For more than two decades, regional less-than-truckload (LTL) carriers have been in the right place at the right time. Their run of luck began in the mid1980s, when shippers—bent on cutting transportation costs, improving customer service, and minimizing inventory bloat—began replacing national distribution centers with regional hubs that fed freight to customers over shorter distances and with increasing frequency.
That shift in distribution strategy, triggered by the emergence of the "just in time" lean inventory concept, has become permanently integrated into the nation's shipping landscape. Today, more than two-thirds of all domestic shipments travel 500 miles or less from origin to destination, and the regional trucking models created to provide those deliveries have experienced accelerating demand through the years. By contrast, the national less-than-truckload category has been in a slow and steady decline.
Last year, says Pittsburgh-based SJ Consulting, 62 percent of all LTL tonnage moved in regional and inter-regional services, which the firm defines as hauls of less than 500 miles (regional) and hauls of between 500 and 1,000 miles (inter-regional). Compare that to 1998, when regional and inter-regional services accounted for slightly more than 38 percent of LTL tonnage. The current mix has remained more or less constant for the past four years and is expected to stay that way, the firm says.
But even a business that enjoys positive secular fundamentals cannot be totally inoculated from the double whammy of economic weakness and soaring energy costs that have pressured shippers and crimped demand for trucking services over the past two years. Add to that increasing competition—and capacity—from long-haul truckers and thirdparty logistics companies, and the regional LTL business has, at least for now, become an exercise in Darwinian theory.
"We believe the gains being made are coming from taking market share [from other carriers] rather than being driven by a strong economy," says Doug Duncan, president and CEO of FedEx Freight and FedEx National LTL, the regional and long-haul units of FedEx Corp. "The market is still contracting."
Revenue per-hundredweight—a key metric of trucker financial health—has been trending upward since the second quarter of 2007. However, virtually all of the revenue gains have come from the pass-through effect of higher fuel surcharges. SJ Consulting cites data from Old Dominion Freight Line to illustrate how fuel surcharges can skew the numbers. In the second quarter of 2008, Old Dominion's LTL yields rose by 5.4 percent over comparable 2007 figures; however, when the fuel surcharge was excluded, the year-over-year yield actually declined 3.1 percent, according to the consultant's analysis.
The good times may not be quite so good for regional LTLs these days, but the regionals are still likely to fare a bit better than their long-haul cousins. David G. Ross, a Baltimore-based vice president and transportation analyst for research firm Stifel Nicolaus & Co., predicts regional LTL tonnage will grow by 3 to 4 percent a year in 2009 and 2010, outpacing the 1- to 2-percent gains he forecasts for the LTL sector as a whole.
One reason for the difference, Ross says, is that regional LTL pricing patterns are "competitive but rational." Although any yield and price increases are likely to remain modest, the sector isn't experiencing the significant yield erosion that's often seen in a cutthroat rate environment. However, Ross cautioned in a report published last spring, future pricing behavior will likely be dictated by how much market share the larger players gain or are willing to sacrifice.
Despite the economic challenges, both the regional and national LTL sectors have picked up a tailwind of sorts created by changing market conditions and regulatory regimes that work in their favor. For one thing, as regional services expand their next-day and second-day service to broader geographic areas, they are rendering less relevant the offerings of national LTL carriers as well as air express services, which charge significantly more for similar transit times.
Regional LTL carriers may also be escaping the competitive vise clamped on them by small-package and truckload rivals. Over the years, small-package rivals captured LTL shipment share at the lower end of the weight spectrum, while truckload carriers have aggressively pursued the heaviest LTL freight. From 1980, the year of trucking deregulation, through 2006, the LTL sector's share of the market as a percentage of total trucking revenue declined to 9 percent from 19 percent, according to data from Stifel Nicolaus. In recent years, however, UPS Inc. and FedEx Corp., the two leading small-package carriers, have entered the LTL market through acquisitions and now see little need to cannibalize their own businesses.
Meanwhile, changes in the federal government's driver hours-of-service (HOS) regulations have made truckload carriers less competitive with their LTL rivals on multi-stop routes. Truckload operators traditionally would pick off LTL freight by aggregating heavier-weight shipments in one trailer and making several delivery stops to consignees in the same general area. However, the new HOS rules, which call for 11 hours of drive time and 10 hours of rest in a 24-hour cycle, effectively require a driver to remain on duty rather than go off the clock while waiting for a trailer to be unloaded, which was allowed under the old provisions. The rules have, in many cases, added a day to the same multi-stop route, thus making truckload transit times less attractive to shippers.
LTL carriers are also benefiting from a spate of truckload failures and bankruptcies in the past year. That's scaled back the amount of truckload capacity available to compete with both regional and national LTL at the higher weight breaks.
The cumulative effect of these trends is that LTL carriers are now getting shipments in the 8,000- to 10,000-pound weight breaks that had largely become the province of their truckload rivals. Ed Conaway, executive vice president of sales for Con-way Freight, one of the nation's leading regional truckers, says Con-way's average shipment weight has risen 1.6 percent year over year. "That is a pretty encouraging increase for us," he says.
Tightening the systems
As encouraging as those signals may be, regional LTLs are not having an easy go of it. In its fiscal fourth quarter (which ended in May), for instance, FedEx Freight reported a double-digit decline in operating income, on a 5-percent gain in revenue. Average daily shipments rose 3 percent year over year.
