Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:48} I run a fund and we own Old Dominion. I am looking forward to talking to you and getting your perspective on the LTL space and competitive landscape. Could you start with a brief account of your background in the business?

{audio:0:01:16} The time I spent at FedEx was mixed across the different lines of business. I worked with all the parcel and freight, air and ground lines of business FedEx has. Most significant to this call, beyond some projects I participated in that involved freight, I was at FedEx Freight for two years from 2018 to 2020. That was a period where we were very focused, and I assume FedEx is still very focused on Old Dominion. During that period, we were fortunate enough to hire one of the IT leaders from Old Dominion, so we had some intensive work to collect additional competitive intelligence from a first-hand basis on Old Dominion.

{audio:0:02:33} How much of a focus is LTL for FedEx? 

{audio:0:02:55} LTL was an afterthought that grew into a significant portion but still secondary to the parcel business. FedEx got into the LTL business at the same time they got into ground business. In the late 90s, FedEx purchased Caliber Logistics and the focus was RPS or roadway package service, to get into ground, but with that came two other business units Caliber owned; American Freightways and Viking Freight, which became FedEx Freight West and East respectively. In 2010, FedEx purchased a third LTL entity, Watkins Motor Freight, and those three business units became what is now FedEx Freight. The reason to drive into the LTL business and maintain it, was to protect client relationships through the leveraging of a bundle of transportation services. The theory being that FedEx would extend and strengthen its position with the FedEx Ground customer base, by being able to offer LTL services, given the high frequency of clients having needs for both services. 

{audio:0:04:49} UPS Freight had a similar strategic intent, however FedEx purchased stronger and higher quality businesses; quality in the service basis as well as from a margin level. The industry knew overnight, that UPS was a substandard player, so many of us were not shocked when the under investment in a poor player by UPS, led to less than stellar results and they sold UPS Freight TForce. FedEx is focused in two areas; financial and operational. Both of these were big focuses while I was there and have only got more significant with recent announcements. The first one was as a leader in driving revenue quality. This was a big focus for us in terms of leveraging. To my earlier point, a service that was based on speed and on time reliability, was known as a leader and was viewed significantly heads and shoulders better. On that basis, the ability to focus on filling the network to a certain degree with the better margin was a different definite focus. Margin has gone way up – practically doubled at FedEx Freight – and that doubling of margin to over 20% has raised the profile of FedEx Freight from a financial basis and the importance of it to the overall results. 

{audio:0:06:58} It's fair to characterize the move of John Smith, from the CEO at FedEx Freight, to the same role as FedEx Ground. The reason FedEx did that was to try to bring margin improvement and higher revenue quality from Freight to Ground. The first important role was as a vanguard of revenue quality. The second would be as a critical provider of large-scale power or movement, to compliment and support some of the other lines of business from a trucking perspective. It's been announced this month that this is only going to increase at FedEx. We started while I was there with two cross opco projects to support a greater role in trucking for the whole enterprise within FedEx Freight. The first of those was by providing support to FedEx Ground for large package delivery. It was useful during the pandemic, when FedEx Ground was swamped with ecommerce packages, for FedEx Ground to offload the big stuff to FedEx Freight, which had a degree of under-utilization as businesses were closed. FedEx Freight had excess capacity, at that time, to help move the big grills and trampolines. FedEx Freight made literally millions of deliveries to residential locations on behalf of FedEx Ground during the pandemic to provide that cross opco support. 

{audio:0:08:48} The second level of cross opco support is the role FedEx Freight plays for both FedEx Ground and FedEx Logistics in drayage and rail-related movements; FedEx freight doing that extensively for the FedEx Freight economy service. The ability for FedEx Ground to offload containers needing to go on rail and have them move by a single network entity, to get the benefit of scale, is something we started to work on, and it's been announced will only continue and deepen as part of the network 2.0 strategy announced by Raj Subramanium at the investor day. The final piece is the ability for cost effective purchase of LTL transportation for FedEx Logistics as part of its forwarding business, is another one of those ways to sweat those assets on a cross opco basis and position FedEx Freight to provide that power and trucking support going forward.

