June 23 2009 09:59 AM

Airfreight & Logistics (Market Underweight):
We spoke with an industrial products shipper based in the Midwest regarding his current bid with FDX for small package and LTL service. Our contact spent approximately $20-25M in annual small package transportation over the last year, of which FDX received nearly 80%, split equally between Express and Ground. Our contact also currently utilizes FDX National and Regional LTL for a third of his roughly $50M in annual LTL business. This shipper is currently working on a bid with FDX to bundle his small package and LTL spend together for additional cost savings.

While our contact has yet to see FDX's proposal, he is hopeful that by bundling services he can shave 5%-10% off of his current spend, although this may depend upon how much additional LTL business he sends their way. Our contact had worked with FDX on a similar bid nearly three years ago, but FDX was less eager to bundle services at that point. Service levels remain generally firm at FDX Express and Ground and service at FDX Freight has been better than most, but has had its fair share of hiccups over the past few months. While inventory drawdowns appear to be slowing, this shipper's volumes continue to track down 10%-15% y/y with no material improvement anticipated until 2010.

Trucking (Market Underweight):
We spoke with a mid-sized retailer about recent volume and pricing trends across transportation modes. This shipper has about a $70M annual transportation spend, including 40% truckload and intermodal, 30% LTL and pool distribution and 30% small package. Our contact noted the relatively greatest pricing pressure on his TL and intermodal rates, with a roughly 10% average rate reduction on bids conducted so far this year. On the LTL side, this shipper has switched primary carriers from YRCW to FedEx National and Freight, with about a 70% FDX/30% YRCW split today, reversed from a 30%/70% split to begin the year. YRCW essentially walked away from this shipper's business after our contact refused to grant a rate increase in March. Conversely, FDX lowered rates by a couple percent on the LTL side and dropped its minimum charges.

Regarding YRCW, this shipper experienced very poor service levels immediately after the Yellow and Roadway integration, although service has materially improved since then with about 80% of shipments back to pre-integration levels. Our contact is monitoring YRCW's financial condition very closely, but feels his reduced LTL exposure should allow for continued use of YRCW's services even if it were operating under bankruptcy protection (assuming service levels didn't deteriorate). However, this shipper has too much exposure to YRCW for pool distribution, and is working to reduce this coverage from nearly 50% previously to about 10%-20% over the next several months. On the parcel side, this shipper uses UPS for about 95% of its e-commerce business. This shipper is in the middle of a multi-year contract with UPS, but was able to secure about a 0.5% rate reduction and materially lower accessorial charges (reducing rates by another full 1%) earlier this year in exchange for a one year extension to his contract terms. Finally, on the volume side, same-store shipments are stable and tracking down about 10% y/y, which is better than initial company expectations of a 15% decline for 2009.

Note: Each of the comments above represents the viewpoint of a single shipper or industry contact. They are not necessarily representative of the overall market and do not necessarily reflect the opinion of Wolfe Research unless specified.
Ed Wolfe can be contacted at (46) 845-0770 or EWolfe@WolfeResearch.com