Some LTL carriers eschewing annual GRIs in favor of “customer-centric” approach
April 13, 2014
They are an annual rite of passage, general rate increases (GRIs) in the less-than-truckload (LTL) sector of the trucking industry.
But is anyone paying attention? And more importantly, is anyone actually paying these announced GRIs, this year in the 3.9 to 5.4 percent range?
Increasingly, the answer appears to be, “No.”
GRIs used to be announced in the dead of winter, designed to take effect around Jan. 1, the way parcel giants UPS and FedEx do. Then, a few years ago, they shifted to earlier announcements, designed to take effect in late summer during the peak shipping season when presumably shippers are more worried about capacity.
Now they are moved up to take effect in spring, at the start of the peak season. This year, FedEx Freight, UPS Freight, YRC Freight, ABF Freight, Con-way Freight, and Saia have all announced GRIs. Significantly, market leader Old Dominion Freight Line has not, leaving the others with no choice but to significantly discount away some of those announced rate hikes.
Also, GRIs do not have much effect on contract freight rates. Contract freight is estimated to comprise as much as 80 percent of all LTL traffic, according to estimates by SJ Consulting. As recently as a decade ago, GRIs may have had more impact on the industry. But with the rise of contract freight, their overall economic impact has diminished.
General rate increases are a vestige of government regulation of trucking rates, which ceased in 1980 when the industry was economically deregulated. While they might still have some significance in providing a “ceiling” from which all contract freight is discounted, GRIs long ago ceased to have much significant impact.
Some leading LTL carriers have, in fact, significantly moved away from annual freight rate increases in favor of a more tailored approach to pricing. These approaches take into consideration a more precise analysis of exactly what that customer’s freight mix means to a carrier’s efficient operation, and therefore what rate that shipper pays.
Pittsburgh-based Pitt Ohio, the nation’s 17th-largest LTL carrier with $362 million in revenue last year, is just such a carrier. It began eschewing GRIs about 10 years ago in favor of what it calls a more “customer-centric” approach to pricing. And technology has played a huge role in that.
“Access to actionable information has changed the price and service discussion for most carriers and shippers,” Geoff Muessig, Pitt Ohio’s executive vice president and chief marketing officer, told LM.
In recent years carriers have developed sophisticated lane based costing models and shippers have gained access to low cost transportation management systems, Muessig adds. Today carriers and shippers can easily exchange information and discuss which lanes allow a carrier to meet the market price, provide good service, and generate an adequate margin.
“General rate increases were needed back in the day when carriers and shippers did not have easy access to this type of information,” Muessig says. “One-size-fits-all across the board rate increases remain easy for a carrier to implement. However, over time a carrier will find that its pricing programs have become distorted to the point where some customers are charged too much and others are not charged enough.”
Since 2005, Pitt Ohio has taken a customer centric approach to its pricing programs. “We believe we create more value for our customers by seeking to understand their business activity before we discuss the need for a rate adjustment,” Muessig explains.
In fact, the effects of GRIs can be somewhat misleading. An analysis of Stifel trucking analyst David Ross on Con-way’s GRIs in the past few years shows exactly that.
Ross says the tradition of GRIs is driven by the “legacy union operating environment” where the leading cost input, labor, rose contractually every year. Even though the LTL industry is now predominantly non-union (and union workers at YRC and ABF have actually taken wage concessions recently), this practice continues.
“The increases are not, however, indicative of the overall pricing environment, in our view,” Ross says.
If there is overcapacity in the LTL industry, most, if not all, of the announced increase ends up getting discounted away, he says. When supply and demand are tight, rates increase more, no matter what the GRIs indicate. Ross says LTL pricing is pretty solid currently with most carriers getting net pricing increases north of 3 percent this year.
Ironically, Ross says it is small shippers—the most profitable accounts for the LTL carrier—who are actually most vulnerable to effects of GRIs, compared with the large national accounts, which enjoy negotiating leverage because of their volumes.
“We believe the higher these rates go, the more likely the small shippers are to start using a 3PL/broker to get a better rate,” Ross says, adding eventually the 3PL then just takes that margin away from the carrier.
Ross analyzed four years’ worth of GRIs from one leading LTL carrier, Con-way Freight, and found it had little impact on the carrier’s bottom line. Con-way, which announced a 5.4 percent increase this year, took a 5.9 percent hike in January 2010, 6.9 percent in again late in 2010, 6.9 percent in mid-2011, 6.9 percent in mid-2012 and 5.9 percent in May 2013.
All told, that is a 37 percent rise in the past four years. It would be 44 percent if this year’s increase were included. But Ross’s analysis shows that Con-way Freight’s overall yield, excluding fuel surcharges, had risen only 16 percent over that span.
Bottom line for shippers? It’s not your carrier’s GRI that matters. It’s what your freight means to that carrier, and how profitable that freight mix fits into your carrier’s overall network efficiency.
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