{audio:0:10:07} You said the LTL business started as an afterthought and then grew, and then you bundled LTL with other services so you had one provider that could do all these things. Was that theory right? Has that played out as being important for customers and an edge for FedEx?

{audio:0:10:45} I think it's definitely helped. There's one other component where the value propositions have been well-aligned between Ground and Freight in ways that they were not to the same degree with UPS. FedEx Ground grew its market share on the basis of superiority claims that FedEx Ground is faster to more locations than the competition. FedEx Freight has established for its FedEx Freight priority service, a similar superiority claim. And on that basis, the idea of providers who want “faster surface transportation” have a unique selling proposition that they can respond to from FedEx Freight. 

{audio:0:11:43} One other thing about that transit service, unlike some other carriers, FedEx arranges its transit service in more geographically coherent regional ranges. You can find a ground transit map online for your zip code and see these nice rings spreading outward from your origin. It will say what your number of transit days are going to be, and they are coherent when you zoom out on a nationwide basis. FedEx Freight runs its network the same way. Old Dominion does some things differently in terms of how it represents its transit speed. One financial downside of that bundle is that it also drives a slightly lower operating margin for FedEx Freight compared to Old Dominion, who does not have a bundle to sell to. This is not the only reason for higher margins at Old Dominion, but it is one of the explanations. 

{audio:0:13:15} In certain situations, for the good of the enterprise, FedEx Freight, for some of those clients, has had to give up some operating margin in order to help Ground win some business at a slightly different price point. There is a slight margin give that is arguably a con of that bundled strategy, but as a whole, it's been a positive for the enterprise.

{audio:0:13:46} I keep hearing how LTL is different and its own little thing, so it's interesting how FedEx blends them together with its other aspects of logistics.

{audio:0:14:04} This is definitely an era where that blend will become more prominent in future. Raj, as the “new generation”, has led a series of initiatives since he moved into the number two role, and now into the number one role, to do things the first generation of FedEx leadership were not willing to do. Freight led that and was further out in terms of being that cross opco partner, and now the enterprise is following that more and also deepening it.

{audio:0:14:53} I remember seeing a positive Fred Smith quote about ODFL, who is on FedEx's radar. What did you learn from hiring an IT leader from ODFL?

{audio:0:15:22} I was aware of that external Fred Smith quote because it was followed by various requests for internal research to understand that. The major players would be led by ODFL. They would also include XPO and Saia, and to a lower degree, YRC and UPS Freight, in terms of competitive concern, given the business challenges those entities have. Those were the ones that felt the most significant competitors to FedEx, but ODFL was the greatest concern. Their ability to grow their revenue with greater effectiveness in sweating their current assets got a lot of attention. ODFL having greater revenue utilization per facility and per trailer, was one area that was highlighted in these studies and led to various efforts to look at what opportunities FedEx had to sweat its assets better. That helped influence the decision for cross opco efforts, because there's low hanging fruit of traffic that could easily be slotted into the network, and to keep it at high utilization levels where the movement would be relatively efficient. At a macro level, that got a lot of attention and was seen as an advantage for ODFL.

{audio:0:18:30} What is a tangible example of something ODFL was doing that FedEx wasn't?

{audio:0:19:11} For the sake of argument, let's look at rising demand in Eastern Pennsylvania. ODFL could drive more efficiency through its facilities to eliminate the need to add additional terminals, as demand might grow in Eastern Pennsylvania. There might be a facility in Allentown; there might be a lot of growth there, but reaching the point where they've got to look for another facility in Bethlehem. ODFL were very successful in delaying or deferring that. That's an aspect on the facility side where ODFL showed better prowess in sweating its assets. On the trailer utilization side, the ability to better turn those trailers and efficiently manage head haul and back haul in ways that reduce the need to add incremental trailers and tractors, was also very powerful. Their ability to get to their revenue targets without adding as many trailers, meant lower labor costs and equipment capital requirements.

