The less-than-truckload (LTL) sector is most certainly undergoing a transformation. Even the moniker LTL may be on the way out, with some analysts now preferring to call LTL the “heavy freight” sector of the industry. It might be best to just call it the “New LTL.”

Changing shipper requirements have, by far, been the biggest factor changing the face of the $33.6 billion LTL sector. It has certainly changed the major nameplates.

A decade ago the “Big Three” consisted of Yellow Freight System, Roadway Express, and Consolidated Freightways. The first two have merged as YRC Worldwide and the latter is out of business. Now, the “Big Three” are UPS and FedEx, fairly new entrants with plenty of marketing muscle and operational savvy, and YRC.

The surviving carrier networks reflect further change. A decade ago Yellow and Roadway each covered the nation with a network of about 700 terminals. Today, Yellow and Roadway have less than 300 terminals apiece.

That’s because shippers are moving more freight in regional networks made up of mostly non-Teamster carriers. These players have seized upon the a lack of new capacity in the market to realize four profitable years—until the middle of last year.

Steve O’Kane, president of A. Duie Pyle, a $200 million Northeast regional LTL carrier, says after three-plus years of “equilibrium,” demand fell off in the fourth quarter of last year. Things improved, however, in the start of this year’s second quarter. “It’s not enough time to say things are solid, but with the downturn relatively short in duration, the pricing environment was able to maintain itself on firm footing.”

O’Kane and other industry leaders are fighting to enhance LTL’s appeal to a wider range of customers. Through technology and other innovations, the carriers say they are constantly adding value to the “New LTL” proposition. Far from a dying sector, they say, LTL is a nimble, responsive sector that has undergone a metamorphosis in the new century. Still, analysts remain lukewarm on LTL; as a matter of fact, Bank of America trucking analyst Scott Flower now calls demand for LTL “tepid” with less than a handful of stocks currently on their “buy” list.

But because of LTL’s strong links to retail, manufacturing, and the industrial economy, the sector remains a vital component in the nation’s supply chain. Its leaders say it’s an indispensable tool for millions of shippers who rely on it daily for timely, and increasingly lighter and more frequent deliveries. Here’s how the industry is changing to remain relevant.

The $33.6 billion LTL market is a mere fraction of the overall $713 billion U.S. freight transportation market. It’s less than 5 percent of the $560 billion U.S. trucking market that makes up about 6 percent of the U.S. Gross Domestic Product.

Overall growth in the sector has been flat for most of this decade. That’s because of competition from other sectors. Third-party logistics (3PL) companies, for example, prefer to build full truckloads for the likes of J.B. Hunt and Schneider National. Small-package giants UPS and FedEx have recently entered the sector, bringing the marketing muscle and long customer lists that only those “big boys” can develop.

Trucking analyst John Larkin of Stifel, Nicolas and Co., says LTL carriers, fighting to help offset the loss of freight to the 3PLs and TL carriers, are increasingly serving as a “collection and distribution arm” for retailers and other businesses with numerous vendors.” He adds that there are opportunities on the assembly and distribution sides of the industry to help offset any loss of freight elsewhere. Those gains might not be too noticeable at the moment because the industrial sector of the economy is down.

“We have an industrial economy that is moving sideways, and autos and construction have been worse than sideways,” Larkin says. Still, he says, LTL pricing has remained “rational,” without the all-out price wars that occurred in other times of reduced freight demand.

The increase in imports, especially on the West Coast, has been a boon to the LTL sector. Because these imports tend to be heavily weighted in retail, LTL has gotten more than its share of final delivery, analysts say.

Thom Albrecht of Stephens Inc. says the LTL sector has large exposures in the retail and consumer non-durables they haul. While such freight can be occasionally erratic, there is what Albrecht calls a “steady-eddyness” element to consumer staples. Most LTL carriers, says Albrecht, have a disproportionate amount of freight tied to the industrial world.

The changing environment has ushered in a new warning for shippers: while there is sufficient LTL capacity at the moment, rates could be on the rise once the current industrial recession ends.

Today’s top LTL executives can best be described as survivors. Of the top 60 LTL carriers in operation at the time the industry was deregulated in 1980, only six remain today: Yellow Transportation and Roadway Express (now part of YRC Worldwide), Overnite (now part of UPS), ABF Freight System, Old Dominion Freight Line, and Central Freight Lines. The rest have gone to that great crossdock in the sky.

This has left these survivors scanning the horizon nearly daily for more inevitable changes. Chuck Hammel, president of Pittsburgh-based Pitt Ohio Express, says there are three main forces driving the “New LTL” industry.

“Technology is making the biggest impact, followed by consolidation and offshore manufacturing,” Hammel says. “Technology impacts our operations the most and capacity in our operations drives the rates.”

David McClimon, president of Con-way Freight, the fourth-largest LTL provider and perennially among the tops in profit margin, says there are three standards LTL carriers must meet in order to survive. The first is clearly focusing in on the market. “This means narrowing your focus so there is no question in the customer’s mind what you do and the value you represent,” he says.

The other two givens for Con-way are differentiated services and customer intimacy. “The concept here is to continually refine your service offerings to target very specific and unique needs. It means segmenting your customer base and targeting markets precisely, then tailoring services to match those needs exactly,” McClimon adds.

