Business is good; could be better. That's the consensus of many less-than-truckload (LTL) executives as the entire trucking industry continues to struggle with record-high fuel prices, reduced capacity, and fierce competition. This evaluation comes from survivors of a shakeout that has seen giants such as Consolidated Freightways and A-P-A Transport cease operation in the past few years, taking more than $3 billion in capacity out of the $16 billion LTL sector.

The savior for the LTL industry, analysts and carriers say, has been the fuel surcharge. Instituted industrywide in the mid-1990s, when fuel prices rose above $1.15 a gallon, the surcharge back then was a mere 1 percent of overall freight rates. Today it may top 20 percent of a shipper's freight bill.

"Thank God for the fuel surcharge," says Douglas G. Duncan, president and CEO of FedEx Freight, a $3.2 billion company that has been aggressive in seeking—and successful in receiving—rate increases.

LTLs and their customers are dealing with fuel costs in several ways. Some carriers have focused more on fuel surcharges than on rate increases. Some have done the opposite, while others are incorporating a fuel surcharge into their overall rates. Some shippers are asking carriers for caps on fuel surcharges; others are foregoing the cap but are asking that a percentage of the surcharge revenue be considered when their mileage-based rates are calculated.

Most LTL executives say they don't care where the money to cover soaring fuel costs comes from—rates, surcharges, the Tooth Fairy—as long as they're compensated fairly for what they're spending at the pump. "We've managed yield and prices in totality," Duncan says. "I gave up trying to dictate to our customers long ago. Some are more aggressive on fuel surcharges and not so much on rates. Others are just the opposite."

Morgan Stanley trucking analyst Chad Bruso estimates that LTL rates, excluding fuel surcharges, are rising this year at a 2.7 percent annual rate. That is "not adequate" to cover carriers' rising costs, he says.

Most years start slowly and build after the first two months. But 2006 was unusual: January came on strong, but freight volumes declined in February, causing some carriers to carry too much capacity and throwing their cost structure out of whack.

The LTL sector's performance is like that of its customers: There are winners and there are losers. FedEx Freight and Con-way clearly are among the winners, asking for and usually getting nearly 6 percent rate increases this year. Some regional operators, including Estes Express and Old Dominion Freight Line, have maintained strong financial performance while expanding geographically.

Others have hit bumps in the road. USFreightways, now part of YRC Worldwide's regional transportation group, has been sluggish. Even Yellow Transportation, one of the financial stars of the national LTL sector, suffered a 35 percent drop in operating income in the first three months of 2006, prompting President James Welch to label it a "weird" quarter. Whether that was an anomaly or a sign of things to come remains to be seen.