By rights, the guys who manage regional LTL trucking outfits ought to be ecstatic. Like truckers everywhere, they took a beating during the economic downturn, but today, the storm clouds have receded and their future looks bright. No less an authority than The Colography Group has pronounced their business hot. "The strongest shipping growth is concentrated in the regional LTL segment," the Atlanta based research and analysis firm proclaimed in its latest market analysis, A World of Change: Global Transport in a Time-Driven World.
It's not hard to see why. Nervous about potential supply chain disruptions in a post 9/11 world, companies of all stripes are keeping goods in local distribution centers closer to the end customer. According to The Colography Group, more than two-thirds of all shipments travel 600 miles or less, and the proportion is growing. At the same time, a spike in e-commerce has flooded the nation's shipping channels with small, light packages, a trend that favors the less-than-truckload carrier at the expense of the truckload hauler.
Ironically, the regionals' business is exploding just when their ranks are the thinnest. Battered by economic blows in the last couple of years, many of the weaker players closed their doors or were swallowed up by competitors, the latest casualty being USF Red Star in the Northeast. That's led to a capacity crunch in some parts of the country. "Right now, in many industry segments, demand for trucking services is exceeding supply," says Jim Latta, vice president of business development and coowner of the privately held A. Duie Pyle, which operates both LTL and truckload service, mostly in the northeastern United States.
If that were the only problem they faced, LTL executives would probably be breaking out the champagne right now. But unfortunately, it's not. With little prompting, most carriers will reel off a list of weak spots in their industry that threaten their ability to serve customers. That's provoking anxiety among the shippers that rely on regional LTL service. It's not just a question of capacity, they say, it's also a question of rates.
What has the truckers worried? For starters, there's the driver shortage—a problem that has defied a decade's worth of attempts at resolution. "I've been concerned for some time that our industry has not been attractive to the best and brightest people," says Gerald L. Detter, president and chief executive officer of Ann Arbor, Mich.-based Con-Way Transportation Services Inc., which serves virtually the entire United States through regional LTL subsidiaries. "Decades ago, it was considered a leading bluecollar industry, with excellent wages and benefits." But that all changed. "Today, it's more work, harder work, for less compensation—that's a bad combination. So the quality of the people who are willing to do this kind of work will dilute itself, in my opinion, and I believe that has happened." Detter predicts truckers will be forced to raise drivers' compensation somewhere between 25 and 30 percent in the next three to five years.
Then there are the trucks themselves. Although some companies have continuously renewed their trailer stock, many simply can't afford to buy new equipment. Latta at A. Duie Pyle says his impression is that many of the trucks sold in recent years have been "straight" trucks (i.e. nonarticulated), which allow only restricted access for loading and unloading by forklift truck, bought by sub-regional carriers.
Despite strong sales among manufacturers of large trucks, many regional carriers are only slowly enlarging their fleets. "We can't be like the grocery industry making two or three cents on the dollar, because of the cost of equipment," says John Shevell, vice chairman of New England Motor Freight Inc. in Elizabeth, N.J., which provides LTL trucking services in the northeastern and mid- Atlantic United States, eastern Canada and Puerto Rico.
Of course, every trucking executive who voices concerns about the quality of trucks or availability of drivers is talking about the other guy. But road congestion is a problem that affects them all. "How do you have reliable service in the face of an infrastructure that is a big, big problem?" asks Ted Scherck, president of The Colography Group and author of the World of Change report. "How do you deliver in Boston? That's a critical problem."
It's not just Boston, of course. Congestion is endemic throughout the high-volume Northeast region, which includes New York. "They want to put the Olympics in here!" complains Shevell. "All that traffic, and no one will get any freight. It's the most absurd thing in the world."
Reaching the outer limits
But it's not just about drivers, equipment and roads. For many regionals, says Scherck, it's a major challenge just figuring out how to cover extensive geographic regions with their limited equipment. "If you're going to be a regional carrier, you really have to serve the whole region," he says. "A lot of second-tier companies are not large enough to provide the level of service demanded at the price demanded in the whole region."
For some, the solution has been mergers and acquisitions, a trend Scherck expects to continue. "We'll end up with, in effect, five or six regions in the United States and the trucking companies are going to have to have competitive service offerings and competitive scope within that region. That's going to be a challenge for a company that is, for example, strong in the Southeast, but has weaker offerings in the Northwest. They'll have to make a decision if they're going to compete in the Northwest. You can't compete by growing organically, so you have to find someone to buy or merge with to give that coverage."
Indeed, that's exactly what FedEx Freight has done, Scherck says. "It's a collection of regional operations instead of a national footprint; that's why it's done so well." Scherck notes that Con-Way and Overnite have used the same strategy to vault into the top tier.
Not every carrier can buy or merge its way to the top, however. The remaining regionals have been left scrambling to find other ways to make their services attractive. Some have teamed up with a traditional adversary, the rails, to provide intermodal service. Some have outfitted their trucks with smart tracking technology. And some are pinning their hopes on new, innovative equipment.
Steve Ginter, vice president of marketing at New Penn Motor Express Inc., which operates LTL services in the eastern United States, Canada and Puerto Rico, says his company has invested in trucks with liftgates that can load and unload cargo without a raised dock. "Especially here in the Northeast, where the infrastructure of our customers is not what it is in the West or Midwest, there's a fairly significant need for lift-gate where we're able to make a delivery from a hydraulic tail-gate," Ginter says. "We're making greater investments in equipment that has a hydraulic lift-gate to meet the needs of customers who need that, sometimes even for a residential delivery."
Others have chosen to expand not their fleets, but their service offerings. "We're doing everything we can to grow different products for our customers," says Brad Brown, head of marketing at Averitt Express Inc., operating LTL mostly in the South. "We believe they want our company to do more than just pick up and deliver goods for them.We've been core LTL for 25 years, and in the last six we've been doing international services with air and ocean freight forwarding. We also have a time-definite product—with guaranteed air, ground and charter," says Brown, who adds that Averitt has even established a supply chain group.
What does all this mean for shippers? Certainly, they should brace themselves to pay higher rates. Carriers argue that an increase is long overdue. "Customers will probably recoil," concedes Con-Way's Detter. "But I suggest they consider the following: Look at the cost of transport compared to the cost of manufacturing over the last two decades. The cost of transportation is much smaller [as a percentage of manufacturing costs] today than it was 20 years ago. Because we have shared those efficiencies—perhaps too much—with customers, now it's time to get paid more."