LTLs take mid-year rate hikes as carriers fight skyrocketing costs

It’s the season for general rate increases in the less-than-truckload (LTL) industry—those annual hikes for non-contract shipments that hardly any shipper in the nation pays.
  
“It’s a nonsensical pricing structure that has no relevance to cost efficiency,” says Satish Jindel, principal of Pittsburgh-based SJ Consulting, which closely tracks the LTL industry.
  
Still, the ritual continues. Because the LTL industry was born in a regulated pricing environment, these general rate increases (GRIs) continue. About the only change has been their timing. A couple of decades ago, they used to occur the first week of January. Now, they seem to mostly occur mid-year.
  
But in an industry where big shippers routinely win volume contract discounts of between 60 and 70 percent – and even once-a-year shippers can get a 50 percent discount for having a heartbeat and a cellphone—increasingly GRIs are looked upon as an anachronism from a bygone era.
  
Jindel estimates that between 75 and 80 percent of LTL freight moves under contracts, which are immune from these general rate increases. Still, the general press reports these GRIs as if they were genuine news, which arguably they are not.
     
“They’re a non-event, but every year they happen,” Jindel told LM. “It’s always about the same range—5 to 6 percent. But most of these companies’ freight moves under contract. But for even the small players, it doesn’t play anymore. Even Joe Blow shipper gets a 50 percent discount for his once-a-year piece of freight.”
  
Ironically, Jindel says, some of the biggest beneficiaries of these GRIs are the LTL carriers’ main rivals (and biggest users of LTL capacity)—brokers and third-party logistics companies (3PLs).
    
“The biggest beneficiaries of GRIs are the 3PLs and brokers because they try to create value by saying to unsophisticated shippers, ‘Here’s what’s going on the market place and here’s how we can create value.’ These shippers are not as successful in whittling down accessorial and other charges. The brokers make money not just on spread in LTL rates but by getting accessorial fees that carriers are not as good as collecting.”
  
For the record, here are the latest LTL rate hikes, mostly effective July 1. YRC Freight, UPS Freight, Con-way Freight and ABF Freight System all took 5.9 percent rate increases. ABF, the nation’s sixth-largest LTL carrier, did say that the effect of its GRI would vary on specific lanes and shipment, a hint that larger discounting might be evident. FedEx Freight announced a mid-year rate hike of 4.5 percent also set to take effect July 1.

About the only differences was the timing of those increases. UPS Freight said they were effective May 28; YRC’s took effect June 3; ABF says its hike went into effect June 10. UPS added its increase applies to minimum charge LTL and truckload rates and accessorial charges.
  
UPS Freight rolled out a GRI increase of 5.9 percent for non-contractual shipments in the United States, Canada, and Mexico, which is set to take effect on June 10. The company set this increase applies to minimum charge LTL and truckload rates and accessorial charges.
 
Others, including Estes Express and A. Duie Pyle, said they were strongly leaning toward mid-year rate hikes as well.
  
“While the bulk of our business is unaffected by the GRI, it is still a relevant event,” Steve O’Kane, president of A. Duie Pyle, the nation’s 20th-largest LTL carrier, told LM.
  
“We have thousands of smaller customers, moving shipments on tariff rates, and the GRI is the most efficient way for us to update these rates to reflect the increased costs of doing business,” O’Kane said. 
  
While the GRI will impact less than one third of the shipments Pyle handles, O’Kane said, it will impact about 60 percent of its active customers it hauls for on a somewhat regular basis.
  
What may be most of interest to shippers is which companies no longer take GRIs. Pittsburgh-based Pitt Ohio, the nation’s 19th-largest LTL carrier with $327 million revenue last year, stopped asking its shippers to take a blanket across-the-board rate hike about a dozen years ago.
  
Officials at privately held Pitt Ohio, which is one of the most innovative and profitable trucking companies, said instead of a blanket rate increase, it prefers to concentrate on increasing its lowest-yielding and most unprofitable freight. So the bottom-yielding 15 percent of Pitt Ohio customers could likely see a heavier rate increase while its best customers are likely to see no increases—or even a slight reduction, depending on how those customers’ individual freight fits into Pitt Ohio’s overall network.
  
“Pitt Ohio doesn’t do it anymore because the rates are so crazy anyway,” Jindel says. “All you do is create problems with best customers. The only ones you need help with are most unprofitable customers.”
  
Increasingly, analysts (and even some LTL executives) are looking at GRIs as a fairly useless remnant of the industry’s regulated days.
  
John Larkin, the respected trucking analyst for Stifel, Nicolaus, Baltimore, recently said in a note to investors that truck pricing had become more “technical/surgical” as use of Transportation Management Systems has become more widespread.
  
“The days of shippers living year after year with rates significantly in excess of market rates appear to be numbered,” Larkin said. 
  
Some carriers are reporting what Larkin called “modest” low single digit adjustments. But sometimes these rate adjustments apply to only a subset of a carrier’s total lanes, he said. Some carriers have exchanged capacity commitments for no rate increases, Larkin added. Shippers reportedly are generally adhering to the volume commitments necessary to complement the carrier’s capacity commitments.
 
Auctions conducted by third-party logistics companies are resulting in rate reductions across the board, Larkin said. The recent economic slowdown has given some shippers confidence that now is the time to be a “little aggressive,” Larkin said, at a time in the seasonal cycle when bids seldom result in rate reductions.
  
There’s no question all LTL carriers are facing sharply higher costs. Wages and salaries are the biggest component.  A. Duie Pyle, for instance, raised compensation for all employees last July, and will do so again this year. 
  
“With LTL being such a labor-intensive business, that is where a great deal of the cost goes, but given the scarcity of quality drivers, we need to continue to provide top wages to attract Pyle-quality employees,” O’Kane explained. 
  
Pyle’s pension costs are up between 5 and 17 percent this year, depending on which plan employees are in. Pyle’s cost of providing employee healthcare was up a staggering 22 percent last year, and it has risen more than 11 percent in the first half of this year, O’Kane said.
  
The cost of equipment has also skyrocketed.  “We are replacing $60,000 tractors with $110,000 tractors,” O’Kane said. “For us, spending money is the easy part!”
  
In general, the LTL sector is taking a sharper focus on yield management and contractual relationships, coupled with an ongoing commitment to service reliability, as it emerges from several battered years of profitability due to the Great Recession. But even with this positive momentum, it is clear challenges still remain as volumes LTL rates remain about where they were in 2007 and earlier.
  
A recent research note from Wolfe Trahan noted that while some LTL carriers have been asking for up to 6 percent rate increases, a shipper told the Wall Street firm that on average the increases have been closer to 2-3 percent year-to-date, due to the shipper’s consistent volumes, history with carriers, and the company’s history of prompt payment.
  
Jindel said that while truckload and parcel carriers often see double-digit margins, LTL carriers are typically at the other end of the spectrum with low, single-digit margins.
  
“This is not because LTLs have a bad cost structure or because they are all bad operators,” said Jindel. “It is just that the industry has lacked some pricing discipline, and shippers have been able to leverage the multiple carriers they use in a way where they have been able to get lower pricing. Shippers may not like to hear this, but they don’t benefit from unprofitable carriers no matter which segment of the industry they are in.”