Shifting GEARS

Although regional LTL carriers project strong growth, they are gearing up to operate in a market that will be significantly different from what they're used to.

By -- Logistics Management, 5/1/2000

The regional less-than-truckload (LTL) industry has had some very good years lately, and most companies expect continuing strong market conditions throughout 2000. But they also agree that the market itself is undergoing significant changes that will cause them to rethink some of the conventional strategic wisdom of the past.

"Today, the LTL landscape looks quite different from what it was five years ago in terms of who the players are, what customers are asking for, and what the market requires," says Geoffrey Muessig, vice president of sales at Pitt Ohio Express. "It's dizzying to speculate as to where it'll be in another five years due to e-commerce and other fast-moving developments."

Perhaps the most far-reaching change the LTL industry has witnessed in the past few years is the emergence of a more demanding breed of customer whose own business models and priorities have changed, requiring the carrier to change also.

"What we have seen is a continuing strong demand for next-day service," Muessig says, "but also an increased demand for early-morning delivery. That's something only a few customers asked for five years ago, but now more and more of them are working in a just-in-time (JIT) environment with reduced inventories and looking to manage their supply chain better. That puts greater pressure on carriers to route their freight more efficiently and perform at higher standards."

Keith Lovetro, vice president of marketing at Viking Freight, says he has witnessed the same pattern. What the LTL carrier is hauling today is a higher-value, high-tech product than it has typically moved in the past, he reports, so the objective of most shippers is to shorten the transportation time to minimize risk of damage, claims, and other administrative costs.

LTL carriers have responded by tailoring programs to meet these needs. "I think the LTL carriers have done a good job of finding customer-service niches," says Doug Waggoner, president of Daylight Transport. "Most are starting to explore Internet opportunities and e-commerce, as well as expedited and guaranteed service. They have gotten smart about improving yield through service offerings the marketplace obviously needed."

Capacity Crunch?

By all accounts, this tactic has worked. The regional LTL business has recorded some very good years, and things look as though they will stay that way for a while. "We haven't seen any diminution of business other than the normal January-February seasonal downturn after the holiday binge," reports Ned Moritz, marketing vice president of Con-Way Transportation Services. "And now that we're into the spring shipping season, LTL looks to be very healthy so far."

Similarly, Lovetro of Viking Freight reports that the regional LTL sector is, in most areas, experiencing double-digit growth in contrast to the single-digit performance of the national LTLs. "We're seeing very strong freight demand, and we're in a very good rate environment," adds Frank Conner, chief financial officer of American Freightways. "And I don't see that changing this year."

The volume of business raises the issue of the industry's capacity to handle it, however, and although opinions vary somewhat, there is general agreement that problems may lie ahead. "Obviously, at this time of year, there is capacity, but as we move forward toward the third and fourth quarter I anticipate that equipment and driver availability could get tighter," says Muessig.

Moritz, for his part, believes capacity has been tight since last June and predicts that it will be strained during the remainder of the year as shipping grows. Lovetro shares his concerns. "With higher demand, you start to find the upper limit of what you can deliver," he says. "We're all starting to feel the pressure."

The Diesel Runup

Conner of American Freightways takes a slightly different view. He feels that capacity is adequate at present, but he warns that problems could develop as a result of the recent jump in the price of diesel fuel. Because truckload carriers generally are hit harder by fuel costs than LTLs tend to be, he says, some of their business may shift over to the LTLs.

Diesel prices, of course, have shot up approximately 60 percent in the past year. Carriers have imposed surcharges to cover their costs. And although customers don't like it, they nonetheless have almost universally accepted the imposition of surcharges as an unpleasant fact of life.

"We put in a fuel surcharge at the end of last August, and we explained and continue to explain on our Web site that our surcharge formula is based on the Department of Energy's weekly national average of diesel fuel prices," Con-Way's Moritz reports. "Our customers have been a very understanding audience."

Conner of American Freightways believes that the lack of negative reaction to surcharges is the result of the ongoing media coverage of the situation. Because they can't avoid hearing about skyrocketing fuel prices, customers accept them as a cost of business that has to be passed on. Waggoner adds that this time around, diesel and gasoline prices "have moved in lock step," which was not always the case in the past, and consumers face the same problem every time they drive up to the gas pump. Besides, he reasons, a surcharge is preferable to the customer than a rate increase, which tends to remain in place until discounted away.

In any event, the effect of fuel surcharges on business has been minimal, says Peter Robinson, director of corporate communications at Jevic Transportation. He says, in fact, that some customers even proposed surcharges before Jevic instituted them.

It's Always Something

Though the impact of the diesel-fuel runup may have been minimal, other challenges loom for regional LTL carriers. Muessig, for one, views the diesel problem as a relatively transient one when compared with another, more permanent issue-driver availability.

"Over the long term, diesel prices will decline, but I don't see any abatement to the driver recruitment issue," he says. "The number of qualified drivers appears to be diminishing, standards are rising throughout the trucking industry, and the talent pool is spread thinner. We can't just run an ad and get qualified applicants any more-we have to go out and find them."

Freelance writer John Paul Quinn reports on a broad range of business topics for journals in the United States and Europe.