{audio:0:21:18} Were there other things you wanted to add to that?

{audio:0:21:41} One of the things the gentleman we hired from ODFL stressed frequently, was the decentralization of leadership at ODFL. The individual terminals were their own profit centers, and organizationally, they were positioned with the right level of autonomy, guidance and direction from the home office in ways that helped keep those operations tightly profitable. ODFL have a terminal manager who has, among other groups, a sales manager/small team, to support demand in the area supported by that terminal market, along with a wide latitude of financial and pricing discretion to drive optimality in that market. That starts to lead to some differences, like more localized determination of what's “good freight” and “bad freight” in that market. Good freight being more profitable freight, more dense, more efficient to handle, and bad freight being the filler that might not be quite to the same degree. 

{audio:0:23:38} FedEx was not felt to be as effective as ODFL in identifying and optimally pricing the good freight versus the bad freight. For example, on an operational basis, for customers with extended destinations, say in our Pennsylvania example, going way out into the country in Eastern Pennsylvania, those types of businesses that might be further from the terminal and might have less business activity in that area, were more effectively priced at the higher cost level that they would actually have. Unlike FedEx Freight with those geographically and regionally coherent transit service levels, ODFL is smarter about adding days of transit to build density into some of those rural areas, so that the operation can be more cost effective in some of those types of situations. ODFL's intelligence on creating that balance and understanding to a rigorous level their cost, and pricing accordingly and operating according at the margins, has added basis points of operating ratio to their financials.

{audio:0:25:19} How easy is that to replicate? I imagine you tried to reverse engineer some things, but in general, how big is that moat there at ODFL and how hard is it to copy?

{audio:0:25:40} Organizationally, some of them aren't compatible with how FedEx operates. A greater degree of centralization is almost mandatory for FedEx, given its size and scale across the full span of the opcos. The airline needs that level of centralized control for Express, so it's hard to see how FedEx could stand up a highly regionalized structure to the same degree. FedEx would have to change its positioning and its network on the transit side to support the very granular service level calculations Old Dominion does. 

{audio:0:26:46} You could think of a transit map for Old Dominion as possibly being in a place like Eastern Pennsylvania; a series of islands where the secondary towns are, and out in the country being much slower. FedEx would have had to change that whole positioning and break it relative to Ground. Those are things that would be hard for FedEx Freight to replicate. The idea of building a pricing model with the appropriate cost models and cost elements below it was definitely underway. We were trying a few things and I assume they're still being worked on. That model would be much better to replicate, the ability to get a sales team with the right information to support that optimal pricing; its analytics, sales training and a pricing process. That was an objective FedEx Freight had and I would say would be more attainable.

{audio:0:28:20} ODFL talk a lot about how they own and have been buying their own real estate for two decades; is that part of their secret sauce or not so important for a competitor like FedEx?

{audio:0:28:45} I'm sure it gives them a degree of flexibility and probably on the margins when they are ready to reconfigure their operation, in the event they want to add a terminal facility. It would make that process marginally easier and faster. The facility expansion and addition projects I was involved with all had long lead times at FedEx, and projects would have to be anticipated, not reacted to. FedEx would have to know, “that in 12, 18 months on current trends, a facility might fill; if it's July 2022 today, then projects for the second half of 2023 would be the ones that would have to be on the table right now”. All the site selection, any of the work with architects, if there's an expansion to look at the existing real estate, and manage all the permitting, that felt very long at FedEx Freight. I could imagine that being an advantage with more controlled by Old Dominion to go faster, and they have grown a lot in the last 10 to 15 years, from more of a regional to a national player.

