LTL news: ‘Double-digit’ rate increases possible

Less-than-truckload shippers, who enjoyed rock-bottom rates as a result of a competitive price war against financially ailing YRC Worldwide, should be prepared to pay significantly higher rates in the next six to 12 months, analysts and carrier executives say.

How much higher? At least 4 to 5 percent for the contracts coming due the rest of this year, and perhaps double-digit rate increases in coming years.
 
“Absolutely I see double-digit rate increases in the next two years,” says Myron P. “Mike” Shevell, chairman of the Shevell Group, which operates leading Northeast regional carrier New England Motor Freight (NEMF). “If we don’t see that type of increase, there will be a substantial number of carriers closing their doors, or being unable to invest in their business.”
 
Another top carrier executive, Con-way Freight President John Labrie, says: “We expect rates to continue to go north. The issue is more one of pace—how quickly will rates increase—rather than a question of whether or not that will happen.”
 
David Ross, trucking analyst with Stifel Nicolaus, agrees with Shevell and Labrie. He is predicting LTL rate increases of 4-to-5 percent over the next 12 months, on average. But he says depending on geographic lane and a customer’s importance to a carrier’s overall freight network, some rates could rise as much as 25 percent.

“They have now realized that is an unsustainable strategy. Some of those carriers are aggressively going back to their customers and saying, ‘If you want us to stay in business as an industry, we need help with rates. So, on regular contract business, the LTL side is having a little more traction than the TL guys in getting rate increases.”
 
Of course, some of those rate increases are coming off a low floor. An analysis by SJ Consulting, Pittsburgh, which analyzes LTL rates, shows year-over-year LTL rates for revenue/hundredweight in the first quarter of this year were 6.7 percent lower than the 2009 first quarter, for the large publicly held carriers. That was on top of a 5.5 percent year-over-year decline in the 2009 fourth quarter compared with the year-ago period.
 
Two major factors are influencing LTL pricing right now—demand and capacity. Demand is rising in both the industrial and retail sectors, the two largest sectors for LTL. On top of that, the LTL carriers have been judicious in managing capacity, not adding trucks and drivers until they are sure the economic rebound warrants it.
 
“In the past the LTL guys inflicted pains on themselves by adding capacity that sometimes caused problems,” said Satish Jindel, principal of SJ Consulting. “That eroded pricing. Some carriers also tried to divert business from YRC in an attempt to push YRC off the cliff, which so far hasn’t happened.”
 
YRC has lost in excess of $2 billion in the last three years, the largest cumulative loss in the history of the U.S. trucking industry. Yet, it remains in business. Ross is pessimistic over YRC’s future, and says the first quarter next year could be a telling one for YRC, a company that traces its origins back 85 years.
 
To say that Ross is pessimistic on YRC’s future is a bit like saying Lady Gaga is a bit suggestive in her performing style.
 
“It’s midnight, they’re in an Amazon rainforest and they have no compass,” Ross told LM, when asked about YRC’s long-term chances.
 
YRC, which has shrunk from the nation’s largest trucking company at $10 billion to about $5 billion currently, is burning through cash at an alarming rate. It has sold terminals, real estate, cut geographic coverage, closed underperforming units, obtained 15 percent wage givebacks from its 40,000 Teamsters and obtained a pension freeze—and it still is losing money, although CEO Bill Zollars claims the company will be in the black (before interest, taxes and debt) later this year.
 
YRC represents about 15 percent of the overall $25.8 billion LTL market (which has shrunk from $33.8 billion in 2008, because of the effects of the recession). That is roughly what analysts claim is the amount of overcapacity in the LTL market place.
 
“If YRC went out, I do think rates would rise in the 10 percent range,” analyst Ross said.