There's a proverb that "there are no mistakes, just lessons." If that's the case, the less-than-truckload (LTL) sector has received a world-class education during the past five to six years.
After a terrible cycle that saw the LTL market shrink from more than $33 billion at the last peak (in 2006) to $25.2 billion at the recession's trough in 2009, carriers appear to have gotten their act together.
Market size has stabilized at about $30.6 billion, though that's still about 10 percent below its pre-recession high. Gone, at least for now, are the price wars that were largely designed to drive ailing YRC Worldwide Inc., the market leader at the time, out of business but ended up backfiring on the carriers that launched them. Volumes have returned as the economy has gradually improved, giving carriers the chance to restore sanity to their pricing and their bottom lines.
In addition, through network redesigns and tough operational pruning, carriers have sopped up a large amount of the excess capacity that plagued them through the downturn and in the early part of what has been a halting recovery. "Capacity is now lined up pretty well with the needs of the market," said William J. Logue, president of FedEx Freight, the LTL unit of Memphis-based FedEx Corp. and the industry's largest player by revenue.
No carrier executive who survived the past six hellish years will get carried away with LTL's outlook. For them, just being able to string "LTL" and "stability" in the same sentence is an achievement.
"The industry is more focused and stable," said Logue. "The up-and-down swings are not there now."
"I'm a lot more comfortable with where we are today than where we were two years ago," said Jeff Rogers, president of YRC Freight, the long-haul unit of Overland Park, Kan.-based LTL carrier YRC Worldwide.
Rogers said pricing, while still competitive, is firm, stable, and consistent. "Everybody is being rational at this time," he added.
Old Dominion Freight Line Inc., considered by many to be the industry's best-run carrier, declined comment for this story. However, its executives were quoted in an analyst call to discuss first-quarter results as saying that pricing was "stable" and "good." Thomasville, NC-based Old Dominion did not cut its rates nearly as sharply as its rivals did during the downturn, a reflection of its pricing discipline and its already-strong financial position heading into the cycle.
Better days to come?
There may be further room for pricing improvement. According to an April 29 analysis from Morgan Stanley & Co., carrier margins can increase an additional 4 to 6 percent from current levels before they reach what would be considered normalized returns on invested capital. Provided a normal historical recovery takes hold, there is still opportunity for further pricing gains, according to the firm.
The firm noted that the margins of the most aggressive discounters during the down cycle, FedEx Freight and Con-way Freight, the LTL unit of Menlo Park, Calif.-based Con-way Inc., are still below the levels of the 2005 peak. The Morgan Stanley analysis said improving economic fundamentals and an "oligopolistic industry structure"—10 carriers account for 73 percent of total industry revenue, by its estimate—"reinforce an already weak incentive to discount" among the carriers and are "supportive of price discipline."
In the past two to three years, truckload and intermodal rates have been rising, while LTL prices have remained largely flat to down. The LTL sector is now benefiting from that trend, as intermodal and truckload shippers start turning to the segment to get better pricing.
David G. Ross, transport analyst for Stifel, Nicolaus & Co., said the continued tightening of truckload capacity in coming years could result in "overflow freight" that will add all-important traffic density on LTL routes. Ross said LTL yields—excluding the impact of fuel surcharges—should increase up to 5 percent in 2012 and predicted carriers would enjoy pricing power through 2014.
A rising tide is not lifting every boat, however. ABF Freight System, the LTL unit of Fort Smith, Ark.-based Arkansas Best Corp., has, like its competitors, increased its rates. However, analysts said the resultant tonnage losses have put a unique hurt on ABF's network utilization because as one of only two unionized LTL carriers, it has the industry's highest cost structure. The company said that first-quarter 2012 tonnage fell 12.5 percent from the 2011 period, and the burdens of a high cost structure and unfavorable tax rates resulted in a higher-than-expected $18.2 million quarterly loss.
YRC, the other unionized carrier and one that faced insolvency in late 2009, has in recent years won a series of controversial cost concessions from the Teamsters union as a trade-off for its survival. ABF had sought similar givebacks from the Teamsters but didn't get them. It has also sued YRC and the union on grounds their pacts fell outside the national agreement governing labor relations with both carriers and are thus illegal. ABF declined comment for this story.
Flak over 'FAK'
Despite the marked improvement, LTL carriers still face two big structural problems. The first is that large shippers continue to use their volume clout to beat back attempts at rate increases; the second is that carriers regularly misprice "Freight All Kinds" (FAK) shipments tendered to them. As a result, carriers undercharge for shipments that weigh more than they realize, allowing shippers to pay lower rates than they should. Because of those two issues, pricing is "still not where it needs to be" to enable carriers to earn their cost of capital, said Ross.
Rogers of YRC Freight said the issue of FAK mispricing has been around for years but has become more prevalent with the increasing influence of third-party logistics service companies (3PLs), which tender a large percentage of loads that generate FAK rates. He said YRC tries to avoid 3PLs that are just "price shoppers" and works instead with those intermediaries "who bring us new business and take cost out of our pricing structure."
Logue of FedEx Freight said the sector needs to move away from "classification" pricing, where rates are determined by the characteristics of commodity classes, to a more simplified structure based on shipment distances, or "zones," and density. The latter approach, long used by FedEx's core parcel customers, would be a "game-changer" for LTL if adopted, Logue said. He added, though, that such a move would likely be a long and complex transition for shippers and carriers.
Satish Jindel, president of Pittsburgh-based consultancy SJ Consulting, said at a recent industry conference that the current classification rate structure "creates no incentive for shippers to adopt good pricing practices." Many LTL users have enjoyed a pricing windfall over the past 30 years, and the flip side of that can be found in the paltry increase in carrier yields, Jindel noted.
In 2011, LTL rates per hundredweight—the most commonly used barometer to measure carrier yields—stood at $16.71, according to SJ Consulting data. In 1983, they were at $14.08 per hundredweight. The annualized 0.6-percent gain has been dwarfed by the annualized 2.6-percent rise in the cost of labor and trucks, SJ data shows.
Slow road to recovery
As an example of the pricing needs of one carrier, YRC's rates would have to rise about 8 percent above where they are today to restore and maintain consistent profitability, according to Charles W. Clowdis Jr., a trucking executive for decades and now head of transportation advisory services for the consultancy IHS Global Insight.
Rogers of YRC Freight said an 8-percent across-the-board increase "is not going to happen" given current market conditions, though on some lane segments the carrier is securing increases higher than that. A key challenge facing YRC is that its customer mix is tilted more heavily toward high-volume corporate business than the company wants. Rogers said, however, that he's more comfortable than he's been in years asking large accounts for rate hikes. In the meantime, YRC continues to go after non-corporate accounts that would command higher prices for its services, he said.
Rogers said the carrier doesn't "need an 8-percent increase" to be consistently profitable and viable. He said, "getting to where we need to be will not be based on price."
The LTL industry, which lives and dies on freight density and network efficiency, knows that pricing actions alone won't return it to sustained profitability. The housing industry, which played a big part in LTL's performance until its own meltdown in 2007, remains unsteady. Without much future contribution from housing, Ross expects LTL tonnage to grow just 1 to 2.5 percent annually this year and next. Even a modest 2- to 3-percent increase in 2014 would depend on at least a moderate housing recovery, he added.
Ross said he does "not believe carriers should rely on pricing alone to restore necessary margins, as network efficiency and cost control remain highly important."