{audio:0:30:44} What about the idea that it's hard or expensive to get locations in certain areas where they bought a piece of land 10 years ago? Is that something you saw as well that became difficult to find real estate, even just to lease to get into certain areas of the country?

{audio:0:31:05} I could imagine they were opportunistic in certain situations. On the other hand, FedEx as an entity – not that all the buying power is shared across all the opcos – but I never got the sense that real estate providers didn't give FedEx more than its due in terms of consideration because CB Richard Ellis, if they don't act for FedEx Freight, then FedEx Ground the next time they need a terminal will talk to somebody else. It's helpful at the margin.

{audio:0:31:54} You hinted at the competitive landscape; you said ODFL, XPO and Saia were the big three and, to a lesser extent, YRC and UPS. Could you walk through those competitors? What are they good at and what are their challenges, to get an industry overview from your perspective?

{audio:0:32:21} A segment of the LTL business sees clients actively wanting union carriers. Certain trade show related LTL movements where a union supporting a convention center is going to react better to other union drivers making the drop offs. There's some degree where there is success that some of those secondary players have in union-oriented segments, which are hard to break into for a primarily non-union provider like FedEx. The multi-year challenges of YRC have been well-documented. High costs and failures in efficiency and utilization have held them back. UPS Freight had similar challenges. In general, those players have been lower margin players. The discipline of FedEx on the yield management side meant that some of that bad freight that those guys were willing to take, FedEx weren't going to compete for. They are secondary competitors due to their poor performance, but also their deliberate decisions about where to compete, which goes back to the strength of XPO, ODFL and Saia.

{audio:0:34:38} I've heard some people in your industry say there's no bad freight, only bad pricing. Is there really bad freight, something that you wouldn't want to carry at all?

{audio:0:35:00} I get the argument on the bad pricing. On the other hand, if the bad pricing is tied to the fact that the shipper involved has a product that has its own lower price points, that it can't command higher prices with the ultimate consumers of what's in that truck, then the pricing that they need is the pricing that they need. Whether you think it's bad freight or bad pricing ties to who has the pricing leverage in that particular area. There are some situations where shippers manage their shipments on a tighter basis than others. Not every provider has the nice square dense freight as much as they might like, so there's also an operational dimension to what is good or bad freight. People who need a lot more loose freight, shippers who are going to floor load trailers, despite the guidance and strong preference for palletized freight, those factors can make freight that might be better under other circumstances, bad.

{audio:0:36:40} You were about to tackle the top tier competitors.

{audio:0:36:44} Top tier players have shared that FedEx conception of being higher service, maybe not with the same transit, given what FedEx Freight has established as a superiority claim, but still more reliable, higher service clients is part of what makes those folks more significant. The second thing from the competitive basis that also makes them significant is that ability to grow efficiently. The LTL business has, historically, been so cyclical that there are plenty of smaller players who are no longer with us because they over grew during a boom time. They were willing to drive growth with some of that worst freight in ways that, when the market turned, it put them in a perilous financial position as pricing in a down market historically reverses cyclically and can affect other LTL players. 

{audio:0:38:09} Their ability to grow smartly is a second thing that positions all of them well. XPO is a standout in making smart investments in technology, which helps them manage labor costs and sweat assets more effectively. Technology to build algorithms to optimize pricing. The future types of technology that we all know are coming, in terms of autonomous freight handling, whether that be autonomous trucks or forklifts. That third piece is the piece these players all look at, and it's the one that might set them up for the longer term as the group that can survive and become the dominant scale providers. I know the industry has been fragmented, but technology and the investment in that could put the larger players in their own tier and make it very hard for smaller fragmented players to keep up over the longer term. Pricing, smart growth and technology are what make those folks also competitors to focus on for FedEx.

{audio:0:39:47} The industry has been fragmented but has consolidated over time. Currently, the top 10 have 70% of the volume and the leaders are continuing to gain market share at the expense of the smaller ones; do you think that trend will continue?