Roy Slagle, senior vice president of sales and marketing for ABF Freight System, says its recent introduction of its “RPM” next- and second-day regional freight service is an example of the tailoring that McClimon mentioned.

“ABF is helping customers simplify their supply chains,” says Slagle. “With the introduction of RPM, we have increased the speed and reliability of our regional service offerings by bringing quality to the short-haul market. Shippers now have the ability to reduce their number of carriers by having one carrier provide long-haul service and regional service from all their locations.”

The established regional carriers—and there are scores of them—are not taking ABF’s expansion into their turf sitting down. “We have positioned ourselves to be a technology leader, an expert in safety and a company that understands our customers and their changing needs,” says Pitt Ohio’s Hammel.

O’Kane of A. Duie Pyle says in its overnight service markets, customers are continually looking for carriers to compress time in the process. “At Pyle, next-day delivery has come to mean next morning delivery,” says O’Kane, noting that 70 percent of its shipments are delivered in that time frame.

Jon Shevell, vice chairman of the Shevell Group, which includes $400 million Northeast regional carrier NEMF, says shippers are getting used to the notion that the days of playing one carrier off against another are over, especially in the high-cost Northeast. There have been no new sizeable entrants in that geographic region for at least 20 years, while several large Northeast carriers have closed, notably A-P-A Transport, USF Red Star, and St. Johnsbury’s, in that span.

“We operate in the most densely congested region in the country, with the highest operating costs for land and terminal space, as well as the area with the highest tolls and still we provide on-time service in the high-90-percent range,” Shevell says. “No carrier can survive here without adequate and fair compensation through rates.”

The biggest change in the LTL sector is the advent of the nation’s two largest parcel concerns entering the fray. Shippers are the target in the battle between the LTL units of $46 billion UPS and $34 billion FedEx. One year after UPS acquired Overnite for $1.3 billion. FedEx bought long-haul national carrier Watkins Motor Lines for $780 million. Overnite was rebranded UPS Freight while Watkins is now FedEx National LTL. All eyes in the market will be fixed on UPS and FedEx as they compete in the heavy freight sector.

“I do think we can be the low-cost provider in that market,” says FedEx Freight (FEF) President Douglas Duncan. “We can provide more reliable services at less cost than the national carriers that are out there.”

It’s hard to argue with success. Under Duncan’s leadership, FEF has surpassed YRC Worldwide as the largest provider in the market with just over 10 percent market share (see chart on page 59T). But UPS Freight says its long history in the heavy freight sector (Overnite was established in 1935) makes it a natural in this space.

“They say one size doesn’t fit all, but one carrier can do it all,” UPS Freight spokesman Ira Rosenfeld says. “What UPS Freight is doing for the first time is bringing the technology, capability, and most importantly, the reliability that it has brought to the small package sector to the LTL industry.”

The presence of such giants in the market is one reason analyst Satish Jindel believes LTL is here to stay. “They’re going to push more technology in the industry,” Jindel says of UPS and FedEx. “They’re going to bring LTL closer to what the parcel guys have done. If it can be done in parcel, it can be done in LTL.”

The first effects of next year’s Teamsters negotiations are already being felt as shippers are increasingly being wooed by non-Teamster carriers. The National Master Freight Agreement covering YRC’s companies and ABF Freight System, expires March 31, 2008. The UPS contract is up July 31, 2008. There has been substantial progress already in the UPS talks, but not among the freight carriers, according to company and union sources.

“With everything going on in the LTL industry, clearly the unionized carriers have pressure on them not only from UPS and FedEx but from the non-union carriers that are growing as well,” analyst Larkin says. “You will continue to see market share shift to non-union carriers. It will be very interesting how defensible the legacy union carriers are in fending off all this pressure from non-union guys and the big integrators, UPS and FedEx.”

There could be a third major player in the market as well. While it may not happen this year, Larkin and other analysts say they would not be surprised if Deutsche Post, parent of DHL, made a move into heavy ground freight sometime. Except for that, future LTL mergers and acquisitions will continue, but mostly among the $100 million to $200 million carriers, analysts say.

Another future change involves imports, which is changing the face of LTL. “What increasing imports do is change the top freight markets,” Pitt Ohio’s Hammel says. “The top five freight markets are not the same as they were five or seven years ago.”

A Duie Pyle is seeing the same trend. O’Kane says business at the NY/NJ ports and airports continues to grow rapidly. “We currently have a land search under way to ensure we have the appropriate capacity to continue to properly provide service for this important segment going forward,” he says.

But regardless of how the economy and the landscape continue to change, LTL carriers will need to continue to innovate in order to survive.

Con-way, which last year began a partnership with APL on less-than-containerload freight to Asia, recently launched a new service between the U.S. and 33 ports in the Caribbean. ABF effectively is in the household goods niche with its “U-Pack” Moving service. Expect to see more offshoots of these types of services as LTL carriers seek to leverage their networks and expertise in other areas.

“This industry is certainly getting exciting, although it’s not for the faint of heart,” says Pitt Ohio’s Hammel. “I love what’s going on and I love what’s coming.”