Business down, prices up: For LTL carriers, oligopolies are a good thing

An oligopoly's presence can cure many ills. Take the less-than-truckload (LTL) sector, which since last fall has struggled with declining volumes triggered by persistent weakness in the nation's industrial production, LTL's bread and butter. Shipments in the second quarter, typically the sector's strongest quarter of the year, fell 1 to 2 percent from the 2015 period, while tonnage dropped 3 percent due to a decline in the average weight per shipment, according to industry data analyzed by LTL carrier YRC Worldwide Inc.

Yet YRC estimated that contract rates, on average, rose 3 percent year over year after backing out the impact of diesel-fuel surcharges, which have fallen along with the price of oil and diesel.

The divergence between volume and pricing trends was clearly evident in the second-quarter results from Saia Inc., an LTL carrier based in Johns Creek, Ga. Saia reported Friday that its daily tonnage, on a year-over-year basis, had fallen for four consecutive months through the end of July. It also posted a decline in second-quarter revenue and a worsening operating ratio, a key gauge of a trucker's efficiency as it measures how many cents out of each revenue dollar it takes to run the business. Yet rates on Saia's contract renewals rose a healthy 5.4 percent in the second quarter.

LTL carriers have enjoyed contract rate leverage for some time. In fact, Fort Smith, Ark.-based ArcBest Corp., Thomasville, N.C.-based Old Dominion Freight Lines Inc., Overland Park, Kan.-based YRC, and Saia all posted stronger renewal rates through all of 2015 than in the first two quarters of 2016, according to data from the companies.

It may seem odd that carriers can push up prices amid a macro environment that, at best, could be described as mediocre. The reason may lie with market concentration. The top 10 LTL carriers control 77 percent of the $37 billion market, while the top 25 control 94 percent, according to data published in late June by BB&T Capital Markets, an investment firm. Given the dominance of a few players, there isn't much room for cost-conscious shippers to maneuver as long as carriers stay disciplined.

The one near-term hope for shippers is that the carriers will decide to undercut each other should traffic levels worsen, something they did between 2008 and 2010, with disastrous results. LTL executives have said they have no plans to revisit that strategy. For the most part, they said, pricing remains rational.

It has to, LTL executives have argued. Unlike the much-larger truckload industry that operates relatively straightforward point-to-point services, an LTL network is more complex and resource-intensive, with a phalanx of terminals and lanes with specific origin and end points. LTL carriers must recoup the significant costs of terminal networks to handle their flows of breakbulk traffic. In addition, LTL driver wages are significantly higher than the wages of the typical truckload driver. Faced with high capital expenditures, LTL carriers can ill afford price wars that will compress their bottom lines.

What the truckload industry does have that LTL doesn't—regrettably for truckload carriers—is extreme fragmentation. The largest truckload carrier by sales, Phoenix-based Swift Transportation Co., has a market share of a bit more than 1 percent. A sluggish demand outlook, combined with a proliferation of players, has put many truckload carriers in the hole during contract negotiations. Truckload and logistics giant Werner Enterprises Inc. said late last month that customers' increasing demands for rate reductions have forced it to shed accounts where pricing was "not sustainable." Omaha-based Werner said it expects traffic to rebound in 2017.

Jamie Pierson, CFO of YRC, said the truckload market is "as fragmented as it's ever been." By contrast, activity in his sector is "as concentrated as it's ever been." Pierson said YRC has forecast a 2- to 3-percent increase in industrial production during 2017, which, if accurate, would be a significant improvement over current trends. Asked if YRC would be satisfied with that type of bump, Pierson replied "we just want to see growth."