Improved LTL shipping practices can go a long way in helping shippers control costs

Looking at some of the recently posted earnings from publicly-traded less-than-truckload (LTL) carriers, there appear to be some consistent themes in the sector.

One of these themes centers on how despite a so-so economic climate, pricing remains solid for LTL carriers at a time when demand is not entirely robust, with average LTL contract renewal rate increases remaining solidly up mid-single digits in 2Q15, something which Stifel Nicolaus analyst David Ross commented in a research note is consistent with feedback from private carriers as well.

Ross added that heading into earnings season, his firm’s core pricing growth assumptions, excluding fuel surcharges, averages 3-5 percent to 4.0 percent annually for the second quarter and 2015.

“Industry-wide discipline has been key in this slow-growth market, and shippers still worry about capacity so are accepting modest increases,” Ross stated.

But even with decent pricing gains intact for LTL carriers while most carriers see volumes fall, the ongoing focus on yield management remains prevalent in the sector. That continues a trend that began in earnest in recent years, when LTL’s wised up to the fact that chasing freight to keep networks moving, coupled with low rates, was not a recipe for success.

There was a time, some said, when everyone was after growth and expansion, with the thought that if you got the density the margins would come through efficiencies and then carriers find that at a certain price that does not work. And in recent years there was a bad period in which LTLs learned and realized price cannot be cut to chase volume, because LTLs end up running a lot of miles and burning out equipment for no return.

But pricing discipline on a general rate increase and classification basis really only goes so far. That is based on how many LTL executives have made it clear that their primary market focus is on rate recovery, which has the effect of limiting capacity.

Satish Jindel, president of Pittsburgh-based SJ Consulting, said that one way for LTL carriers to improve both their bottom lines and overall productivity is to get a better grasp on the cost of handling a shipment and the pricing they have for it.

One of the ways to do this is through dimensional pricing, he pointed out.

“Companies focusing on the technology side of this like Cubiscan and Mettler Toledo are allowing LTL carriers to capture freight dimensions, and when carriers find freight dimensions are not in sync with density, it does not mean that NMFC (National Motor Freight Classification) density is bad, it just means the way pallets are created and packaging is done by shippers results in more cube being used than it can weigh,” he said. “This comes back to pricing. You need to collect the proper price of the freight they are handling, because when they do not do that it is not the carrier losing out. Shippers should not get upset about that. The shippers who have discipline and proper shipping practice are subsidizing those with bad shipping habits. Even if LTL carriers continue to keep the discipline on shipping packages, there is still a long way to go. The dim machines have the capabilities to help carriers capture the actual dim vs. the dim being billed for bad shipping practices and could also help shippers by showing how they could avoid being hit by increases in dim, because all they want is to put more freight on the trailer by spreading the costs on one shipment instead of charging more for any shipment. That creates opportunities for shippers to manage their LTL cost increases. It is not about negotiating a tougher rate; it is about improving the shipping practice.”

That was the thesis Jindel made clear, because there is a “lot of wasted space” on LTL trailers, with carriers needing shipper cooperation to get trailer cubic utilization up to 95 percent, not just tonnage.

LTL carriers also need to develop a performance matrix for internal managers to look at trailer load factors, not just in terms of pounds but for actual cube dimensions, which is not happening enough, he said.

“Most carriers don’t have that ability even though they are moving to dimensional pricing and capacity but don’t know how to measure it,” explained Jindel. “Things need to move faster. Wall Street analysts are looking at things like tonnage and yield but what is missing is tonnage per pound, so they need to start preparing cube-related measurements.”

Jindel agreed with Ross’s up to 4 percent annual LTL rate hike estimate for the second quarter and 2015. But he stressed that shippers need to realize that by improving shipping practices, even while being subjected to a cost increase, there are ways to effectively lower their LTL spend by taking a smarter approach.