An announcement yesterday by FedEx Corp. that it was reducing fuel surcharges for its LTL freight by 25% should lead to similar moves by the other major carriers as everyone jockeys for position before the peak shipping season begins next month, according to industry analysts.
FedEx accounts for nearly 15% of overall LTL revenues with its FedEx Freight regional operation and the recently acquired Watkins Motor Lines’ long-haul business, which it now operates as FedEx National LTL. (Go to story: http://fleetowner.com/news/fedex_watkins_acquisition_complete_090506/index.html.)
“There is a bit of overcapacity [in LTL], but not to such a large extent that there’s real rate discounting,” said analyst Chris Brady, president of Commercial Motor Vehicle Consulting. “Compared to a year ago, competition for freight is stronger, but this seems more like a market share play by FedEx.”
Calling the FedEx reductions “the most overt sign of price competition in the LTL market since the mid 1990s,” a report issued yesterday by Bear Stearns & Co. said, “We suspect others will follow.”
While the trucking analysts at Bear Stearns had been predicting a gradual weakening of LTL margins, they said the immediate fuel surcharge reduction would “be felt more quickly” in the second half of 2007.
The economy’s slowing growth has created a softer overall LTL market, but the FedEx surcharge reduction is more likely an attempt to grab market share in the long-haul side of the business, according to analyst Satish Jindel, president of S.J. Consulting.
The other major competitors for long-haul LTL freight– Yellow, Roadway and UPS – are all unionized carriers, which means they have “slightly higher costs” than non-union FedEx National, Jindel told Fleet Owner. The announced fuel surcharge reduction lets FedEx leverage that cost advantage “to get long-haul LTL market share and gain some cost reduction with increased density,” he said. If they succeed, “then their net margins would not decline.”
The timing of the move is intended “to give some incentive to shippers to make the switch (to FedEx National) before the peak freight season begins,” Jendil said. Traditionally, August marks the beginning of that peak period, “so most (competitors) will have to have some response,” he said. “It might be decreases in fuel surcharges, or it might be financial incentives in rate structures, but they can’t expect (shippers) to pay a premium for the same service.”
Fuel surcharges for its package delivery businesses FedEx Express and FedEx Ground were not included in yesterday’s announced reduction.