It's springtime, and as per usual in the less-than-truckload (LTL) industry, general rate increases (GRIs)—adjustments that apply to cargo not moving under contracts—are busting out all over. Six of the biggest LTL carriers—FedEx Freight, UPS Freight, YRC Freight, ABF Freight System Inc., Con-way Freight, and SAIA—have already hiked their tariffs to varying degrees.
But the latest round isn't over yet. That's because the big dog hasn't barked.
Old Dominion Freight Line Inc., by almost every measure the nation's most successful LTL carrier, has, at this writing, not announced its intentions. That, in and of itself, is not unusual. Old Dominion is usually the last or one of the last carriers to disclose tariff adjustments, more commonly known as GRIs. These changes generally affect 25 to 30 percent of a carrier's book of business; at Old Dominion, that figure is around 25 percent.
Some, like David G. Ross, analyst for Stifel, Nicolaus & Co., argue that the GRIs are insignificant because much of the hike can still get negotiated away. Ross cites the example of Con-Way, whose last six GRIs dating back to January 2010, resulted in a 37-percent aggregate increase in tariff rates. However, Con-way's overall yield, including the impact of fuel surcharges, rose 23 percent during that time, according to Ross. The disparity indicates that "real pricing is much lower than these announced rate increases," he wrote in a note.
Still, carriers prize the GRI business because it represents small to mid-size companies, which are the carriers' most profitable accounts and often subsidize the large customers, which leverage their volumes to extract big price concessions during contract talks.
If history is any guide, Old Dominion will price its tariffs at the low end of the industry's current range, which has so far been set at 3.9 percent by FedEx Freight, a unit of FedEx Corp. and the nation's largest LTL carrier. Old Dominion reports first-quarter results on April 24.
PRICING WAR AFTERMATH
In each of the past three years, Thomasville, N.C.-based Old Dominion raised its tariffs by 4.9 percent, effectively underpricing most of its rivals during that period. Old Dominion had the luxury of coming in low because it stayed out of the bottom line-busting price wars of 2009 as carriers desperately tried to defend their market share and grab share from rivals in a recession-wracked economy. Another motive at the time was to undercut financially ailing YRC Worldwide Inc. in an effort to force the then-market leader out of business and take capacity out of the market. The strategy didn't drive YRC to the sidelines and succeeded only in damaging the profit margins of several of the carriers who tried the scheme.
Chip Overbey, Old Dominion's senior vice president, strategic planning, said in an e-mail that the company's past GRIs were driven more by a desire to balance price and service rather than a change in philosophy to become more aggressive on rates. "We do not knowingly price business to chase volume at the expense of a price," he said.
Still, Overbey notes that the company had latitude its rivals lacked. In 2009, "we did not dig the same pricing hole as did many of our competitors," he said. "Therefore, we did not need a significantly higher GRI to recoup the pricing [or] margins previously given away during that period."
Some might argue, though, that Old Dominion is now out to put the hammer down on pricing in a drive to attract tonnage. Data recently published on Seeking Alpha, a financial website, showed that Old Dominion's fourth-quarter yield, or "revenue per hundredweight"—which many consider the metric to define a carrier's pricing strategy—declined slightly from year-earlier levels. Fourth-quarter tonnage, though, rose nearly 11 percent. By contrast, Con-way, ABF, and Saia showed gains in revenue per hundredweight over that period. However, none reported tonnage increases of more than 2.9 percent. The website data reflects Old Dominion's "aggressive stance" in going after tonnage and, by extension, market share.
Not necessarily so, said Overbey. Old Dominion's yield is influenced by multiple factors such as price, a shipment's weight and density, its length-of-haul, and any unique handling characteristics, he said. Revenue-per-hundredweight data "is a very dynamic measure, and it is not a complete or accurate measure of pricing," he said. Changes in the carrier's freight mix, as well as other shifts in the variables of Old Dominion's business, can alter its yield measurement on a day-to-day or month-to-month basis, he said. As a result, yield fluctuations "cannot be construed as a change in pricing strategy," he said.
Interpretations aside, Old Dominion hasn't found it hard to attract business. Earlier this year, it estimated that first-quarter tonnage would grow between 11 and 11.5 percent from year-earlier levels. January tonnage rose 11.6 percent year-over-year, followed by an 11.7-percent increase in February. March's data has not been released. For 2013, Old Dominion's revenue rose 9.5 percent to $2.34 billion, while net income climbed 21.6 percent to $206.1 million.
The latest spate of GRIs comes amid a solid pricing climate for LTL carriers. William Greene, lead transport analyst at Morgan Stanley & Co., noted that the current round of increases occurred only nine months after the last cycle, as opposed to the 10 to 12 months seen in recent prior cycles. This is a positive for pricing as carriers feel emboldened—partly because of weather-related capacity tightening and partly because of firmer demand—to raise rates at faster intervals than before, Greene said. Ross of Stifel said that, overall, carriers should expect to see 3-percent rate increases for 2014, net of fuel surcharges.