2009 State of Logistics: The incredible shrinking LTL market
John D. Schulz, Contributing Editor -- Logistics Management, 7/1/2009
It’s hardly a magic trick, but the beleaguered less-than-truckload (LTL) industry is shrinking before our eyes.
Buffeted by overcapacity in the worst freight environment in more than 30 years, LTL revenue among the eight largest carriers in the sector fell by 25.6 percent in the first quarter of this year. Excluding fuel surcharges, LTL revenue fell by 19.3 percent for that elite group of eight which includes YRC Worldwide (National and Regional), Con-way, ABF Freight System, Vitran Express, FedEx Freight, Old Dominion Freight Line, Saia, and UPS Freight.
In fact, this group accounts for about 70 percent of revenue in the $34.5 billion LTL sector—which accounts for about 13 percent of all for-hire trucking revenue. But the sector is not growing overall: In fact it has remained flat for a decade and now has two competing camps nipping at its heels.
First, TL carriers such as Schneider National and Swift have lowered their weight threshold for LTL pickups in hopes of gaining additional freight. At the other end, consolidators and 3PLs such as C.H. Robinson are converting LTL freight by consolidating freight into larger, cheaper truckload moves.
In most years, a seasonal uptick in volume normally occurs in springtime: Not this year. Recently, LTL giants Arkansas Best (parent of ABF) and YRC Worldwide both filed government reports stating April volumes finished the month worse than expected—and the news has affected profit margins.
In the aggregate, those eight LTL giants suffered average declines in operating margins of 1035 basis points in the first quarter. Some of the losses have been astounding. YRC Worldwide, which has a 27 percent LTL market share, lost $257 million in the first quarter. That makes YRC’s losses over the last nine quarters a staggering $1.869 billion—large enough for the LTL giant to consider applying for $1 billion in bailout funds from the federal government’s Troubled Assets and Relief Program (TARP).
YRC’s future is not so much in the hands of its management and customers as it is its lenders. Its worst-case scenario is what happened to Consolidated Freightways, another large unionized long-haul LTL carrier. After years of losses, CF closed suddenly on Labor Day 2002 after its lenders simply said, “No more.”
“I believe market consolidation is a good thing,” Con-way Freight President John Labrie said recently. “Consolidation reduces excess capacity and improves conditions for the remaining players. You just have to make sure you are a relevant remaining player.”
YRC’s situation is affecting the rest of the LTL carriers on more than one level. On one hand, should the $9 billion LTL giant go under, that would immediately eliminate the sector’s overcapacity by a stunning amount. According to trucking analyst John Larkin of Stifel Nicolaus, there’s already been an 8 percent short-term reduction in LTL capacity. Larkin says perhaps another 6 percent of capacity reduction is necessary in order to get pricing aligned with demand.
But on the other hand, some analysts say that YRC’s precarious condition is hampering rivals’ long-term planning. “They are counting on their problems being solved by changes to YRC’s condition or for the economy to return,” says Satish Jindel, principal of SJ Consulting. “That limits them from managing the business for today. They don’t have control of their own business to return to profitability.”
All this is positive for shippers. Analysts say year-over-year LTL contracts are being renewed with rates falling as much as 2 percent to 3 percent, excluding fuel surcharges. Despite LTL carriers’ announcements of general rate increases averaging 2.6 percent, nearly none of that has stuck in the marketplace. Real LTL rates actually fell 1.5 percent in the first quarter, according to LM’s Price Trends columnist Elizabeth Baatz. Continued LTL rate decreases can be expected for the rest of the year, analysts predict.
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