LTL profit revival in the works

The once-beleaguered $35 billion less-than-truckload (LTL) sector, beset by stagnant growth and lackluster profits for much of the past decade, is enjoying a revival.
  
Mostly because of the strong industrial and retail economy, as well as tightness in capacity due to the lack of any new entrants in the past 10 years, the LTL sector is poised for one of its best profit years since at least 2004, industry executives and analysts say.
  
“For the foreseeable future, pricing is more important than volumes,” James Welch, CEO of YRC Worldwide, parent of the second- and eighth-largest LTL carriers in its long-haul and regional operations, respectively, told LM.
 
“What’s going to be interesting with fuel prices dropping, will that improve consumer spending and tighten capacity even more?” Welch wondered aloud. “It’s too early to tell. But there’s a lot of emphasis on base rate adjustments matching price with a shipper’s particular volumes.”
  
The YRC units were among most of the major LTLs that took general rate increases in the 5 percent range at the start of the year. Whether the carriers will hold to those increases, or perhaps take another during the peak third quarter period as some did last year, remains to be seen.
 
But clearly LTL shippers ought to brace for stiff rate increases in the 3-5 percent range when their contracts are up for renewal this year, analysts and carrier executives say.
  
Besides GRIs and contractual rate increases, the methodology by which LTL carriers are charging for their services is about to change. That’s because most of the major LTLs are in the process of implementing dimensional pricing – or, “dim pricing”—to charge more by the volume a package takes up in a trailer as well as its weight and distance traveled.
  
“We’re the only piece of the transportation industry that doesn’t price by dimension,” Welch said. “Ocean, air, parcel, they all do it that way. We’re trying to get ourselves ready. We are gathering the phases together.
 
“At the end of the day, what are we selling? It’s space on a trailer. Dim pricing is the best way to sell. I don’t know precisely when the LTL industry will convert, but I have to think it’s coming. We’d like to see it. It’s going to take a few carriers to jump out there and say, ‘This is how we’re going to price.’ I can’t predict when that will be.”
 
Given the tightness in the market place and the pricing power that LTL carriers currently have over shippers, it could be sooner rather than later.
 
David Ross, trucking analyst for Stifel Inc. who closely tracks the LTL industry, said in a recent note to investors that year-over-year growth rates in LTL pricing (excluding fuel surcharges) and tonnage accelerated through last year’s fourth quarter, ending on a high point in December. 
  
First-quarter volume growth should be “positive as well,” Ross said, especially compared to the weather-related costs that LTL carriers had in the winter of 2014.
 
“Pricing should remain healthy,” Ross said.
  
With continued tightness in truck capacity, he said, assuming that the relatively consolidated LTL space remains disciplined on pricing and the industrial economy expands further, LTL margins should again increase in 2015, Ross added.
  
The one risk LTL carriers face in raising rates too high is that some freight could gravitate to third-party logistics companies (3PLs), Ross said. Those third parties control as much as 20 percent of LTL freight already, and have enjoyed considerable pricing power over trucking companies in the past few years.
  
Declining fuel prices likely may hurt LTL margins in the first half of the year, analysts and trucking officials say. But it’s difficult to ascertain how much, they say, because fuel surcharges are often negotiated downward by some larger shippers who enjoy volume discounts.
 
The unquestioned profit leader in the LTL sector remains Old Dominion Freight Line, which operated last year with an operating ratio around 85. It did that while enjoyed 19.4 percent growth on $2.7 billion revenue. That was the fastest organic (non-acquisition) growth of any LTL carrier, according to figures compiled by SJ Consulting for LM.
 
Other fast-growing LTLs are Saia, the 10th-largest carrier which enjoyed 11.7 percent revenue growth to $1.27 billion revenue. Double-digit revenue growth also was posted by privately held Dayton Freight Lines, which jumped 15.4 percent to $446 million, Averitt Express’s 11.7 percent growth to $677 million and Daylight Transport, a West Coast light asset carrier, which had 10.4 percent revenue growth to $202 million.
 
“The industry is doing a good job of keeping everyone aware of what’s going on from a cost standpoint,” says Phil Pierce, senior vice president of sales and marketing for Averitt Express. “Good, loyal customers see the value of securing adequate capacity with a quality carrier. Larger shippers are really interested in working with us in improving their shipping operations to help put some constraint on our costs. They know they are part of the equation.”