a brave new world of pricing

For less-than-truckload (LTL) shippers, 2007 has been a pretty good year. It's not just that they're enjoying more rate negotiating leverage than they've had in some time (thanks to a relatively soft economy). It's also that they received word this spring of an important and long-sought legal victory that could open the way to more motor carrier rate competition.

In May, the federal Surface Transportation Board (STB) took one of the final steps in deregulating the trucking industry by ending antitrust immunity for the carrier rate bureaus and the committee that oversees the national freight classification system. Assuming it withstands a legal challenge, the ruling could have far-reaching effects on the industry, giving shippers greater influence in the classification system, stripping freight bureaus of collective ratemaking approval, and perhaps smoothing the way for carriers and shippers to explore new and less complex ways of pricing LTL freight.

When it issued its decision, the STB said that it believed the time had come to open the motor carrier industry to the forces of market competition. "Given the maturity and vitality of the motor carrier industry, that system (collective ratemaking) is incompatible with a free market-based and fully competitive system," the ruling said. "The public has a significant interest in having the competitive market set the rates for all shippers, without the restraint on competition that collectively set, antitrust-immunized class rates can produce. Our action today will protect all shippers, especially the small-volume or infrequent shippers who are most likely to lack the bargaining power to obtain market-driven discounts from the collectively set class rates."

The announcement met with widespread approval from shippers and shipper groups like NASSTRAC, which has sought to end the bureaus' antitrust immunity for more than a decade. NASSTRAC, which by coincidence was holding its annual conference at the time of the ruling, wasted no time issuing a statement applauding the decision. Gail Rutkowski, NASSTRAC's president, said at the time, "We have felt for many years that collective ratemaking by carriers is anticompetitive and does not benefit shippers."

Classified information
Others are not so pleased by the ruling. Critics include the National Motor Freight Traffic Association (NMFTA), the parent organization of the National Classification Committee (NCC), which is one of the groups that will lose its antitrust immunity. In July, the NMFTA challenged the STB's decision to terminate the NCC's antitrust immunity in the U.S. Court of Appeals for the D.C. Circuit. (NMFTA will also seek a stay of the ruling—which is now slated to take effect in January—while its challenge proceeds through the court.) Bill Pugh, executive director of the National Motor Freight Traffic Association, contends that the STB exceeded its authority in terminating the NCC's antitrust immunity. "We believe the decision is without a basis," he says.

Unlike the other entities affected by the STB's ruling, the National Classification Committee is not a rate bureau and does not establish rates, though it does play an influential role in the rate-setting process. As its name suggests, the committee, whose members are motor carriers, classifies commodities based on their freight characteristics: density, stowability, ease of handling, and liability for breakage or loss. It assigns each commodity a classification, which is a numerical rating from 50 to 500. Those are compiled in the National Motor Freight Classification (NMFC).

The National Motor Freight Classification serves as the basis for rates developed by the rate bureaus (and very often carriers that do not belong to the bureaus but are part of the NMFTA). Generally, the higher the classification, the higher the freight rate. Individual carriers then use the rates set by the bureaus as a baseline for negotiations with shippers. In practice, most negotiated rates are significantly discounted from those base rates.

The STB made it clear in its decision that it has no quarrel with the classification system. It noted that even the NCC's most vocal critics acknowledge that classification can simplify the process of quoting and negotiating rates. What led it to lift the NCC's antitrust immunity, the board said, was concern about the potential for abuse. Shippers have long complained that they are virtually shut out of the classification process and that their views rarely, if ever, are taken into consideration. In its ruling, the STB said it feared that carriers might be tempted to use the classification system as an indirect form of collective ratemaking— an activity, the board said, it would find very difficult to police.

Pugh dismisses that concern. "We have never done that in 70 years, including 50 years with immunity," he says. "There is no indication we would do that."

The more things change …
Whatever the outcome of the NMFTA's court challenge, one thing is clear: The rate bureaus won't be shutting down anytime soon. Over the years, they've broadened their activities beyond rate-making to include the development of products like mileage guides and cost studies. Freight bureau SMC3, for example, derives only 2 percent of its revenue from general rate-making, earning most of its income from services like its Czar-Lite online rate database. In any case, the STB's ruling does not prohibit rate bureaus from engaging in rate-making activities; it merely makes them subject to the same antitrust rules that govern most industries.

As for the National Classification Committee, Pugh insists that it, too, will continue to have a role. "I don't think things are going to be much different from the shippers' point of view," he says. "The classification is going to be maintained."

