Quarterly Transportation Market Update: Less-than-truckload primed for profit
November 01, 2012
After several recession-battered years, the $33.5 billion less-than-truckload (LTL) market is set to get back to making money. Carrier executives and analysts are predicting rate increases in the 2 percent to 4 percent range. That does not include any increase in fuel surcharges, which right now are adding about 30 percent to every LTL bill.
Of course, any 2013 estimate is cautious. After all, we’re in the midst of global macroeconomic uncertainty, a presidential election cycle, and just so-so economic growth in this country.
But after being battered by three years of recession that decimated profits in the sector, LTL carriers are focusing more on improving yields and profitability in order to make decent enough returns to recapitalize their businesses and rolling stock. Improved conditions in the auto and housing sectors are buoying some carriers’ hopes that 2013 could be their best year for profits since 2006.
“Thin margins are not allowing LTL companies to earn their cost of capital, and without an increase in tonnage to drive density and operating leverage, price and productivity improvements are the only real ways to expand margins to justify reinvesting in the industry’s old and aging fleet,” says David Ross, the LTL analyst for Stifel Nicolaus.
In other words, LTL shippers who took advantage of a price war and excess capacity during the 2009-2010 recession should be budgeting for fairly significant price increases in their 2013 budgets. The price war that tried—and failed—to extinguish YRC Worldwide, the second-largest LTL carrier that has lost in excess of $2.6 billion over the past six years, is over. YRC is still in business, and is revitalized under a new management team led by CEO James Welch and his top lieutenant, Jeff Rogers, two respected LTL operators.
Whatever YRC’s future is, analyst Ross believes LTL capacity will be restrained over the next 12 months. There are no new entrants in the LTL market because of high barriers to entry for terminals, which are costly and time-consuming to build.
That’s good news for carriers, who are already showing some margin expansion as a result of re-pricing in their poorest-yielding accounts. This is necessary, adds Ross, to recapitalize aging fleets. He says that it may take two or three years to add enough new trucks to bring the average LTL fleet age into historical norms due to the cutback and elimination of new truck purchases during the recession.
“We’re focusing on improving yields, and that was not always the case in the past,” said Con-way Inc. President and CEO Doug Stotlar. “There is a new emphasis on profit, and that hasn’t always been the case in our industry. But it is now.”
So, how are shippers to cope with this new era of tighter capacity, higher rates, and tougher carrier negotiation mindset? Let’s look at what’s behind the numbers.
Unlike the highly fragmented truckload sector, where even the largest carrier barely maintains a 1 percent market share, the top handful of LTL carriers control the majority of the market. In fact, the top five LTL carriers enjoy a collective 56 percent market share—FedEx Freight (16 percent), YRC (15 percent), Con-way Freight (11 percent), UPS Freight (8 percent) and Old Dominion Freight Line (6 percent).
With these top carriers now concentrating on shedding their worst performing accounts in order to better concentrate on higher-yielding business, it isn’t surprising that analysts and carriers agree that LTL pricing is firming.
“I would say that pricing is ‘largely rational,’” says Ross. “Certain regions are seeing tighter competition, and soft volumes in late summer put pressure on spot pricing. However, the majority of carriers in what is a highly consolidated industry continue to be focused less on market share gains than on recovering from the record low margins that characterized the freight downturn.”
Ross is expecting to see yield increases continue at least through the third quarter of next year—and carrier executives agree. “The pain inflicted by the economic downturn is still fresh in everyone’s mind,” says Steve O’Kane, president of A. Duie Pyle, a major Northeast regional LTL carrier. “When excess capacity drove prices down during that period, everyone in the industry was injured. But those that lead the way in trying to gain market share—or put a competitor out of business—saw their results suffer the most. I believe this lesson was learned dramatically, and it’s helping carriers maintain pricing discipline.”
Wayne Spain, executive vice president and COO of Averitt Express, agrees with O’Kane’s assessment. “Carriers had to discipline themselves to this ‘new normal’ and find ways to improve yield and drive costs out of their network in order to compete, including removing capacity,” says Spain. “As shipping volumes have slowly risen, supply and demand have moved closer to equilibrium. Now we’re beginning to see a closer alignment of rates with available capacity.”
Satish Jindel, who closely tracks the LTL sector as principal of SJ Consulting, says that there is definitely greater awareness among certain carriers that they need to sustain a minimum 96 operating ratio (OR) in order to recapitalize their fleet so they can stay in business. “The past three or four years have seen pretty bad results in the LTL sector,” says Jindel. “It makes them realize that they can’t have that type of 99 or 100 OR. That has helped pricing get firm.”
Chuck Hammel, president of regional LTL Pitt Ohio, says that he’s noticed a slight weakening of rates this summer as a result of some softening in the economy and less freight all around. “What we’ve done is slowed down on our rate increases,” says Hammel. “We increased everybody on the first of year. But things are slowly down and shippers are pushing back, so carriers are looking for business and are pricing aggressively in order to get new business. That began in the second quarter.”
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