Regional LTL executives are not sitting idly by waiting out the downturn. Instead, they are busy fine-tuning their networks in readiness for the next economic uptrend, believing that the fast-cycle distribution concept that spawned their original success is even more relevant today as businesses grapple with elevated cost structures that may never return to the levels of two or three years ago.
Duncan of FedEx Freight says the company, which delivers about 90 percent of its traffic in one to two days, will opt for more direct routings and bypass its hubs as it builds additional traffic density on its lanes. This direct loading concept is part of FedEx Freight's strategy to streamline its network without defying the laws of physics. "We can't make the trucks drive any faster," he says.
Avoiding hubs when possible can save as much as four hours of downtime, Duncan explains. That may not sound like much, but it's an important first step. "You first have to remove hours, minutes, and seconds before you can remove days" from delivery times, he says.
YRC Regional Transportation, the parent of New Penn, USF Holland, and USF Reddaway, is using a different technique than Con-way to speed up deliveries. To reduce operating costs and maintain its next-day delivery commitments, YRC Regional has designated 17 so-called "velocity centers," where freight moving between low-density city pairs will be aggregated with loads on other low-density traffic lanes, according to Keith Lovetro, the subsidiary's president and CEO.
For example, shipments between Terre Haute, Ind., and Cleveland, a lane that lacks the traffic density to justify point-to-point LTL service, are pooled in Indianapolis with freight that originates in other cities. The pooling process itself takes between two and three hours, a relatively narrow window but one that still allows YRC Regional to build density and make overnight deliveries, Lovetro says. Twelve of the centers were operational at this writing, with the remaining five scheduled to come online in September.
The strategy is part of a system revamp launched in the spring in an effort to stem YRC Regional's significant losses in the fourth quarter of 2007 and the first quarter of 2008. During the second quarter of this year, the USF Reddaway unit, which operates mostly in the West Coast and Mountain states, exited markets in Texas, Oklahoma, Louisiana, and New Mexico because of high costs, sub-par traffic flows, and elongated transit times. YRC's Yellow Roadway national LTL subsidiary now handles much of the freight that YRC Regional relinquished and that didn't defect to rivals.
In addition, YRC Regional eliminated six Southeastern U.S. service centers from its USF Holland unit, which has been hurt by weak demand largely in the economically ailing Midwest. YRC Regional accounts for between 20 and 25 percent of the traffic generated by parent YRC North American Transportation. According to Lovetro, those moves have reduced the number of miles driven, on a per-shipment basis, by 4 to 6 percent, saving the company millions in fuel and other operating costs.
But cutting transit times further will be far from easy, considering that some truckers are pushing the lengths of haul beyond their traditional parameters. FedEx Freight and Con-way, for example, provide next-day deliveries between a growing number of city pairs more than 600 miles apart. FedEx Freight also offers second-day deliveries on traffic lanes extending to 1,600 miles, while Con-way offers two-day transit times for lanes approaching those lengths. The typical length of haul for YRC Regional, which focuses almost exclusively on next-day deliveries, is about 450 miles.
Collaborators or competitors?
As regional truckers extend their coverage areas, they are finding that collaboration— rather than competition—with truckload carriers might be an effective means of serving their customers. According to Ross of Stifel Nicolaus, many long-haul LTL movements actually consist of two regional LTL moves connected by truckload for the line-haul portion.
The operation works like this: A regional LTL carrier picks up a large quantity of LTL shipments in an area such as the Los Angeles Basin, and then consolidates them into multiple truckloads for delivery to a retailer's distribution center elsewhere on the West Coast. From there, the retailer hires a truckload carrier to haul the freight to the Northeast. The full trailer is dropped off at a Northeast regional LTL carrier's facility, and the carrier deconsolidates and distributes the freight throughout its network.
The coordination of regional LTL and truckload carriers will continue to offer an "effective alternative" for shippers, Ross said in an analyst note released in the spring. Ross's view is endorsed by Marc Rogers, vice president of regional services for Schneider National Inc., one of the nation's leading truckload carriers. The company is making a concerted push into the regional market, and Rogers believes there is room for greater cooperation between LTL and truckload carriers. "Each of us brings something different to the table," he says.
Schneider today provides regional truckload services in 11 Western states and plans to expand into the U.S. Southwest by the end of 2008, Rogers says. The company will expand into the Southeast in 2009 and will offer regional coverage across the nation by 2010, he adds. The move is prompted by customers' requests that Schneider add regional services to its portfolio as well as drivers' desire to operate their rigs over shorter routes so they can have more consistent home time, he says.
The regional model requires a traditional long-haul carrier to map its operations differently, "but we believe we will make this work," says Rogers, who was hired by Schneider a year ago to boost its regional exposure. He acknowledges that the carrier is a latecomer to the regional game and that its expansion is based on a model that other truckload carriers have retreated from.
Strategies aside, what the regional LTL industry needs is a good old-fashioned economic upturn. SJ Consulting President Satish Jindel expects shipment count and tonnage to improve in the early part of 2009, with pricing firming up in response. But, he says, the industry's near-term fate will hang on decisions made by YRC, which controls between 25 and 30 percent of all LTL traffic. On Sept. 8, YRC announced plans to combine its Yellow and Roadway long-haul LTL units into one operating network with combined sales forces and an integrated product portfolio. If YRC aggressively acts to shutter terminals and withdraw truck capacity, Jindel says, the overall picture—both for regional and long-haul operators—could improve much faster.