LTL industry’s focus on yield management continues to serve as driver for sector’s rebound

While publicly-traded less-than-truckload (LTL) carriers are gearing up to announce first quarter earnings results, it appears—at least on the surface—that the sector has made up significant ground from the depths of the Great Recession. This is due, in part, to tighter capacity and steady rate gains since 2010.

There are many drivers contributing to the turnaround occurring in the LTL sector, including a sharp focus on yield management and contractual relationships, coupled with an ongoing commitment to service reliability. But even with this positive momentum, it is clear challenges still remain as volumes and the general economy remain below pre-recession levels seen in 2007 and earlier.

This was made clear in a recent research note by Stifel Nicolaus analyst David Ross, which noted that LTL shipment/tonnage levels are higher than they were a year ago at this time, as is pricing to a degree. And his firm’s outlook for LTL industry tonnage through 2013 “is for a slow, potentially choppy recovery (1.0 percent-2.5 percent annual freight growth) with no expectation of a housing recovery.

Regarding LTL pricing, Ross wrote that rates are expected to increase 4 percent-5 percent, excluding fuel surcharges, in 2012, explaining that given the increased price rationality among competitors and the structural tightening in active capacity (the number of trucks and people moving LTL freight), pricing power should remain with carriers through at least 2014, adding that this is contingent on how carriers deal with capacity, which will in turn determine the actual level of rate increases. But at the same time he pointed out that pricing is still not where it needs to be for LTL carriers to earn their cost of capital.

“Business levels have been stronger than anticipated on a year-to-date basis,” an LTL carrier executive told LM. “What is driving this is a focus on yield, more so than our bill count and tonnage, which is up 1 percent compared to yields being up closer to 9 percent.”

Steps being taken on the yield management front for this carrier include addressing specific accounts on a regular basis that don’t have the yield increases required, as well as the 3PL and brokerage community regarding their “blanket” pricing programs and trying to create a level playing field on the pricing front.

Many 3PLs and brokerages, he said, provide more of a generic pricing program for LTL shippers, which is not customer-specific and is much more of a purely transactional business, with a value proposition that is often driven by technology-based offerings like a TMS more than rates. The key for LTL carriers in competing with these types of businesses is to not sub-optimize their own sales forces and to maximize yield opportunities on each transaction, he said. 

Like Ross, the executive said volumes for the second half 2012 and beyond look promising, noting that at the end of the first quarter there was tight LTL capacity.

“We believe there will continue to be a capacity crunch continuing going forward,” he said. “GDP growth is higher than anticipated, and things like the Cass Freight Index and the ATA tonnage reports are relatively strong.”

As the economy continues its slow rebound, it stands to reason that a focus on effective yield management and pricing on behalf of LTL carriers is not going to abate anytime soon.

“The economy continues to show slow growth overall,” said Greg Lehmkuhl, president of Con-way Freight, in a recent interview. “If you look at the dynamics of the LTL industry things have changed a lot from 24-to-36 months ago. There is a ton of capacity that has come out of the industry, with carriers, including ourselves, closing service centers and reducing capacity and demand has flown back. We are seeing more consistent equilibrium between supply and demand on an aggregate basis, which is one dynamic. Another one is that LTL carriers in aggregate are not recovering their cost of capital. So after a real pricing decline in 2009-2010 carriers are more focused than ever on ensuring they are getting adequate price increases from their customers due to the investments they are making into their business. You are seeing significant yield increases year-over-year now.”