Quarterly Transportation Market Update: LTL Running on Empty
Carriers are hoping to ride out a "horrific" year in pricing and demand while shippers are seeking stable carriers in their flight to quality. How this drama will play out is anyone's guess.
By John D. Schulz, Contributing Editor -- Logistics Management, 3/1/2009
David Ross, a trucking analyst with Stiefel Nicolas in Baltimore, opened his mental thesaurus to come up with a few adjectives to best describe the current state of the less-than-truckload (LTL) industry.
He took a moment, and then ran down the following list: "atrocious, awful, dreadful, horrible, really nasty, ugly." Yes, that pretty much covers it. On the flip side, however, many shippers can only think of one word to best describe their LTL service and rate options for 2009: Wonderful.
Shippers should be feeling practically giddy since their LTL carriers—desperate to fill their empty trucks in the worst freight environment since the industry was deregulated in 1980—are increasingly engaged in price wars on many lanes. At the same time, carriers are offering ever-more innovative and non-traditional services while maintaining their core networks at 98 percent (or more) on-time reliability.
In fact, shippers who are renewing their LTL contracts this year can expect flat-to-declining real rates and sharply lower fuel surcharges from their carriers. In the mean time, carriers are adjusting their networks to attract the most profitable freight they can find in geographic areas where they have the best freight balance and lane density.
"It will be a buyer's market for LTL in 2009," says Satish Jindel, principal of SJ Consulting, an organization that has tracked the LTL sector for nearly 20 years. "The U.S. economy won't provide additional growth for demand...and at this stage, LTL customers are becoming price sensitive."
Jindel has analyzed LTL demand and compared it with the number of trucks and terminals the industry operates and has come to a stunning conclusion. There is currently as much as 25 percent excess capacity in the LTL industry. Ironically, that's just about exactly the market share of YRC Worldwide, the LTL giant that one analyst recently called the "800-pound gorilla" in the sector.
Currently a $9.6 billion concern, YRC owns approximately a quarter of the market (see adjacent chart) in the $34.4 billion LTL sector. That sector has been basically flat for nearly 10 years as shippers and 3PLs are discovering less costly ways to move the same freight. "The market conditions are as tough as they have ever been," says Jim Fields, chief operating officer of Pitt Ohio Express. "We're fighting cost increase pressures from suppliers on one side and we're being challenged for revenue and margins from our customers on the other side," says Fields.
"There's just too much capacity," Jindel adds. "Unlike truckload where the big carriers are taking out capacity and the smaller guys are closing down, the LTL sector has kept capacity about the same. You even have some privately held LTL carriers adding terminals." Steve O'Kane, president of privately held A. Duie Pyle, is doing exactly that.
Next month, O'Kane says Pyle is opening a 54-door terminal in New Brunswick, N.J., to prepare for the inevitable recovery. "Unfortunately, the economy is going to drive some capacity out of the market place and some of the competition may well fall under the weight of their own debt in these challenging times. We want to be positioned to ensure we have capacity, and take advantage of whatever opportunities are created in the market place to gain new customers."
What no LTL carrier can do at this stage in the game is sacrifice service, executives say. "Shippers want transportation that enhances their service and, at the same time, lowers their overall costs," says Phil Pierce, executive vice president for sales and marketing for Averitt Express, a regional LTL carrier. "It's not just a matter of getting freight from Point A to Point B any more, it's about finding the most cost-effective and efficient way to get it there."
Bad news and more bad news
Less-than-truckload, which accounts for only about 5 percent of the total $760 billion freight market, has inherent advantages for industrial and retail shippers alike. For one thing, LTL terminal networks are virtually impossible to replicate. Because of the cost of real estate for terminals and other factors, there have not been any significant new entrants in the market place for more than a decade.
That's the good news for the overall LTL market. The bad news is that the market is flat even in good economic times. In today's environment, LTL's overall share is declining by close to 5 percent year over year.
That's largely because shippers have been increasingly consolidating LTL shipments into larger and cheaper TL moves. That has caused shipment weights to rise and shipment counts to fall and has resulted in generally weak pricing and yield for even the strongest players in the sector. In fact, LTL shipments among the major carriers dropped 4.6 percent in last year's third quarter as the recession deepened (see adjacent chart).
"Pricing is horrific," says Myron P. "Mike" Shevell, chairman of the Shevell Group, which includes Northeast LTL carrier New England Motor Freight (NEMF). "I've been in this business for more than 60 years and this is the worst I've seen it in 30 years."
Analysts tend agree with Shevell. Noel Perry, an economist with more than 30 years experience in both the trucking and rail industries and now a senior consultant with FTR Associates, says the country is in the "eye" of the deep recession. But he cautions that the end of a recession does not mean immediate updates in transport demand.
"We need to clear the excess of housing, cars, and bad credit before demand takes off again," Perry warns. "So grit your teeth and hope for a bad 2009." And it appears that Perry is getting his wish. U.S. manufacturing in December fell at its fastest pace in nearly 30 years, according to the Institute for Supply Management's index.
Perry has a dire prediction that trucking, especially LTL, will get "progressively worse" this year before the start of a turnaround in 2010. Shevell and others tend to agree.
The YRC dilemma
The biggest question in the market remains YRC Worldwide which has posted losses in four of the past six quarters and is in the midst of massive downsizing, operation mergers, renegotiations, and payoffs of more than $2 billion of long-term debt which has been heavily weighing on the $9.6 billion company.
In the wake of double-digit tonnage declines at both its national and regional units, YRC recently won a 10 percent wage concession from its 40,000 Teamsters members who are also forgoing 3.5 percent cost-of-living adjustments through 2013. That amounts to annual savings of nearly $250 million.