Pugh acknowledges, however, that if the STB ruling survives his group's court challenge, some procedural changes in the NCC's operation might be necessary. The NMFTA is working with the Department of Justice to determine what changes might have to be made. They almost certainly will include greater shipper involvement.

But critics of the NCC are unlikely to be satisfied with minor changes to the committee's procedures. Michael Regan, head of NASSTRAC's advocacy committee, views the whole classification system as a throwback to the era of regulation. "The classification committee has been judge, jury, and executioner," says Regan, who is CEO of transportation software and service specialist Tranzact Technologies. "People wonder how we would survive without it. Well, how did UPS survive?"

Regan believes the end of antitrust immunity offers new opportunities for both carriers and shippers. "The next couple of years ought to be interesting," he says. "You have the opportunity to put distance between yourself and your competitors by managing transportation costs more effectively."

A brave new world of pricing
Still, the prospect of setting prices without using freight classifications gives some truckers the jitters. "We would be worried about that going away," says Randy Mullett, vice president of government relations for Con-way Freight. "It is easier to price when comparing apples to apples, with everyone signing off on the same base classification." Con-way, a multiregional carrier based in Ann Arbor, Mich., has never participated in the rate bureaus, but it does subscribe to the NCC.

As for what types of pricing models might replace classification, Regan points to the dimensional pricing method used by UPS and air-freight carriers as one possibility. Under the dimensional, or cube-based, pricing model, charges are determined primarily by how much space a shipment takes up. Regan sees a move toward dimensional pricing as a particularly strong possibility in LTL markets.

Another option, he says, would be a yield management system similar to those used by the airlines. Airline yield management systems are designed to sell as many seats as possible—at multiple price points. The basic concept is that once a plane takes off, an empty seat becomes unsold inventory that's lost forever. In the same way, truckers worry about using their capacity and will compete on rates to do so.

In fact, Regan expects to see changes in trucking pricing structures in the nottoo-distant future. "It is not that far away," he contends. "If you want to see what motor carrier pricing will be like, look at the airlines a few years ago."

Mullett agrees that the STB ruling gives shippers and carriers an opportunity to look at pricing practices anew. But he expects change to come relatively slowly. Abandoning the classification system would require carriers and shippers to make wholesale changes to their operations, he says. "It is so embedded in everything, even in the way people price their products—the goods themselves. It will require some bold steps by industry leaders on the transportation side and on the shipping side."

Still, he reports that Con-way is analyzing the implications of shifting to various pricing models, dimensional pricing among them. Adopting a new model would require significant adjustments for Con-way, which, like most carriers, has built its accounting system around the NMFC, he notes. "We are taking this very seriously," Mullett says. "We are not willing to just say this is great. A lot of analysis and modeling goes with it." But he adds that he expects the industry to evolve toward more rational and understandable pricing.

Danny Slaton, senior vice president of business development for SMC3,agrees that change will come slowly. "I've heard talk of cube-based pricing, but so far we've not seen anything with real substance," he says. Shifting to a new model would require major modifications to carriers' and shippers' rating, billing, and purchasing systems, he says. "It's more work than just converting rates."

Cubin' revolution
Hank Mullen, a transportation consultant who specializes in LTL freight classification and rate issues, agrees that pricing practices will not undergo an overnight transformation. In the short term, he says, "absolutely nothing" changes. "If you want to use the current NMFC, you can adopt that, and nothing changes from the shipper point of view," he adds.

Though he urges shippers to move cautiously, Mullen acknowledges that he's a strong proponent of cube-based pricing, having gone so far as to trademark the term. (His company, The Visibility Group, offers software and services to help shippers and carriers shift to the cube-based model.)

Both carriers and shippers would benefit from the use of dimensional pricing, he says. Advantages for shippers include the fact that pricing is based on factors they can control, like container dimensions, day of the week, and transit time requirements. In addition, shifting to a simplified system could reduce their freight-bill auditing costs. For carriers, Mullen says, benefits include the ability to base pricing on space and demand. He adds that carriers may also find that the dimensional information provided by shippers allows them to do a better job of load planning— a plus in an era in which trailers are likely to cube out before they weigh out.

Despite these potential advantages, nudging the industry to adopt new pricing models won't be easy. Just ask Yellow Freight (now Yellow Transportation). Back in 1995, the long-haul LTL carrier attempted to do just that. With some fanfare, Yellow Freight announced a simplified pricing plan. But the idea may have been ahead of its time. The effort promptly fell flat on its face.