The economy isn't getting any stronger. Energy, raw material, labor, and insurance costs are skyrocketing. Competition is cutthroat. Shippers demand more for less—or at least for the same. And there's the ever-present specter of further government regulation. What's a less-than-truckload carrier to do?
Simple: Change the game.
As for how they might do that, everything is on the table. Carriers are rationalizing fleets, streamlining route systems, scrutinizing customer lists, and more.
In mid-June, Yellow Transportation, the nation's largest LTL carrier, was set to begin what President Michael Smid called a "complete network redesign." That program will include greater use of purchased transportation as an alternative to in-house line-haul service, more flexibility for Yellow's truckload unit to solicit and deliver shipping services, and a cut in the amount of traffic tendered to the railroads in favor of over-the road transportation, which is more cost-effective for Yellow on certain lanes. In an exclusive interview, Smid also said that more resources will be allocated to providing customized services for LTL loads as well as to expanding expedited, or time-definite, deliveries, the fastestgrowing segment of Yellow's business.
Ira Rosenfeld, a spokesman for UPS Freight, the LTL unit of logistics giant UPS, says his company is "looking at every option" to make better use of its assets. Unlike Yellow, UPS— whose small package unit is the railroads' largest customer—is looking to move more LTL volume on the rails, Rosenfeld says.
Meanwhile, UPS Freight is tightening its delivery network. On May 12, it announced that it would reduce transit times for shipments moving from 11 Sunbelt states across 1,000 traffic lanes nationwide. The new setup will allow a shipment from Memphis, Tenn., for example, to reach any of UPS Freight's New England destinations within two days, according to the company.
A fundamental transformation
To bring revenue more in line with costs, the industry is migrating to a cube-based pricing mechanism and away from the traditional classification structure, under which freight rates are set by classification codes assigned to groups of commodities. The move, which has met with resistance from large shippers, is designed to ensure that rates more accurately reflect a carrier's actual costs in today's economic climate, Rosenfeld says. Although the carriers were already heading in this direction, skyrocketing fuel costs have accelerated the process, he acknowledged.
All of this is just the start of a long-term restructuring, experts say. When the smoke finally clears, the $35 billiona- year LTL sector will have been fundamentally transformed. "The present-day issues confronting the LTL industry, and the industry's response to them, are likely to permanently reshape the way it does business," said Brian P. Clancy, managing director of MergeGlobal Inc., a financial advisory firm that specializes in transportation and logistics industry mergers and acquisitions, in an e-mail.
In some cases, the changing conditions could work to the LTL carriers' advantage and help them capture business from truckload (TL) carriers, MergeGlobal said in a recent report. For instance, the hours-of-service rules that limit truckload drivers' time on the road could make LTL more attractive to shippers that require multiple stops and normally use truckload service for shipments weighing 8,000 to 10,000 pounds. The spike in diesel prices will also tilt the competitive balance toward LTL because fuel makes up a smaller percentage of LTL carriers' costs in comparison to truckload carriers, the firm noted in its report.
However, LTL carriers could lose up to $8 billion in revenue to multistop ground parcel carriers, MergeGlobal said. Ironically, the cause would be skyrocketing diesel prices, which would make shipments at the lighter end of the spectrum more expensive to handle in an LTL network than in a ground package network with a more efficient material handling system.
Revolutions take time, and to succeed, carriers will have to break a sweat. A second-half recovery appears to be in doubt, and 2009 isn't looking much better. "We don't assume a whole lot of help from the economy" next year, said Yellow's Smid.
And the situation might get worse before it gets better. LTL carriers hungry for market share in a segment that's plagued by overcapacity have discounted their base rates to levels that, in the words of one observer, "are really out of hand." Shippers are being hammered by soaring fuel costs, and carriers' top-line growth is mostly coming from fuel surcharge pass-throughs instead of from organic growth or firm pricing.
Rosenfeld, a 20-year industry veteran, calls it the weakest rate environment for carriers since the early 1990s. "No one is winning here," he says.