Freight business opens up lucrative routes for FedEx

When Greg Farmer backs his FedEx truck into the loading bay of a vehicle parts warehouse in Atlanta, it looks like he is too late. All of that day's small packages are being loaded on another truck bearing the logo of UPS, FedEx's arch-rival.

But Mr Farmer is not there to collect small packages. His cargo is three big crates, so heavy they need to be manoeuvred by forklift truck. "When I tell people I drive for FedEx they assume I deliver parcels," says the 29-year-old driver. "I have to explain that we also handle freight."

While small packages dominate, road freight is becoming an increasingly important part of FedEx's business.

Freight revenues increased 19 per cent to Dollars 747m in the third quarter and operating profits were up 46 per cent at Dollars 54m.

FedEx is the only package delivery company with a freight network in the US, providing it with an additional source of growth at a time when the domestic parcel market is slowing. "Freight is one of the reasons why FedEx has outperformed UPS in recent months," says Satish Jindel, a logistics expert at SJ Consulting.

FedEx stumbled into road freight almost by accident seven years ago, when it acquired Viking Freight, a regional carrier, as part of its takeover of Caliber System, a logistics group.

The company considered disposing of Viking but eventually opted to keep it and made further acquisitions to build a nationwide reach.

Fred Smith, FedEx's chief executive, saw an opportunity to bring to trucking the same speed and reliability that small package customers take for granted. He recognised that the shift by manufacturers and retailers towards just-in-time supply chains was creating a need for more nimble freight services.

"The key element in all our businesses – freight and packages – is certainty," says Doug Duncan, chief executive of FedEx Freight. "If we say it will be delivered overnight, it must be delivered overnight because our customers don't have much slack in their supply chains. Their inventory is in our trucks."

FedEx is focused on the light end of the truck industry – known as less than truckload (LTL) – carrying smaller quantities of goods than the heavier Truckload carriers.

The company has modelled the business on its package delivery network, building 49 regional hubs that get nearly 90 per cent of shipments to their destination anywhere in the US within two days.

"We are only interested in high-value, fast-cycle distribution," says Mr Duncan. "That's different from the commodity side of trucking, which transports goods in bulk at low prices without much certainty about timing."

FedEx's expansion is driving consolidation of the fragmented LTL market. Scores of smaller regional companies are being forced out of business, while others are seeking greater scale and geographical reach through acquisitions.

This month's Dollars 1.3bn merger between Yellow Roadway and USFC, two of the largest LTL carriers, underlined the trend.

Mr Duncan says FedEx's breadth of services and international capability gives it an advantage over rival LTL carriers.

The company is starting to bundle its freight and parcel services into a single contract for its biggest customers. And there is potential for FedEx's international air and ocean freight services to feed imported goods directly into the domestic freight network. "We can transport goods from a manufacturing plant in China right through to its final destination in North America without it leaving the FedEx system," says Mr Duncan.

While FedEx is the only parcel company with its own road freight network, all the companies are diversifying into a wider range of logistics services.

For example, UPS and DHL have bought international freight forwarding businesses, giving them greater access to surging exports from Asia to North America and Europe.

Mr Jindel says UPS might consider acquiring a big LTL carrier, such as Yellow Roadway, to match FedEx's freight capability in the US, while DHL could seek partnerships with truck companies.

Kurt Kuehn, senior vice-president of sales and marketing for UPS, says his company is content to secure road freight services from third parties but does not rule out an acquisition in future. "We are one of the biggest buyers of LTL capacity in the US," he says. "The question is whether we need to own that capacity or continue to buy it. Could we make a good return on the assets?"