LTL Trucking Outlook: Good news or bad?

Projections for the less-than-truckload business depend on who's reading the cards.

By Staff -- Logistics Management, 8/1/1998

If economics is the dismal science, then financial analysis must be its close cousin. Those who follow less-than-truckload (LTL) carriers continue to be pessimistic about the industry's prospects, even while the carriers are doing relatively well.

Carrier executives, not surprisingly, have a different view.

Both sides explained the reasons behind their pessimism or optimism during NASSTRAC's fifth annual financial review and forecast for the trucking industry. The organization, whose members are LTL shippers, invites trucking company CEOs, economists, and Wall Street analysts to the one-day session in Washington each June.

All agreed that in the current economy, carriers have performed well financially. Irwin Silberman, an economist who follows the trucking industry, told the group that in 1998's first quarter, LTL revenues were up 7.0 percent, tonnage was up by 3.9 percent, and revenue per hundredweight (which he said was the best indicator of rates) was up by 2.8 percent. "On the surface, that looks good," he said. "There's clearly been an improvement in profitability, revenue, tonnage, and some growth in yield."

Silberman, however, expressed concern that the four largest unionized carriers--Consolidated Freightways, ABF Freight System, Yellow Freight System, and Roadway Express--accounted for 58 percent of LTL carriers' revenues, but only 22 percent of the operating income. All four of those carriers reported lower tonnage than they did a year earlier. In contrast, the Con-Way group of three regional carriers alone earned 27 percent of all LTL operating income. "We really have a group of haves and have-nots," Silberman said.

Those tonnage losses came before the large unionized carriers reached agreement with the International Brotherhood of Teamsters on a new five-year contract. Many shippers switched to non-union carriers in the months before the pact to protect themselves in the event of a strike. Edward M. Wolfe, an analyst with investment firm Schroder & Co., told the NASSTRAC group that he estimated the Big Four had lost 4.0 to 6.0 percent of their tonnage as a result of those diversions.

Silberman and other analysts remain pessimistic about the unionized carriers' future. "Give me a nice recession, and I think the statistics will prove the tune. The big players of 1994-1995 will not be the big players of the year 2000," he said. "National LTL is a commodity service. They can't price the way they want to and they can't do the things they want to."

Anthony Gallo, a vice president and transportation analyst for BT Alex. Brown in Baltimore, agreed that a power shift was occurring in the LTL industry. He argued that changing distribution patterns, as shippers sought lower costs and greater distribution efficiency, would hurt LTL carriers.

Gallo also said he believed the competitive dynamics for national LTL carriers were unfavorable. One problem, he said, was that although barriers to new competitors entering the business were high, the cost of exiting the business also was very high, so even poorly performing carriers did not leave the market quickly.

Shippers greatly influence competitive conditions for LTL carriers, Gallo continued. Buyers consider a high level of service performance to be a minimum standard, differentiating on price, he said. They also have several alternatives, including truckload, regional, parcel, and air carriers. His conclusion: "The good times for trucking have probably peaked, and there is no relief from competition."

Paul Schlesinger, vice president of research for investment firm Donaldson, Lufkin & Jenrette, said he was seeing some troublesome shipping trends that did not bode well for LTL. "The growth in freight lags that of the economy. LTL is lagging the growth of freight demand. National LTL is lagging the growth of overall LTL," he observed.

Schlesinger said that the five-year pact with the Teamsters should help the unionized carriers, but added that they still had above-market labor costs. "The mere fact that they have Teamsters on the property is an impediment," he said.

Carriers Optimistic

Carrier executives responded that it was premature to summon the undertaker. A. Maurice Myers, chairman, president, and CEO of Yellow Corp., the parent of Yellow Freight, said the diversion of freight in the first quarter was not a fair indicator of trends. In his view, 1997, when the carriers had a good year financially, was a better indicator.

Myers admitted that LTL carriers' performance was not as strong as he or the investment community would like to see. But he remained confident in the industry's long-term prospects. To prosper, he said, a carrier will have to differentiate on customer service, adopt superior technology, and provide customers with "guaranteed certainty."

Rodger G. Marticke, president and CEO of Viking Freight Inc., a non-union carrier operating in 12 western states, also foresaw a good future for the LTL industry--at least for the best carriers. He said he expected to see additional consolidation within the LTL industry, pointing out that the 10 largest carriers increased their market share by 11 percent between 1990 and 1996. Marticke added that the competitiveness of the industry was driving carriers to offer more than LTL transportation, diversifying into such areas as assembly, distribution programs, and other value-added services.

That may be where LTL carriers will find their future. With businesses pressing to reduce inventories, a trend toward smaller, more frequent shipments would appear to offer opportunities for LTL carriers. But commodity transportation alone will not meet shippers' requirements. "Shippers are buying results, not mode," said Schlesinger. What will be required to win profitable business in a low-inventory environment will be reliable service, he said. What carriers must offer, as Myers put it, is "guaranteed certainty."