Less-than-truckload update: Stability achieved, rates to rise
November 01, 2013
The $35 billion less-than-truckload (LTL) industry is enjoying a buoyed rate environment even as it continues to manage through new regulatory red tape and fight against relentless cost increases in everything from labor to equipment.
In fact, David Ross, the LTL analyst for advisory firm Stifel Nicolaus, describes the current LTL environment as “stable,” a word that’s even been echoed by several top LTL executives.
For shippers, this newfound stability is translating into higher freight rates. Pricing has improved for LTL carriers, even though tonnage levels are still slightly below where they were in early 2008 before the Great Recession. Besides actual rate hikes, yields are improving as carriers are using newer equipment—with better fuel mileage—as well as technology to plan routes and cull their least productive freight.
And due to the fact that the top five carriers (FedEx Freight, YRC Worldwide, Con-way, UPS Freight, and Old Dominion Freight Line) control more than 55 percent of the LTL sector, Ross says that long-term pricing power should continue to remain with the carries. “Carriers need to continue to maintain price and capacity discipline in order for the industry to improve margins in a slow-growth environment,” says Ross.
The largest LTL carriers are making news in other areas. YRC is still fine-tuning its long-haul networks of the former Yellow and Roadway units. Canadian-based Vitran recently sold its U.S. operations for the bargain-basement price of $2 million, less assumption of debt. ABF Freight System, the sixth-largest LTL carrier, recently negotiated a 6.5 percent wage concession with the Teamsters, who have been balking at its final approval.
Others are reporting solid financial results. The market leader continues to be Old Dominion, which regularly reports operating ratios in the upper 80s as it reaps benefits from a decade-ago decision to diversify away from its regional LTL base to become a national carrier offering multiple transportation solutions.
“I would say the current state is just fine—nothing great, but not bad by any stretch,” says Chuck Hammel, president of privately held Pitt Ohio, a major multi-regional LTL carrier. “Our revenue is up around 8 percent and our yield is up around 3 percent. So the market is fine, but nothing great.”
Based on the current business conditions, nearly every LTL executive contacted by Logistics Management said that they’re telling shippers to gird for rate increases in the 3-percent to 5-percent range for next year. Here’s why rates are rising and what LTL shippers should expect in 2014.
Relentless cost pressures
What specific factors are driving up operations costs of the typical LTL carrier? Short answer: Everything. But the best-run carriers are doing their best to mitigate these rapidly rising cost spikes. Let’s look into what’s happening to costs where the rubber meets the road.
A new Class 8 tractor used by LTL carriers costs upwards of $125,000. Truck drivers, when carriers can find them, increasingly are getting higher pay. Insurance costs more, and because of environmental regulations, the cost of building a terminal has gone through the roof.
“Everything is up, and some of our costs are just skyrocketing,” says Myron P. “Mike” Shevell, chairman of the Shevell Group, the operator of New England Motor Freight (NEMF), a $340 million Northeast regional carrier. “Shippers have to know their rates are going to rise, because that’s the only way we’re going to stay in business.”
As if that isn’t enough, the Obama administration continues to crack down on unsafe drivers. Its recent change to driver hours of service (HOS) effectively trims a half hour of productivity away from most trucking operations, while its Compliance, Safety, Accountability (CSA) initiative, supported by most LTL executives, is increasing carrier costs by reducing the number of eligible drivers available for hire.
“New regulations are having an impact on everyone and increasing our costs substantially,” says Pitt Ohio’s Hammel. But he quickly adds that there is no way the market place would absorb every cost increase if it were passed through as higher freight rates.
“The cost of running a trucking company is increasing way faster than (that),” Hammel says. “There is no way we can raise our rates enough to cover those increased costs. The market just won’t accept that. So we need to lower our cost in order to maintain our margins.”
Hammel adds that LTL carriers are now focusing on yield improvement and taking cost out of their operations—rather than price increases—in order to realize growth. “Many of us are experimenting with CNG [compressed natural gas] vehicles, and almost everyone is adding technology to either make themselves more efficient or help themselves understand their costs better,” he says.
The federal government doesn’t appear to be helping many truckers, either. Many executives say the new Affordable Care Act will exacerbate their already rising employee health care costs. The government also just tweaked truck driver hours of service, causing a slight loss of productivity.