{audio:0:40:16} Of the remaining 30%, what will keep them in business and what will put them at risk? Those smaller players have an identified geographic or industry niche and their ability to protect their position in their niche by whatever they're doing that's a little more specialized, to react to their smaller customer bases, can keep them in business. Those providers have a reason to be “known”, so that they're not just an anonymous truck and driver. That's the path for the smaller players to be strong. 

{audio:0:41:27} Back to that technology piece, I didn't include the front-end customer technology piece as it relates to transportation management and some of the advanced resale and bidding type models that are out there in the tech space. The more those providers are anonymized by selling through those platforms, they less they stand out. They're just a truck and a price. Failures there that might only lead the shippers to know who they are because they screwed up, then those players start to say, I remember that guy who screwed up that load in March, and I don't want to have anything to do with them. They can be commodified by technology and if they let themselves be dictated to that way, they're going to have trouble. 

{audio:0:42:28} Of that 30% that remains, what percent have a geographic or industry niche they can defend versus how many may continue to bleed market share to the bigger players?

{audio:0:42:49} It's hard as it's so context and client-specific. If they can't, they won't make it.

{audio:0:43:04} You mentioned how some places want union drivers. The union carriers have ceded market share to the non-union carriers, but it sounds like there might be some floor there. Are we near that floor or how much of that union slice of the pie might diminish?

{audio:0:43:37} It's been diminishing as the significance of unions in the US has diminished. That's certainly part of that challenge. We're at or pretty close to the floor. We can look at the weird situation that I still don't quite feel has been properly explained and documented, around the subsidies that YRC got from the government and the pandemic, as an example of this. The government is one of those spaces where union carriers can help. The shady support that YRC got suggested there was a fear they were going to go under and the government felt they had to do something to protect their carrier. From a YRC perspective, they've been at their floor for quite some time. I am amazed they're still in business and I don't know how much further down they can go at this point.

{audio:0:44:57} I'm with you on that because it seems on the usual metrics of on-time deliveries and claims, I wonder why they are in business myself. Could you envision a scenario a decade out that the top players like FedEx, ODFL, XPO and Saia, continue to dominate and there will be some pie of very small players that can protect their niche, and another small pie of union providers that have their advantages as we spoke about?

{audio:0:45:39} That would be my vision. In the context of some of the supply chain challenges we are having, there are longer term questions about the driver force and the stock of available drivers. If I were a driver, I would fly to quality among the carrier base, given some of the other dynamics. That's the type of behavior that further supports centralization. Some of those other investments in the technology will be necessary to maintain fluid supply chains at the price points we want, involving more autonomous capabilities. That also makes the players who have capital to invest most likely to succeed. All that augers centralization.

{audio:0:46:48} What about threats to the LTL business? Do you have a view on 3PL?

{audio:0:47:00} 3PLs would be more of an overriding generic term for some of the types of technology-enabled providers who commoditize smaller carriers without leverage, whether they're more technology-oriented or traditional that look more like a C.H. Robinson. They do offer a value to the industry through their control of enough of the customer base, that they make it easier for a carrier even like FedEx, to access a wider number of customers, because you talk to one player not 20 others, so that's the benefit 3PLs offer the LTL industry. 

{audio:0:47:59} On the other hand, you have to pay for it as a carrier and you pay for it with the higher discounts that a 3PL will command, given all the traffic they control. From that vantage point, carriers have to make a choice around the cost benefit of working with those 3PLs. Other than a few trusted 3PL providers, FedEx Freight has deprioritized working with 3PLs. FedEx Freight has tried to maybe not fire the 3PLs but at least take a harder line on the pricing they grant them. If the pricing is higher than the 3PL wants, the 3PL walks away. FedEx is trying to exert that leverage with many of those providers. On the other hand, for those providers with whom FedEx has a good relationship – we looked at some other programs to work on trying to get more traffic through the 3PLs into back haul lanes, under-utilized lanes – a 3PL can definitely can help with that as they may have relationships with those who might have freight on back haul lanes. 

