LTL carriers “somewhat optimistic” for 2011 as rate hikes sticking amid sector capacity concerns

It’s been awhile since LTL carrier executives were able to see the word “profit” at the bottom of their financial reports. Some are half-jokingly reporting having to go to the dictionary to make sure of the meaning of the word. Sure enough, they found it, right there between “persistence” and “quarterly net gains.”

The beleaguered LTL sector underwent a massive downsizing in 2009. According to figures compiled by SJ Consulting, the sector shrank some 25 percent from $33.8 billion in 2008 to $25.2 billion last year. Some of that business returned in 2010, as preliminary estimates show the sector rising to $27.5 billion (see adjacent charts compiled exclusively for LM by SJ Consulting).

A significant portion of that lost business in 2009 was because of financially ailing LTL giant YRC Worldwide. Because of closed or sold units and a reduction in its national footprint, YRC shrank from about a $10 billion company two years ago to about $5 billion today.

It wasn’t just YRC’s downsizing that affected the sector. Parcel giants UPS and FedEx continued to “cherry pick” the best LTL business, offering deep discounts to its existing parcel carriers. Also, truckload carriers and 3PLs such as C.H. Robinson were offering services that consolidated former LTL shipments into more efficient, cheaper TL moves.

But leading LTL carrier executives are reporting the sector’s outlook is brightening. Already, an unprecedented two general rate increases have taken effect in the past 12 months, with a majority of those 5-6 percent rate hikes sticking with most customers. And with a future likely to continue a reduction in drivers’ hours of service and greater scrutiny of unsafe drivers, those factors are likely to further squeeze overall truck capacity, analysts say, further aiding the LTL sector.

“I am somewhat optimistic for 2011,” Chuck Hammel, president of Pittsburgh-based Pitt Ohio Express, a leading regional LTL carrier, told LM. “I think the worst is behind us and we should see slow but steady growth.”
 
Hammel said the major factors influencing LTL carriers right now are an uncertain overall economic future, carriers that are adding capacity and the pending CSA 2010 regulations, which some carrier executives say have the potential to remove as much as 10 percent of overall truck capacity off the highways.

Pitt Ohio’s Hammel reports that it has been able to increase overall rates in 2010 between 2 and 5 percent, depending on customer, traffic lane and other freight characteristics. Other LTL carrier executives are reporting similar success, mostly on a customer-by-customer basis.
 
“I’m not sure what to think regarding capacity moving forward since there seems to be quite a few carriers adding equipment and drivers,” Hammel said. “As long as that continues to happen rates will lag behind demand.”

David G. Ross, trucking analyst for Stifel Nicolaus, Baltimore, recently noted that third-quarter tonnage for the publicly held LTL carriers (which represents about two-thirds of all LTL tonnage) rose 11 percent year-over-year. Most LTL carriers are reporting what Ross called “solid volume growth” and market share gains over the much-depressed levels from third quarter of 2009.

The biggest market share gainers were FedEx Freight, Old Dominion Freight Line, Saia and Roadrunner, Ross said. The latter two were the only two LTL carriers reporting both above-average growth in tonnage and yields, Ross said, noting both carriers have spare capacity in their networks and already are profitable at current rate levels. In fact, ODFL was the only publicly held carrier to report a sub-90 operating ratio (89.9) during the third quarter of 2010.

Despite some overcapacity plaguing the LTL sector, analysts are heartened by the fact that several leading LTL carriers have carried out what Ross calls “an unprecedented second round” of general rate increases that occurred during the peak season between August and October. These increases, which Ross estimated have applied to between 20 and 40 percent of the carriers’ overall business, “have been sticking better than normal,” he said.

All this translates into pricing power shifting back to the LTL carriers after several years of “advantage-shipper” rate negotiations. And with the general U.S. economy on the rebound (albeit more slowly than nearly anybody would want), Ross is predicting price increases of between 4 and 5 percent for 2011 and 2012 in the LTL sector.

“This could be better than 2004 (pricing) because it is a supply-driven tightness,” Ross told LM. “We anticipate very tight capacity in trucking.”

Analysts noted there are two types of trucking capacity—infrastructure capacity (terminal doors, etc.) and active capacity (trucks, drivers, dockworkers). While there is an oversupply of the first, there is not an oversupply of the latter, Ross said.