“Our cost of fleet insurance is increasing in spite of our phenomenal safety record,” says Steve O’Kane, president of Northeast regional carrier A. Duie Pyle. “The cost of new equipment continues to rise, and when the pressure we’ll experience on driver wages is added into the mix, there is an absolute certainly that costs will increase—and that rates will have to rise to retain capacity.”
A wild card for the LTL industry is the role that third-party logistic providers (3PL) companies have increasingly taken in the past few years. Privately, some trucking executives say they’ve developed a love/hate relationship with 3PLs, adding that they don’t relish freight controlled by 3PLs because they tend to be among the toughest rate negotiations they face. However, LTL carriers certainly can’t ignore 3PLs because of the increasing amounts of volume they now control.
“It’s getting tougher from a rate negotiation standpoint,” says Chuck Papa, vice president of transportation management services for Penske Logistics, a major 3PL. “Volumes have been slow, and consolidation has made (the rate environment) stronger for the remaining players.”
What Papa sees in his day-to-day dealings with the LTL sector is that carriers are increasingly targeting their lowest-yielding customers and getting away from generic, general rate increases. “Those shippers who aren’t easy to do business with are seeing the largest increases,” he says. “Carriers are more selective in pricing models than in taking price increases across the board, and we’re seeing them walk away from business that didn’t make sense for them.”
Most carrier executives say that the current lackluster growth in Gross Domestic Product does not inspire much confidence in the U.S. economy—but it’s actually been a positive for shippers. If the economy were growing any faster, it would likely result in a true capacity shortage in LTL due to the lack of available drivers.
“The capacity shortage is a concern, and it comes down to drivers,” says Papa. “CSA is not nearly having as much impact as we thought. However, the impact has been from HOS. It’s affecting the line haul operations, and carriers are being forced to run either team or relay operations that are affecting overall capacity.”
One possible solution to ease the capacity situation is for LTL shippers to consolidate their freight through use of 3PLs to create more “closed loop” collaborative networks. “This is absolutely an opportunity for the LTLs,” Papa says. “It’s fully variable pricing. It’s not an open network, but rather how you fit into our network.”
The driver shortage continues to keep a lid on capacity even in the LTL sector where driver pay can be as high as $32 an hour. “It is not a question of if an acute driver shortage is going to occur, so much as it is a question of when it will occur,” O’Kane adds. “As the driver supply continues to tighten, driver wages will rise.”
Coming off four consecutive good years, LTL carriers expect that trend to continue in 2014. But there is always a concern over the fragile state of the economy. An economic downturn could lead to a degradation in pricing discipline—and the 2008-2009 spiral could begin all over again, carriers say.
NEMF’s Shevell says that unless LTL rates improve substantially, the LTL industry could soon resemble the airline industry in some markets. “There might only be one or two financially viable carriers left in some regions,” Shevell says. “This industry needs help, and rates are the only way to get it.”
Many executives called the current rate environment “rational.” Pyle’s rates, net of fuel surcharges, are up 10.6 percent from their low point in the second quarter of 2010. While a 10.6 percent increase over three years sounds pretty good, its the second quarter of 2010 that was its low point. Rates had actually declined by 8.2 percent from their peak during the fourth quarter of 2007.
“So, while rates are up over 10 percent in three years, they are up less than 2 percent from their peak in 2007,” says O’Kane. “Without significant cost reductions and efficiency improvements, we would be struggling.”
Pitt Ohio’s Hammel says that, generally, customers are accepting 3-percent to 4-percent rate increases. “Many shippers understand the need for carriers to take rate increases, but they work hard to keep those increases within their budgets.”
Another year of 3 percent to 5 percent rate increases are likely, carriers and analysts believe. Analyst Ross says that rates are just one component of carriers’ yield—the others are fuel surcharges, freight commodity class, shipment size, and length of haul. Another issue affecting reported average yield is business mix, or the percentage of freight that comes from traditionally low-yielding national accounts verses high-yielding, small field accounts.
“When small shippers decide to outsource transportation procurement management to a 3PL, even if the LTL carrier is handling the same business afterwards, it’s typically at a lower yield and thinner margin,” Ross adds.
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