Tightening LTL capacity, increasing freight demand means rising rates in 2012

The $26.5 billion less-than-truckload (LTL) is a tiny share of the nation’s $700 billion total freight transportation pie, but it increasingly is seen as a vital component in shippers’ supply chains.
  
That’s because LTL carriers, with their networks of thousands of terminals and hub-and-spoke system of pickups and deliveries, enjoy significant barriers to entry in the otherwise deregulated trucking industry. In fact, there has not been a significant, sizeable new entrant into the LTL sector since UPS and FedEx made forays into the niche through acquisitions in the early 1990s.

Because of that, capacity in the LTL sector is rather finite, especially with the current driver shortage that is only expected to worsen with tighter regulations on drivers. Although the LTL sector did ratchet down capacity by as much as 20 percent during the economic downturn of 2007-09, freight demand has returned to LTL and is “fairly steady at the moment” even with its usual seasonal declines at this time of year, according to David Ross, trucking analyst at Stifel Nicolaus, Baltimore.

Paced by market leader Old Dominion Freight Line, LTL carriers are reporting year-over-year tonnage increases for 2011 and those gains are expected to repeat again in 2012. Ross is predicting a “slow, potentially choppy” economic recovery with price increases in the 2-3 percent range, although that could vary widely by geography, lane, customer and carrier.

Most major LTL carriers announced general rate increases (GRI) between 5.9 and 6.9 percent, effective in the fourth quarter. Privately, carrier executives say they would be happy to actually get half that amount from its customer base. But event that amount would continue a trend of increasing LTL yields (excluding fuel surcharges) that began in 2010.
 
“I don’t see the rate environment getting a whole lot firmer, but I don’t see it getting softer either,” said Jeff Rogers, president of YRC, a subsidiary of YRC Worldwide (YRCW), the nation’s second-largest LTL carrier. “Everybody’s GRI was very effective when they were announced in August. That has held well. The pricing environment remains steady to favorable. We are able to drive rate increases.”
 
Carrier executives and analysts say LTL carriers have been successful in gaining price increases from customers on specific lanes and “we believe this pricing power should remain with the carriers for at least the next couple of years,” according to Ross.
 
The determining factor for the LTL sector will be how well each carrier deals with the capacity issue when freight demand really hits high gear—which could occur in 2012, executives and analysts say. Obviously, if carriers added capacity faster than volume grows, that would reduce their ability extract healthy rate increases.
    
Another factor in the equation is the increasing role that third-party logistics companies play in the LTL industry. Analysts say carriers should try to get increasing rates from their large national accounts, which use their leverage to insulate themselves from the GRIs and other rate hikes.
  
Carriers will need to get better pricing from their large national accounts because the traditional, higher-margin smaller shippers have been gravitating toward 3PLs in an attempt to gain some leverage in pricing. This is affecting LTL carriers’ margins and some analysts say the only place to restore that is through the large, national accounts.
 
“Somebody is going to have to pay more to offset that 3PL margin decline,” said Rogers. “As freight shifts to the 3PLs, you do lose a little margin. I agree that significant price increases are going to come on the national accounts. It has to. There’s no place else to get it.”
  
As for now, LTL capacity and pricing is approaching that “sweet spot” that carriers enjoy.

“As far as capacity in LTL, it is tight but certainly not too far out of balance,” said Chuck Hammel, president of Pitt Ohio, a leading Northeast regional LTL carrier. “Pricing is firm but not out of control yet. As you might expect, customers always push back on price increases and this environment is no different. However there are simply too many uncontrollable cost factors in play within the trucking industry that carriers and shippers alike simply cannot ignore.”
  
Other carrier executives say there are other factors besides capacity working against shippers in the current economic environment.
 
“While it is a factor, I believe it is too early to attribute tightening capacity as the lone cause for the pricing pendulum to swing in favor of the carriers,” said UPS Freight Senior Vice President of Sales John Fain.
 
He said LTL pricing has firmed around the industry’s GRIs announced this summer for a variety of reasons, including fuel surcharges, but primarily due to a new found pricing discipline that has replaced those carriers that were sacrificing yield to build volume.
  
“The nation’s continuing sluggish economy compounded by increased costs for labor, healthcare and materials have forced many carriers to revaluate their pricing strategies,” Fain said. He said UPS Freight took a different approach.

“We gained market share not by discounting but by offering LTL shippers a value package unmatched in the industry” Fain continued. “As example, we recently rolled out technology previously reserved only for package customers, a pickup notification system directed at eliminating missed pickups.”
  
Whereas 95 percent of parcel pickups are scheduled, in the LTL industry the number is closer to 50 percent. When you are calling for a truck on a tight schedule with a number of pallets and different weights a carrier must make critical equipment decisions at a moment’s notice.
 
“Any delay can lead to an unwanted added expensive missed pickup for both shipper and consignee,” said UPS Freight spokesman Ira Rosenfeld.
 
The UPS Freight LTL Pickup Notifications, which it says is unprecedented in the LTL field, eliminates those extra costs by confirming when a pickup is scheduled; informing all parties the shipper when the driver is en route and notifying the shipper when the pickup has been is made. “UPS Freight’s system will not only tell a shipper a truck is on the way, it allows the customer to reschedule a pickup en route in case of delay,” Rosenfeld added.
  
Phil Pierce, executive vice president of sales and marketing at Averitt Express, a major regional and interregional LTL carrier, said shippers are more willing to accept rate increases if service levels are such that they are guaranteed sufficient capacity.
 
“As we head into 2012, we’re continuing to see our customers value the services we provide them,” Pierce told LM. “We’re working together with them to arrive at win-win solutions while capacity in the LTL market tightens. Shippers are more willing to accept a reasonable increase in rates if it assures them that their freight will keep moving.”
  
Effective Dec. 1, 2011, all YRC customers that used the current versions of the legacy Roadway and Yellow base rates were converted to YRC base rates. The current versions of the Roadway, Yellow and YRC base rates are equivalent, so this is a change in name only and will have no effect on your rates or discounts. As a part of YRC’s commitment to service, this change will extend the YRC no-fee, LTL standard service guarantee to all current rate customers.

Rogers of YRC Worldwide said that tariff change “should be invisible” to YRC shippers, who nevertheless will be analyzed on a lane-by-lane basis as to what their freight is contributing to YRC’s profitability.