June 8, 2012
General rate increase sign of a healthy rate environment in spite of muted growth in freight volumes.
Effective July 9, FedEx Freight will raise non-contract rates by 6.9 percent on less-than-truckload (LTL) shipments moving within the United States and Canada, between the U.S. and Canada, and on the U.S. portion of shipments in the U.S.-Mexico trade. FedEx Freight is the LTL unit of FedEx Corp. and the nation's largest LTL carrier by sales.
FedEx Freight will also adjust the minimum charge it imposes on LTL shipments. Additionally, it will likely hike accessorial fees tacked on to the base price of a shipment to reflect the cost of services not related to the core transportation component. However, FedEx Freight said it will not change its current fuel surcharge levels as part of the pricing action.
With this announcement, FedEx Freight becomes the first carrier in 2012 to impose what are known as "general rate increases" (GRIs) on LTL shippers. But if history is any guide, today's announcement will be mimicked to a large degree by FedEx Freight's rivals,
In general, GRIs are applied to between 20 percent and 40 percent of the LTL sector's overall product mix. However, the GRIs are considered a starting point for contract negotiations with some of the nation's biggest LTL users, which comprise the balance of the carriers' business.
Across the industry, contract renewals are seeing rate increases--excluding fuel surcharges--in the 4- to 5-percent range, according to investment firm Robert W. Baird & Co.
A healthy rate environment
Analysts say the FedEx Freight move reflects a healthy rate environment that is gradually enabling LTL carriers to rebuild profit margins damaged by a long freight recession and price wars. Rate increases will also help them to re-invest in the resources needed to stay competitive. Even before FedEx Freight made its announcement, David G. Ross, transport analyst at investment firm Stifel, Nicolaus & Co. said that pricing trends were strong enough to help carriers expand their margins and that most of the "re-pricing of bad accounts is done."
Ross said domestic U.S. freight activity is holding steady and is up incrementally from this time last year. The slow growth is broad-based with no single shipping sector showing unusual strength or weakness, he said.
In a climate of somewhat muted growth, pricing and operating efficiencies have become more important to carriers than a quest for market share, Ross said. The industry is "not even at half-time" in its drive to grow profits from the most recent trough in 2009, he said.
That was the year that LTL pricing collapsed as carriers tried to defend market share amid a nasty economic recession that compressed freight volumes. The weak rate environment was also driven by two of the three biggest carriers, notably FedEx Freight and Con-way Freight, reducing prices in an effort to push ailing YRC Worldwide, then the market leader, out of business.
YRC has survived, however, and in the two subsequent years, volumes have picked up—albeit moderately. As a result, carriers began pricing their space rationally while culling unprofitable business form their rolls.
In 2010 and 2011, carriers once again possessed pricing power and raised non-contract rates multiple times. But with supply and demand now roughly in sync and with myriad economic concerns keeping freight demand somewhat muted, carriers have throttled back on the frequency of increases in 2012. Still analysts believe the carriers will retain rate leverage unless they go off on another rate-cutting binge, which seems unlikely.
In another sign of a healthy rate environment, Nashville, Ind.-based consultancy FTR Associates said its monthly "Trucking Conditions Index" for April rose significantly from March levels to a reading of 9.1. Any reading above zero indicates a positive environment for truckers. Readings above 10 indicate that volumes, prices, and margins are in what FTR termed a "solidly favorable" range for the carriers.
"Volume growth is modest, but because the industry is not adding capacity, even modest freight growth is sufficient to support firm rates," Larry Gross, senior consultant at FTR, said in a statement.
Gross said truckers should see a gradual improvement in the operating climate through the rest of 2012 and into 2013. Volumes should continue to grow modestly. Additionally driver supply will tighten as government regulations, such as the CSA 2010 program designed to winnow out purportedly unsafe drivers, begin to have an impact, he added. As a result of the shortage, trucking companies will be able to command higher prices.
Truckers should also feel a tailwind from the continued decline in diesel fuel prices, Gross said. As of June 4, the national average price of a gallon of diesel stood at about $3.84, down about 23 cents a gallon from the end of April alone, according to the Department of Energy's Energy Information Administration.