{audio:0:49:46} Odessa Texas is one we'd always talk about as a heavy back haul lane where anything out of Odessa would be gravy because we'd want to get more freight into Odessa, and it was hard to financially justify extra routes with the imbalance on that lane. That's where 3PLs offer value, especially in some of the demanding supply chain situations we have now. They are probably a necessary evil in the industry, but FedEx has had a complicated relationship with them. 

{audio:0:50:37} The other challenge is if you're dedicated to better service, like FedEx and ODFL are, when you deal with a 3PL you're not dealing with the end customer either. They control the customer interaction so that makes it difficult. What are your thoughts on the current conditions in LTL specifically, because you mentioned LTL has traditionally been very cyclical, so is this something that's going to continue or do you think it goes back to its cyclical ways? 

{audio:0:51:25} The first question that has to be answered is, what is going to be established as the new normal in terms of a dynamic and fluid supply chain management? If we move into an unpredictable period like we've had given Covid factors and periodic closures and shutdowns, that's one scenario that would look different. I believe that, at some point we're going to settle into something that looks like more of a new normal, where we're going to beat this pandemic well enough that we're not going to have the same uncertainty with these shutdowns. Assuming that's the case, the question becomes, what does the new normal look like in terms of that balance between demand for LTL services and supply and capacity, labor and trailers? 

{audio:0:52:54} I do think, for a variety of reasons, that the permanent capacity side of the equation is going to be lower in LTL than it was before the pandemic. Fewer and maybe some retiring drivers is part of that. That would lead me to look at the immediate post-pandemic environment as settling into something where the pricing is on a slightly higher baseline, because of that different balance between supply and demand. My projection is that with the use of all this technology and the increasing centralization, that the cyclicality peaks and valleys are going to flatten through the use of that technology and more rapid and effective management of prices by carriers. Cyclicality will reduce and that will stabilize the industry.

{audio:0:54:14} I hope you're right. Is carrying more ecommerce freight part of that equation too? It seems as if it's a growing percentage of all these LTL carriers?

{audio:0:54:26} What FedEx Freight has is a capability called FedEx Freight Direct, which is a service designed for large item residential ecommerce delivery like grills or furniture, which people are increasingly ordering online. FedEx Freight is not unique in that as XPO has their last mile service. I anticipate a more prominent role for ecommerce. This is where the bundle that FedEx can offer makes a lot of sense, because for your small parcel ecommerce needs, you have FedEx Ground and your large items you can simply up trade to FedEx Freight and you're working with one company. Ecommerce is a strategic focus at FedEx Freight, and was one of the programs I was managing in my strategic planning role.

{audio:0:55:40} What is your view of the reputation of Congdon and Gantt and the culture at ODF? From your study as an outsider at FedEx, could that stay in place or is it driven by top management?

{audio:0:56:10} The more prominent cultural drivers for the success of ODFL is the decentralized aspect of their management and culture. You do have top management at the central office who are confident in empowering local leadership. If they were to change that it would be risky, and they would need a strong justification. I have no reason to believe the top leadership was looking at it any differently. This did influence the guy that FedEx Freight hired. They made some decisions he felt were shortsighted from a centralized basis on some technology projects, and given the importance of technology, it would be interesting to see if they're able to continue to architect a coherent technology strategy that brings the benefits of centralized technology while protecting a decentralized culture. That was an area of top management concern we heard about.

{audio:0:58:24} Thank you very much for your views, this was very helpful and interesting, I appreciate all your time.

{audio:0:58:34} Glad to do it, and great talking to you today.

Old Dominion Freight Lines vs Fedex Freight: Competitor Angle

Former Managing Director at Fedex Freight

inpractise.com/articles/old-dominion-freight-lines-competitor-angle

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Former Managing Director at Fedex Freight

Interview Transcript

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