On July 23, Fedex announced that is has reduced its standard LTL fuel surcharge by 25 percent. This applies to LTL freight moving on both Fedex Freight and Fedex National (formerly Watkins Motor Lines). Douglas G. Duncan, the President and CEO of Fedex Freight indicated that this is being done to help shippers and to increase market share. This begs several questions. What are the true motivations of Fedex Freight and why is this being done now?

Fedex seeks to Gain Market Share

It is somehwat surprising to see a market leader such as Fedex Freight make this move. With LTL revenue of $4.9 billion and with fuel surcharges being very profitable to Fedex (and other carriers), why would Fedex make a pre-emptive move that will reduce their revenues and profits? Fedex must realize that their competitors are going to match their moves to retain market share.
There appear to several reasons for the Fedex initiative. With business soft, Fedex must believe they can increase capacity and gain market share. Their forecasts must indicate that the increase in volume will offset the lost profits from the fuel surcharge revenues. In addition, published reports indicate that UPS Freight achieved a 12 increase in shipments in its most recent quarter. This may help Fedex Freight take back some lost market share.

Injure the Weaker Players

The LTL carriers that are not as well run as Fedex Freight and that are more dependent on the fuel surcharge revenue to prop up profits will be hurt by this action. If they lower their surcharges to match Fedex, this may put them in a more vulnerable state.

Take Business from Yellow, Roadway and ABF

Contract negotiations are under way with the major unionized carriers. In addition to the threat of a possible work stoppage, this pricing initiative provides Fedex with another weapon to take market share from YRC and ABF. Clearly fedex Freight is seeking to create uncertainty in the minds of the customers of the unionized LTL carriers and provide them with a financial incentive to make a switch.

The Bottom Line

For every action there is a reaction. You can be sure that this move is being discussed in the boardrooms of every LTL carrier in North America. This will certainly trigger responses from many carriers that cannot afford to lose market share. It will be interesting to look at Fedex Freight's financial results in the coming quarters to see if this pricing strategy will produce the desired results. There will no doubt be some winners and losers.