Most of the actions have included rate bumps and stricter enforcement of accessorials and detention fees in efforts to free themselves from shippers that have suboptimal freight and facility operations.
LTL carriers also have been actively limiting larger shipment weights that have spilled over from a capacity-constrained truckload market. The heavier shipments can clog pickup and delivery operations designed to move freight in and out of LTL networks quickly, as they require longer unloading times and can tie up an entire trailer, which often means tying up another driver.
However, none of those actions have been as jarring as a June 11 notice from FedEx Freight (NYSE: FDX) to some 1,400 customers that it would no longer pick up freight from locations that don’t fit its operational requirements. The abruptly implemented notice designed to “control capacity and avoid backlogs in the most capacity constrained freight service centers” left shippers with only a weekend to find alternatives.
FedEx Freight temporarily taps out; data shows carrier struggled to keep pace in weeks leading up to announcement
Robust trucking demand and a labor shortage among both drivers and dockworkers were some of the catalysts behind FedEx’s decision to cancel service to some customers. However, the steps to ease congestion, improve service levels and reduce operating costs stirred the ire of shippers in the days that followed.
The carrier has since tamped down some of its service cancellations following pushback from shippers and is now taking a more targeted approach when choosing which accounts and freight it will no longer haul.
Data from Recon Logistics, a third-party logistics and transportation management system provider, highlights the sag in service metrics at FedEx Freight heading into the announcement. The carrier’s performance scorecard, which includes ratings for on-time percentages, metrics involving pickups and deliveries, as well as damages and claims data, hit a 2021 low prior to the service alert.
Chart: Recon Logistics
FedEx’s struggles were also evident at MyCarrier, a software company with an LTL transportation management system for small and midsize shippers.
“The shipment data [for the overall LTL industry] which looked at changes in the requested pickup date from shippers to the actual pickup date by carriers declined by one day on average during June when compared to the prior three-month period. However, for FedEx Freight, there was a half-day increase in the average change during May and June compared to its average for the prior two months,” according to Tommy Barnes, chief revenue officer at MyCarrier. “The trend increased further in June.”
Barnes did note that FedEx had a lower average change in requested time versus pickup time than the rest of the industry heading into May.
An unnamed source with another third-party logistics provider told FreightWaves that FedEx had been flying drivers commercially around the country to position them in the areas of its network with the greatest need in the week leading up to the announcement. Of the FedEx representatives the source spoke with, none were 100% sure of the criteria used to implement the embargoes, but indicated that it was done to free up capacity in the most critical areas.
“It probably loosened up some short-term things for them. The way it was done, how quickly, basically they just took a machete and sliced away. There were some fingers and toes of some pretty large organizations that got cut. I can’t see those companies having total trust in FedEx Freight going forward or at least not for a long time,” the source said.
The desired impact appears to have been achieved as FedEx Freight was able to reduce its daily shipments from 115,000 to roughly 105,000, according to the 3PL representative. The company has operated as high as 130,000 to 140,000 daily shipments in the past, but with driver challenges and other labor shortages facing the industry currently, the prior comparisons don’t hold, the source said.
LTL carriers have been investing in and managing networks to avoid service interruptions
In addition to consistently using price as a means to purge unwanted accounts, carriers have been making large investments in technology, automation and equipment to keep service levels high even as demand remains elevated.
“We’ve made big capacity investments, notably on the driver pay and power equipment side. So we’re actually in a very good capacity position in our view even against very good tonnage levels,” said Keith Lilly, president and CEO of North Park Transportation, a Denver-based LTL carrier operating out of 26 terminals in six states primarily in the Mountain time zone.
Thomasville, North Carolina-based Old Dominion Freight Line (NASDAQ: ODFL) was advertising available capacity throughout its network in early June when the carrier reported industry-leading results, among the carriers providing updates, for the first two months of the second quarter.
Old Dominion has been steadily growing its terminal and door count in recent years. The carrier has a $275 million capital plan for real estate in 2021, which complements its $290 million budget for fleet investments.
“We have available capacity within our service center network due to the significant investments we have made over many years,” said Greg Gantt, president and CEO, in the press release.
Johns Creek, Georgia-based Saia Inc. (NASDAQ: SAIA) has added 25 terminals since its expansion into the Northeast began in 2017. The terminals have been added to support the carrier’s market share and service initiatives. Saia plans to spend $275 million in 2021 to advance its real estate campaign and replace tractors and trailers.
Barnes said the carriers that are best managing the current freight influx are the ones that consistently redeploy capital throughout their networks.
“The progressive LTL carriers are reinvesting in their customers and their networks through use of automation and enhanced technology. They are primarily ‘using data,’ not just acquiring data, in an intelligent fashion to drive costs lower,” Barnes said.
He said those efforts include the use of new costing technologies, which better pinpoint actual costs, and other initiatives and investments aimed at driving pickup and delivery efficiencies and deeper linehaul optimization.
“The best-in-class LTL carriers know how to price their core business very well, which leads to consistent network balancing,” Barnes continued.
The impact from FedEx Freight’s service cancellation has had some carriers protecting their network from any potential added strain.
