LTL sector is returning to a better place
July 31, 2012
Much has been written and said about the less-than-truckload (LTL) sector on this Web site and in the pages of this magazine. Make no mistake, though, the sector these days is in a much better place than where it was not all that long ago.
That is made even more clearl when looking at earnings results of various LTL players. A common theme in these reports is revenue per shipment is on the rise in tandem with pricing gains. That is not a bad place to be at all, especially in this economy.
What’s more, many LTL companies have rolled out general rate increases (GRI) in the 4.9 percent-to-6.9 percent range in recent weeks which have already taken effect or will be soon.
As previously noted, Stifel Nicolaus analyst David Ross wrote in a research note that LTL’s should continue to have the upper hand over shippers when it comes to pricing power.
“During 1Q12, LTL yields (excluding fuel surcharges) continued to climb from the late 2009 trough, and we expect them to continue rising through 2014, even as comps get tougher, because they are still a good bit away from where they need to be, in our opinion,” wrote Ross. “Given increased price rationality among competitors and the structural tightening in active capacity (# of trucks and people moving LTL freight), we believe pricing power should remain with the carriers as long as capacity and pricing remain rational.”
That part about rates still not being where they should or need to be sends a direct message to shippers: we are not done raising rates yet and likely won’t be for a while.
But this is not a matter of raising rates for the heck of it. Much of this comes from the heavy investments required to run these asset-heavy networks strategically located throughout the country.
I got to learn a bit more about this in a recent conversation with Rick O’Dell, president and CEO of Saia. Saia, by the way, had a huge second quarter. Revenues were up 8.1 percent at $288 million, and operating income jumped 157 percent to $21.2 million.
“The LTL market is in a recovery mode, and we are focused on capitalizing our business going forward,” said O’Dell. “We announced a 6.9 percent GRI increase in early July and continue to see positive momentum, not only with GRI but also with contract renewals coming in at the 5-to-6 percent range. We are seeing a nice recovery with rates.”
And many LTL carriers are, in turn, basing pricing needs on the current capacity environment, too, he explained. Saia, he noted, has some excess capacity in its network but the company is not interested in putting it to work at yields that are not generating the types of returns that are needed.
What’s more, while the LTL sector is recovering, it is not really back to where returns justify reinvesting in the business.
“At this point, the focus is on the recovery of rates in the market and that is limiting capacity,” said O’Dell. “There was a time when everyone was after growth and expansion, with the thought that if you got the density the margins would come through efficiencies and then you find that at a certain price that does not work. We have gone through a bad period and learned through the downturn you cannot cut price to chase volume, because it does not work out well. You end up running a lot of miles and burning out equipment for no return. You are now seeing a rationalization with that, and it is creating more tightness.”
On top of that, regulatory changes like CSA are making it more challenging for carriers to create drivers, he explained. This essentially forces carriers to determine if they really want to invest in their businesses if the returns are not where they need to be in terms of expanding capacity from a growth perspective when adding personnel and equipment.
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