In February, YRC was given a life line after it renegotiated debt with lenders and extended a credit agreement through April 2012. That's a long enough time frame to support its merging of its long-haul Yellow and Roadway units, according to YRC President and CEO Bill Zollars. "We're very pleased with the support that we've received from our lenders and the spirit with which they've negotiated amended terms," Zollars said in a Feb. 13 letter to shippers obtained by LM. "Completion of the amendments reflects our lenders' support of our plans and our ability to execute them."
The new credit amendment helps YRC's financial liquidity, Zollars said. In addition, its new asset-backed securitization (ABS), which matures annually, recently was renewed. That allows for an additional $500 million in financing.
YRC has also been selling terminals to raise cash, and in some cases is still using those terminals in lease-back arrangements. The first real estate proceeds netted $150 million. Another $150 million in asset sales will strengthen YRC's cash position and also help in debt repayment, according to Zollars.
All this is designed to buy YRC some time to realize the anticipated $250 million or so in its Roadway-Yellow integration and other cost-savings. It recently cut 3,750 jobs associated with its Yellow and Roadway long-haul units; but even with these changes it's losing money.
David Silver, an analyst with London-based Benchmark Journal research firm, has an "avoid" rating on YRC, even with the wage concession agreement. "While this will help the bottom line throughout 2009, the weakness in tonnage demand and management's troubles in refinancing its debt will more than offset that benefit," Silver wrote in a YRC analysis to investors.
Lee Clair of Norbridge consulting firm says YRC has "significant problems" regarding debt and other issues. "What their outcome is will have a tremendous impact on the rest of the market," Clair says. "It's fluid and changing every day. How much capacity comes out is important because there is significant overcapacity."
While the jury is still out on YRC's chances of survival, most analysts believe the LTL giant falls into the category of being "too big to fail." And while its fate is still a big unknown, there are indications it might become a more profitable company on a smaller scale.
"YRC needs to look at itself the way a landscaper looks at a hedge," says Jindel of SJ Consulting. "YRC needs to trim itself down to become smaller and healthier. Down the road, just like a hedge, that trimming will make itself greener. That's green, as in money."
How do LTLs stay profitable?
While 2009 may not be a banner year for the LTLs, some progressive companies have already taken steps to improve profitability.
FedEx Freight this year began a guaranteed 10:30 a.m. service for an extra $75 per shipment fee. UPS Freight is shaving transit times by a day or more along thousands of city-pair lanes. ABF Freight System is continuing to hone its Regional Performance Model (RPM) which has helped the traditionally long-haul LTL carrier capture some regional freight. Averitt expanded truckload services into five states and opened four terminals in Texas in addition to adding its intermodal and ocean offerings.
With fuel prices falling, analysts and executives say LTL companies should be able to reinstitute some of the cost controls that were initiated over the past year. Controlling costs will be vital until demand recovers. Late last year, Con-way Freight began closing 40 of its 343 terminals and eliminating about 200 jobs to cut $35 million in annual costs. The carrier also took about 5 percent of its capacity out of its network, but officials emphasized that the move will in no way will compromise service. In fact, Con-way officials emphasize, their steamlined network is designed to optimize service.
John Labrie, president of Con-way Freight, said that carriers cannot afford even one bad experience with a shipper who is counting on truckers for that final, vital supply chain link. "We're providing customers with better service today than at any time in my 18 years with the company," says Labrie.
Today's uncertain economy has obviously made shippers skittish about dealing with financially marginal carriers, Labrie and others say. "More and more big shippers are concerned about the financial liability of carriers," Labrie says. "That topic comes up more and more. They are thinking about that in relation to supply chain disruption."
There is some bright news, however. Fuel continues to benefit carriers. It started dropping late in the third quarter of 2008, just as freight demand began to suffer. This is definitely helping shippers, who were paying LTL fuel surcharges as high as 38 percent last July. In January of this year, those fuel surcharges had dropped to around 14 percent, carrier executives said.
"Fuel is a help, but now you have no freight to put on the trucks," NEMF's Shevell says. "Demand has dropped off dramatically. But fuel savings has probably saved the real marginal carriers."
Gazing toward the future
No matter how the drama plays out, Norbridge's Clair says LTL carriers must restructure their networks, which were built incrementally as companies grew. But now in a flat-to-shrinking market, the key to profits is how well carriers restructure these networks, take out obsolete terminals, and put in larger ones to take out costs and improve services.
Pricing is another problem. Clair calls LTL pricing "a remnant of regulation that does not reflect anything other than regulation." He says carriers have significant opportunities to become more aggressive on pricing in selective areas where they want to deploy their most important assets and alter rates in areas where their costs are much higher.
Changes in the way parcel giants UPS and FedEx price their hundredweight services may also help LTL pricing. UPS has increased the minimum per-package weight from 15 to 20 pounds, which amounts to a stiff rate increase in its hundredweight services. That offers LTL carriers a chance to win back that service, Jindel says. "I'd be focused on controlling operating costs, building density by lanes, and investing in marketing," Jindel says. "They need to be cutting their capital expenditures to zero. But their marketing and sales efforts must be responsive to needs of shippers seeking lower costs."
But it can't all be about costs, Con-way's Labrie emphasized. "Most companies provide differentiation around service or the customer experience. They can't afford to risk that. Shippers are very concerned that their carriers do not put them at risk. That plays right into our hands. We want to assure that our customers win in the market place."
Still, the death watch is on for some borderline carriers. "Unless you're financially strong like we are and basically debt-free with major cash reserves, you're not going to be around," predicts NEMF's Shevell. "It's death waiting at the doorstep."
The consensus is demand may return to normal in the second half of this year. "While we remain optimistic, our experience thus far in 2009 is that just isn't a reality," says Averitt's Pierce.
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