“As it relates to FXF [FedEx Freight], we’ve executed a strategy to ensure anything that leaks into our network from that move is compensatory and works well in our network,” Lilly added.
Curtis Garrett, VP of pricing and carrier relations at Recon Logistics, shared similar thoughts with FreightWaves.
“Most other carriers weren’t coming to the rescue of those cut off by FedEx unless they were already incumbents getting significant volume in these accounts,” Garrett said. He said navigating a service event like this “requires quality, accurate shipment data, deep LTL carrier relationships and knowledge of current LTL carrier network needs.”
Garrett said LTL carriers are starting to lean on the 3PLs more for vetting shippers. Data acquired through a TMS and third-party transactions allows providers to accurately rate a shipper and its freight.
“Good 3PLs are evolving into becoming the filter for carriers to onboard LTL business — and the quality of data matters now more than ever. This is how a smaller third party can have more value from a carrier-facing perspective than a bigger one with more spend under management,” Garrett added.
Tight market pushing yields higher
Carriers already had a strong position in rate negotiations prior to FedEx Freight’s announcement. The group has held the upper hand in contract renewal conversations since the end of last summer, not too long after parts of the economy came back online following the outbreak and volumes began to surge.
In addition to taking yields higher, many carriers, both LTL and truckload, have said that they are using the favorable environment to price unwanted and hard-to-haul freight out of their networks.
Barnes referred to the LTL market for shippers as the “toughest pricing environment in 20-plus years.”
“From a yield perspective, our view is the shipping public sees the value in reliability, quality and fast transit times. The environment remains very strong,” Lilly said.
The positive rate trends were evident in the second-quarter updates from carriers, which showed revenue per hundredweight was up by mid-teen percentages, including fuel surcharges. While the year-over-year comps were up against the period demand was most impacted by COVID last year, the industry has been successful taking rate increases throughout most cycles in the past.
Q2 updates surprise to the upside
Intraquarter updates from the LTL carriers showed that first quarter’s demand strength flowed through to the second quarter.
The year-over-year comparisons were massive for April and May with tonnage and yield metrics revealing large gains. While the comps reflected COVID-related demand headwinds from 2020, the sequential performance in the first two months of the second quarter showed strength as well.
ArcBest Corp. (NASDAQ: ARCB) reported some of its best revenue and yield performances in the past 10 years during the period. Revenue in April increased 6% from March and was up 3% sequentially in May.
Table: Company reports
Old Dominion saw the best year-over-year growth rates out of the publicly traded carriers. It said its performance for the first two months of the quarter reflected its “ability to win market share.”
XPO Logistics (NYSE: XPO) cited “stronger-than-expected performance” in its transportation segment, which includes LTL. The announcement was made in its June form 10 filing with the Securities and Exchange Commission, which provided an initial earnings outlook for the spinoff of its logistics segment, GXO.
In response to the intraquarter updates, Deutsche Bank (NYSE: DB) analyst Amit Mehrotra said in a note to clients that the results were “still extremely impressive” and “well above expectations.”
UPS Freight acquisition a longer-term yield lever too
TFI International (NYSE: TFII) said it would be pushing price initiatives when it acquired UPS Freight (NYSE: UPS), now TForce Freight, in January. A bundled services approach left much of UPS Freight’s business priced well below competitors, often being hauled unprofitably when viewed on a stand-alone basis.
TFI said that it will look to reprice the bulk of the acquired freight, nearly $3 billion, over the next three years. TFI’s plan is to refresh the fleet with new equipment to lower operating costs and raise contractual rates to improve the segment’s operating ratio to 97% within the first year and to 90% by year three.
The removal of an industry loss leader is expected to lift LTL yields over time.
Economic data points to continuation of elevated demand for LTL services
The Manufacturing Purchasing Managers’ Index remained above 60% for the fourth consecutive month in May (61.2%). A reading above 50% implies growth in U.S. manufacturing.
LTL shipments historically have a high correlation to the PMI data, typically lagging fluctuations in the index by three months. Freight related to manufactured goods can account for roughly 80% of LTL shipments for some carriers.
PMI index components like new orders (67%), production (58.5%) and supplier deliveries (78.8%) remained in growth mode. While manufacturing inventories (50.8%) moved into expansion territory, customers’ inventories (28%) remained “too low,” a signal that inventory replenishment will continue.
While many of the nation’s largest retailers reported growth in inventories on a year-over-year comparison for the fiscal quarter ended April, inventory build again lagged sales growth for most in the recent period.
Also, the comps were to very low inventories from a year ago. Many retailers entered the pandemic carrying minimal inventory and saw stock levels quickly sold through as consumers were panic-buying in the early days of COVID.
Retail sales, up 28.1% year-over-year in May, dipped 1.3% from April on a seasonally adjusted comparison. Of note, the May level was the second-highest month on record for core retail sales, which excludes auto dealers, gas stations and restaurants.
Looking forward, the fundamentals currently in play in the LTL market are unlikely to change anytime soon. A strong consumer wallet, the need for more inventory and a building industrial backdrop will likely keep LTL freight demand high, capacity tight and yields on the rise in the near term.