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Quarterly Transportation Market Update: Less-than-truckload primed for profit

After being battered by three years of recession that decimated profits, LTL carriers are now focusing on improving yields and profitability in order to recapitalize their rolling stock. Now shippers need to cope with a new era of tighter capacity, higher rates, and tougher carrier negotiations.
By John D. Schulz, Contributing Editor
November 01, 2012

Could yield improvement fail?
This newfound emphasis on yield improvement could be pushed off the road by a couple of factors. First and foremost is the macroeconomic situation. For example, if China’s economy slows, that will have a ripple effect on overall U.S. economic conditions—and, by extension, the LTL market place.

“I have never believed that we’ve ever fully come out of the 2009 recession,” says Jindel. “We’re still largely in the same situation of high unemployment and slow overall economic growth.”

Secondly, Jindel adds that there are certain carriers that, despite difficult times, have an inability to understand what cost is to service certain customers. “That leaves them offering pricing that is not profitable, and that creates a competitive response,” he says. “Some shippers are still using that to their advantage in avoiding price increases.”

Pitt Ohio’s Hammel agrees: “There are some shippers that, when you mention rate increases, will simply say, ‘There are a lot of other carriers that will take my business.’ And there may be.”

For that reason, Jindel’s 2013 LTL rate forecast is more in the 2 percent to 3 percent range, excluding fuel surcharges—which averaged 29.3 percent in the second quarter, compared with 29.8 percent in the second quarter of 2011. Some carriers will get higher than those average rate increases because of special geographic lanes and density issues. “The one other thing that’s helping yields stick is that there’s more discipline among carriers who had precipitated the decline in rates,” Jindel says.

The changing conditions and leadership at YRC are a major factor in the rate environment as well, Jindel says. “YRC management is more focused on the business enterprise as opposed to shareholder value; and that’s promoting greater emphasis on service improvement. Through that, you can get pricing improvement.”

2013 forecast: Cloudy and more expensive
For at least the next 12 months to 18 months, the analyst community is hinting that LTL rates should run slightly ahead of the rate of inflation. Active LTL capacity remains relatively in balance, supporting continued pricing momentum for LTL carriers. While some carriers have been adding drivers and trucks, analyst Ross says that may be offset by some financial failures of less well-capitalized carriers as lenders may be more inclined to let them fail.

Ross is forecasting LTL tonnage growth through 2014 amid a “slow, likely choppy, recovery,” with less than 3 percent annual freight growth and pricing rising faster than volume—1 percent to 5 percent annual yield increases, depending on supply/demand situations in specific geographic lanes.

Most carrier executives agree capacity will be “restrained” over the next 12 months. Except for Old Dominion, LTL returns simply are not adequate for the public carriers to be motivated to add capacity, they say.

With new Class 8 tractors costing in excess of $100,000, and terminals in major metropolitan areas costing upwards of $10 million, no one is likely to invest in adding capacity for an operating ratio in the mid 90s, O’Kane says. “It doesn’t make sense…just look where today’s LTL yields are as compared to the pre-recession era of 2006-2007. In a time when costs have gone up dramatically, industry yields are not much different than those of five years ago.”

O’Kane and other carrier executives contend that rate increases of 3 percent to 4 percent are both realistic and necessary. “But whether or not they play out that way is anybody’s guess,” adds O’Kane. “If the economy keeps expanding slowly, my guess is David Ross is close to being correct. The industry needs it to keep up with costs, and with an infrastructure that is outdated and works against greater productivity, the cost increases must be reflected in prices.”

LTL carriers also believe that the more volume a shipper has with a core carrier, the more opportunity to remove costs. Some examples of cost reduction can come from changing a live pick-up to a spotted trailer; shipping palletized freight rather than loose cartons; directionally loading trailers for a carrier; moving pick-up times earlier in the day to allow the carrier to work freight earlier; providing better information to assist the carrier in load planning; provide electronic bills of lading; or adjusting the lanes being used to better fit the carrier’s system.

“Not all shippers will be able to do what’s necessary to employ these cost savings measures,” O’Kane says. “But the more they consult with their service providers and exchange thoughts, the more ways both sides will be able to take cost out of doing business.”

Averitt’s Spain adds that shippers can improve their supply chains by sharing as much data as possible with their carriers to improve our ability to accurate forecast needs and provide flexible transportation options. “Collaboration, as always, is the key to a successful partnership,” Spain says.

 

About the Author

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John D. Schulz
Contributing Editor

John D. Schulz has been a transportation journalist for more than 20 years, specializing in the trucking industry. He is known to own the fattest Rolodex in the business, and is on a first-name basis with scores of top-level trucking executives who are able to give shippers their latest insights on the industry on a regular basis. This wise Washington owl has performed and produced at some of the highest levels of journalism in his 40-year career, mostly as a Washington newsman.


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