Several of the nation's top less-than-truckload (LTL) carriers, fresh from announcing rate increases of nearly 7 percent on their non-contract traffic, are prepared to impose another round of rate hikes in February 2012, according to a top executive at a firm that advises shippers on spend management issues.
John Haber, executive vice president of transportation for Atlanta-based NPI, said he's been told by reliable sources at several LTL carriers to expect another round of general rate increases in February. That would be about six months after the most recent cycle of increases, most of which went into effect at the beginning of August. The one exception is FedEx Freight, the LTL unit of FedEx Corp. and the nation's largest LTL carrier, which today announced a 6.75-percent rate increase, effective Sept. 6.
Haber, whose firm represents about 300 shippers of varying sizes, said he's been told that the 2012 increases would likely fall in the 5- to 6-percent range, less than the 6.9-percent rate increases announced by UPS Freight, ABF Freight System Inc., YRC Worldwide Inc., and Con-way Freight or the 6.75-percent increase from FedEx Freight.
YRC CEO James L. Welch, in an Aug. 5 interview, declined comment on any future rate increases. Representatives for UPS Freight and ABF denied that such a rate increase was in the offing. A spokesman for Con-way declined comment.
From late 2006 through 2009, LTL carriers were buffeted by a freight recession exacerbated by a broad economic downturn that followed the financial crisis that began in September 2008. During that time, the industry was also embroiled in a persistent rate war that compressed carriers' profit margins. Many speculate that the rate-cutting strategy was a concerted effort to drive financially ailing YRC, then the market leader, out of business.
YRC has survived, however, and since the start of 2010, the carriers have reversed course, raising rates and culling marginally priced freight in an effort to boost revenue per pound—or yields—and improve profitability. Since January 2010, for example, UPS Freight, the LTL unit of UPS Inc., has imposed three general rate increases. UPS Freight was the first carrier to announce a rate hike this time around.
Haber said LTL shippers can look for alternative solutions, but with the major carriers falling in lockstep—or poised to—they may have little room to maneuver. He said experienced shippers with significant volumes might be able to bargain the carriers down to a 3- to 5-percent increase, but likely no lower.
Haber said he understands the carriers' need to generate adequate returns to offset higher labor and operating costs, satisfy shareholders, and reinvest in the business. However, he added that the amount and the frequency of the increases have been "excessive."
Haber said FedEx Freight has been the most active in walking away from low-margin business after two years of aggressive rate-cutting designed to capture market share. The unit last month reported that it turned an operating profit in its fiscal fourth quarter, its first quarter in the black after six consecutive quarters of operating losses. In the quarter, FedEx Freight's yields rose 13 percent year over year, while tonnage fell by 8 percent during that span.
In April, Alan B. Graf Jr., FedEx's CFO, told an investor conference the company "shot ourselves in the foot" with its LTL discounting strategy. "We got too aggressive on yields and tried to make it up in productivity. The reality was that we could not," he said.
In a statement accompanying ABF's generally solid second-quarter results, Judy R. McReynolds, president and CEO of parent Arkansas Best Corp., cautioned that the "progress made so far does not produce sufficient returns for our shareholders nor does it allow us to adequately recapitalize our business." The path to profitability lies with "improved pricing on ABF's existing account base and from continuing efforts to achieve a more competitive cost structure," she added.
The wild card in any future rate actions is likely to be the health of the U.S. economy. Charles W. Clowdis Jr., managing director-transportation advisory services for consultancy IHS Global Insight, said although "all of the LTL players would like to raise rates in early 2012," a weak economy and stagnant or declining freight volumes may make it difficult to implement an increase at that time.
Unless business picks up appreciably, a rate increase is possible only if carriers can tighten capacity to the point where shippers must pay up to get their freight moved, according to Clowdis.