Maintaining a competitive edge
LTL carriers report another strong year, but competition is making profitability tougher to achieve.
By Staff -- Logistics Management, 7/1/1999
The $20 billion less-than-truckload (LTL) industry has been on a roll for two years, and it looks as if the industry is headed for another strong year in 1999. The "Big Four" national carriers, profitable since 1997, exceeded earnings expectations for the first quarter.The Big Four include Consolidated Freightways, Yellow Freight, Roadway Express, and ABF Freight System. The four carriers together in 1998 brought in revenues of $9.4 billion, or almost half of the revenues for the entire LTL industry. Their average 1998 operating ratio was 97.1 percent, slightly off their 1997 average of 96.7 percent. (The operating ratio represents operating costs as a percentage of operating revenue. The lower the ratio, the better the carrier's financial performance.)
The regional LTL market includes dozens of small independent carriers, but several large carrier systems dominate. The major players include Con-Way Transportation Services, which operates Con-Way Western (CWX), Con-Way Central (CCX), and Con-Way Southern (CSE); USFreightways, which operates USF Red Star, USF Holland, USF Dugan, USF Reddaway, and USF Bestway; and Union Pacific-owned Overnite Transportation, a former national carrier that has transformed itself into a group of regional operations that cover most of the United States. The largest regional carriers enjoyed operating ratios that were nearly five points better than those of the Big Four.
Rounding out the LTL industry are a handful of interregional carriers, which have the difficult task of running both regional and longhaul traffic through their terminal systems while maintaining service levels that are competitive with the regionals'. Revenues for the two major interregionals, American Freightways and Old Dominion, increased significantly in 1998.
Mixed Outlook
What can the various types of LTL carriers expect in the months ahead? According to Anthony Gallo, an analyst with the Baltimore investment firm of BT Alex. Brown, the outlook is brightest for the regional LTL carriers. "The regionals tend to command higher pricing because their service is faster," says Gallo. "Since many regional carriers are non-union, their labor costs and productivity are better than the nationals'."
Gallo says the national LTL carriers will continue to face pressure from what he calls "competitive substitution," which means that shippers no longer automatically call a national LTL carrier for shipments ranging from a few hundred to a few thousand pounds. Instead, they increasingly are considering such alternatives as regional LTL carriers, parcel carriers, and consolidators or intermodal services. (See the chart on Page 62.)
"Shippers are looking for lower delivered cost, and modal choice is part of that strategy," says Gallo, who adds that the use of truckload consolidation in particular is increasing. "At the other end, parcel and express carriers are getting more market share from the customer's need to receive smaller quantities of goods more often," he says.
Gallo is hopeful about the future of the Big Four. "They are more focused on meeting customers' needs, and they have streamlined terminal systems, which relieves the pressure to create volume at any rate," he says. "Pricing has firmed in the LTL market. Carriers should realize at least 2-percent revenue gains if they can hold the line on discounting."
The BT Alex. Brown analyst points to four areas where the Big Four have made major improvements that will help their competitiveness and their profitability. The Big Four have:
- Streamlined their terminal networks. Terminal network design had been based on maximizing load factors, not necessarily on providing fast service with minimal handling. Now, there are fewer terminals, less intermediate handling of the freight, and strictly enforced cutoffs. Trucks don't always go out full, but this discipline allows LTL carriers to focus more on meeting shippers' needs than on keeping the terminal-system pipeline full.
- Re-engineered processes and information systems. Internet-based systems give carriers and their customers immediate online access to shipment tracking, freight bills, proof-of-delivery information, rate quotes, and claims information. "Technology is the key to better freight-flow management and better transit times," says Gallo.
- Introduced premium, time-critical service. Time-definite and time-critical service have become almost expected by shippers that have re-engineered their own distribution systems around lean inventories, just-in-time manufacturing, and supply chain logistics. LTL service has to perform perfectly in this demanding environment.
- Refined their pricing practices. In the past, the nationals often reacted to a soft economy and market-share challenges by slashing rates to keep their systems full. Now that the national carriers are providing faster service, they are getting better prices for some types of freight. Improved costing systems also let them identify which freight is desirable and which is not. "The Big Four carriers now realize that freight is not created by price cuts," says Gallo. "Rather, it simply changes hands at lower levels of profitability."
Labor Issues Still a Challenge
The labor front remains the greatest challenge for the unionized LTL carriers. Although many LTLs gained market share in 1997 when the Teamsters Union struck United Parcel Service (UPS), most of these carriers lost business early in 1998 because of their own labor problems. Many lost freight to non-union carriers and other competitors--including UPS--because of a threatened Teamsters strike. The carriers and union avoided even greater losses by settling the contract ahead of schedule.
"The labor problem hangs around the unionized carriers' necks," says Gallo. "The mere threat of labor unrest continues to erode shipper confidence in the unionized carriers' ability to provide uninterrupted service."
Labor costs and productivity continue to be issues for unionized LTLs. Labor consumes about 65 percent of each revenue dollar for these carriers. Teamsters rules, moreover, prevent drivers from being used for loading and unloading. On the up side, carriers now have the right to use intermodal transportation for up to 28 percent of their total miles on imbalanced traffic lanes. Not only does that help the carriers manage their freight flows and traffic balance better, but it also allows them to handle the same amount of freight with fewer trucks and drivers.
Gallo thinks competitive pressure most likely will result in more industry consolidation, either in the form of mergers or marketing alliances. The economics of putting more freight through the same system are powerful, he says, but the complexity of combining worker seniority systems, terminal networks, and information systems makes mergers very difficult in the LTL world, he says.
That's why Gallo believes industry consolidation is more likely to take the form of carrier partnerships. Small and large carriers might seek ways to increase shipment density and improve asset utilization and workforce productivity that are not driven by price. For example, a Western carrier and an Eastern carrier could provide joint service between their respective operating areas. "This already happens with the systems of regionals under the same corporate umbrella, such as Con-Way and USFreightways," he points out. "It should be able to add value for separate trucking companies working together."
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