“In general, active capacity is fairly tight in the LTL sector,” Ross said. “There are no capacity shortages right now, but supply and demand are pretty close.”

Other incidental indices charting overall economic demand are backing the analysts’ predictions of higher rate expectations in the LTL sector.

Satish Jindel, principal of Pittsburgh-based SJ Consulting, said the overall U.S. economy is what is driving the economic conditions in the LTL. But he worries the economy is growing only because of artificial, one-time-only government stimuli, not because the nation is actually creating additional wealth.

“I do not see our economic condition in 2011 being any better than it was in 2010,” Jindel predicted. “I don’t see any noticeable improvement in shipment volumes or tonnage in 2011.” Because of that economic drag, Jindel is predicting LTL rate increases of about 3 percent in 2011, excluding any rise in fuel surcharges (currently running about 23 percent, based on $3.20 per gallon diesel).

  “The only way the LTL industry can make performance better is by taking capacity out to get pricing up, or by expanding into the territory of other businesses,” Jindel said. “The LTL guys are going to have to attract those 200-400-pound shipments that UPS or FedEx is taking, or by attracting those 7,000-8,000 pound shipments that the truckload guys have. They have to expand their market.”

Jindel said the best word to describe the LTL sector in 2011 is “stable,” which after the past three years of downturn and limited profitability, is actually an upgrade.

“I still believe LTL carriers can do better—but not without changing their approach,” Jindel says. “They have to elbow back into the market segments that was theirs before. The total market size for LTL shipments is (potentially) $38 billion, but some of that right now is going to the parcel guys and TL guys. If they expand into that business, they have much room to grow.”

Still, optimistic signs abound for LTL.  The Institute of Supply Management index was up to 56.6 in November, which is favorable sign toward LTL volumes. The American Trucking Associations overall truck tonnage index (including truckload freight volumes) was up 6.1 percent year-over-year, the sixth consecutive monthly increase. Ross is predicting LTL shipping volumes to remain “stable” through March, despite the typical seasonal decline during the winter months.

Bottom line: LTL freight volumes should grow steadily, if not spectacularly, through 2012, although they will not yet get back to where they were during the peak levels of between mid-2003 and mid-2006.

Any change in overall hours of service regulations (which would affect truckload more than LTL) and the pending implementation of CSA 2010 (which would affect the available driver pool for TL carriers) nevertheless might have a “spillover” effect on LTL capacity, as some truckload freight potentially could shift back to the LTL carriers. That is exactly what happened during the last HOS refinement in 2004.

“Truckload affects LTL,” analyst Ross explained. “When the government revised HOS in 2004, that change brought a lot of multi-stop freight back to LTL. Anything that limits truck capacity will require more than truckload to move the freight, and that’s good for LTL.”

Nowadays, the break-even point on whether a truckload carrier accepts a small load of freight may be around 5,000 pounds. If HOS changes or other capacity limits affect the TL sector, the breakeven point may rise to 6,000,-7,000 pounds, which is beneficial to the LTL carriers.”

Right now, capacity concerns among shippers are more in the abstract than real, carrier executives say. “We are not hearing a lot of concern from our customers regarding capacity,” Pitt Ohio’s Hammel says. “Our customers expect us to be there for them regardless of the dynamics in the industry and we’re determined to meet their expectations.”

Nevertheless, the future could be quite different. “We expect active capacity to remain fairly tight,” Ross is predicting.

The wild card in the LTL equation is the future of YRC Worldwide, the financially ailing $5 billion giant which has shrunk in size by 50 percent over the past three years. Ross believes YRC carriers (the former Yellow and Roadway long-haul units as well as the Holland and New Penn regional carriers) need “significant” rates increases of at least 10 percent “fairly soon” in order to survive.

Should YRC be able to exact such rate increases, which would be a further positive for its competing carriers. Should YRC somehow fail and be forced into bankruptcy or liquidation, which naturally would cause LTL pricing to skyrocket as some 12 percent of the sector capacity would be eliminated by any YRC cessation.

“Our forecast and models assume YRC is still around,” Ross said. “But I believe the only way YRC makes it through and makes it a viable company is by getting 10 percent rate increases. If YRC can get 10 percent rate increases, that is great news for the rest of the LTL. Competitors like ODFL, Saia and Con-way will get at least that much, maybe more.”