LTL’s are feeling pressure from freight brokerages

While the less-than-truckload (LTL) marketplace pales compared to truckload in terms of market share, it remains an important sector on myriad fronts.

And with so many more active players than its truckload brethren, it also is marketplace that has more than its fair share of challenges, too. And one of these challenges is the pressure LTL’s are facing from truck brokerages, of which there are many.

I am not telling you anything you don’t already know in that regard. But I do hear from LTL carriers on a pretty regular basis that they are feeling the heat from the truck brokerage side.

Earlier today, an LTL sales executive told me that there is a significant influx of truck brokerage players that are active in the LTL market, which is reducing margins for carriers that are “struggling for pennies.” What’s more, the LTL executive said it is fair to estimate that brokers are selling 25 percent of total LTL loads today and that figure is rising.

The proliferation of brokerages on the LTL side, according to the executive, has more to do with a slow economy and overcapacity.

“The poor economy drives customers to seek cheaper rates,” he said, “and overcapacity drives carriers to offer lower rates to fill capacity. Those two things together put the third party in the middle, and third parties are doing an effective job of making our money their money. We are allowing them to do that as a collective carrier group.”

When asked about the disparity between what an LTL carrier receives for a load compare to what a broker receives for a load, the executive said that publicly traded LTL carrier operating margins are in the low 100s range, while on the transactional side brokerages had margins that averaged 12 percent.

This, he said, gives an indication that carriers are more and more buying into broker’s cheap rates in order to get volume, with brokers subsequently marking those rates up to shippers.

“3PLs/brokerages get paid, because they bring these TMS (transportation management systems) in and consolidate the look of all the carriers—LTL and truckload alike—that a small shipper would use and it appears to be more efficient from for a shipper,” he said. “It may be, and that is an advantage they have over us as carriers, because we are such a fractured industry and that makes us vulnerable.”

A 3PL executive with an active trucking brokerage told the LTL executive that 50 percent of LTL company revenues that offers better margins to carriers, meaning that half of the business represents variable costs—or the costs of doing business.

The other half, of course, represents profits, much of which comes from smaller customers that often do not have contractual—or lower rates—than larger shippers with more freight to haul. Subsequently, this is a major driver in small shippers turning to brokers to find cheaper loads.

“What this indicates to me is that smaller shippers are targeting securing loads more through brokerages and more third parties are going to ‘commoditize’ LTL, and LTLs will really be working for third parties in the future, as opposed to being an independent industry as they are today,” said the LTL executive.

This current situation makes for a very interesting dynamic in that when looking at various utilities and services that have been deregulated—like airlines—and the fallout, with many airlines either leaving the industry or going bankrupt.

Our conversation changed course a bit when I noted that it seems apparent that LTLs have much better pricing power now than they did back in 2009, when many chased volume in exchange for lower rates—a strategy that was not viewed as a success and saw many shippers turning to brokerages in search of even lower rates. And I asked if this made for an exasperating situation for LTL carriers.

Here is his answer: “Yes. It was because our industry has no response to it, and we are sitting there watching it happen before our eyes. It was like watching a river overflow and not being able to do anything about it.”

And while using truck brokerages appeals to shippers’ high-level executives, LTL carriers tend to deal more with traffic managers and people in similar positions whose bonuses and evaluations are based to a degree on discounts.

Brokerages, he said, are rolling out TMS and audit pay features in conjunction with low rates, which appeals to shippers. This, in turn, leaves carriers defenseless to an extent, as they don’t have things like TMS which pulls all modes together, and they also have to remain separate as an industry for many reasons, with antitrust being the biggest, according to the LTL executive.

“We cannot talk pricing together with other LTLs but you have brokers using other brokers about pricing when they find a customer that can fit the carrier program and can save money,” he said. “Brokers selling down to other brokers is happening all the time. And when you Google ‘cheap LTL rates’ it opens up a whole different world for LTL.”