Less than Truckload (LTL) Outlook 2020: Full recovery on the horizon?

A combination of an improving industrial economy, with manufacturers rebuilding lower inventory levels, has top executives from the $44 billion less-than-truckload (LTL) market crossing their fingers in hopes of a financial rebound this year.

Indeed, after more than 14 straight months of declining tonnage in the industrial portion of the economy, LTL carriers are hoping for recovery in that sector as international trade worries and overall geopolitical concerns lessen.

“Consumers have done very well in retail, but the industrial side of the economy has not moved as quickly,” says Darren Hawkins, president and CEO of YRC Worldwide. “We rate the manufacturing index as an important leading economic indicator, and with our exposure to industrial, we have a high correlation to that portion of the economy. The lion’s share is on the industrial side, and things have settled down in that area and are moving steadily in the right direction.”

Even better news for LTL carriers is their newfound pricing discipline. Even with the sudden closure last February of New England Motor Freight (NEMF), which ranked as the 20th-largest LTL carrier with $345 million in revenue, the industry absorbed that capacity without resorting to predatory pricing in order to obtain that NEMF freight.

In fact, there’s nothing in the air to signal an LTL price war, especially as carriers continue to enjoy the benefits of a concentrated market. The Top 10 LTL carriers control about 73% market share, according to data from consultancy ShipMatrix, and the Top 25 absorb about 90% of the LTL market.

Analysts say that the LTL market is dominated by three very strong, non-union companies: FedEx Freight, Old Dominion and XPO Logistics. All are formidable competitors to Teamsters-covered YRC Freight and its three regional subsidiaries as well as ABF Freight System, among others. “In addition to being non-union, well-run companies, the top three all have highly developed and sophisticated information technology systems that allow them the information to provide better service at a lower cost,” said Donald Broughton, principal of Broughton Consulting.

But an analysis by Logistics Management shows that even the best-run LTL carriers face operational hurdles these days. All are continually competing for fewer qualified drivers who are demanding higher pay. Costs for equipment and insurance are soaring. And the economy, while good, has been growing at an uneven pace, causing unforeseen spikes and dips in demand.

Let’s examine how the best LTL fleets are coping with this ever-changing economic model, and why they’re hoping 2020 is a year of economic recovery for them.

Matching capacity to demand

Nothing throws off internal planning sessions at even the best-run LTL carriers more than an uneven economy, up one year and so-so the next. And, that’s exactly what happened in the past two years. The market witnessed historic volumes in 2018, while 2019 was labeled by some as an industrial recession.

“LTL demand is not very strong at this point in time,” says Chuck Hammel, president of Pitt Ohio, the nation’s 17th-largest LTL carrier. “We have moved from up slightly to flat. Last year got progressively soft as the year went on, an so far this year it’s the same. However, we’re optimistic things will improve.”

Raj Subramaniam, president and COO of Fed Ex Corp., parent of the nation’s largest LTL carrier, said recently that he was “not pleased” with overall financial performance of many units. At FedEx Freight, its LTL unit, Subramaniam said that it’s continuing to focus on yield management, profitable growth, and aligning its cost structure to the lower volumes throughout this fiscal year.

“These efforts have enabled FedEx Freight to significantly offset the impact from softening economic condition,” Subramaniam said recently on an earnings call with analysts. “This is yet another example of matching capacity to demand.”

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 3.3% for all of 2019—that was about half the annual gain in 2018 (6.7%). In December 2019, the ATA SA For-Hire Truck Tonnage Index rose 4% after falling 3.4% in November. That makes planning for equipment, drivers, terminal expansions and freight demand highly risky for 2020, executives say.

“Last year was not a terrible year for the truck tonnage index, but despite the increase at the end of the year, 2019 was very uneven for the industry,” said ATA chief economist Bob Costello. “The overall annual gain masks the very choppy freight environment throughout the year, which made the market feel worse for many fleets. In December, strong housing starts helped advance the index forward.”

The U.S. Bank National Shipment and Spend Indexes ended 2019 with both metrics falling sequentially and on a year-over-year basis. It said that the indexes reflected that at least parts of the economy, like manufacturing activity, are currently “under pressure.” Last year’s indexes posted the smallest gains of any year since 2016, U.S. Bank said.

“There is no doubt that 2019 overall was a tough year for motor carriers,” U.S. Bank said in its analysis. In fact, shipments contracted 5.9% from 2018, marking the largest annual drop calculated back to 2011. But shippers’ spend was up 3.4% from 2018, which U.S. Bank called “remarkable,” considering that volumes were off significantly.

For trucking, U.S. Bank said that the falling factory sector is having a significant impact on shipments and spend. Truck sales have exceeded the demand for the added capacity, and freight levels will likely remain “sluggish” into the second quarter. However, it forecast that shipments could start to improve as capacity starts falling with fewer truck purchases as well as carrier closures.

“I think LTL will perform better than truckload this year, and it’s not because of the economy or trade wars, it’s because of e-commerce,” says Satish Jindel, principal of SJ Consulting. “LTL carriers are handling more retail shipments than ever before, and that will continue. LTL carriers must learn how to handle those shipments.”

The last-mile conundrum

LTL carriers have been perplexed by the potential of “last-mile” deliveries due to the surge in e-commerce business. The conundrum is this: How much of this business is worth chasing given the sharply higher costs involved in delivering to often rural, out-of-the-way places with no hope of any backhaul traffic.

FedEx Freight recently began its FedEx Freight “Direct Service” that provides freight deliveries right to or through the front door. The company says the new service currently covers 81% of the U.S. population, and is anticipated to cover 90% by July.

FedEx Freight calls this “a market leading value proposition,” that includes a two-hour delivery window to your room of choice will full packaging removal. The company says it has “a strong pipeline” and already has prominent retailers lined up for the service. It’s all part of a larger FedEx initiative to improve revenue at its Freight and other units.

What LTL carriers have found is that B2B last-mile is preferable to deliveries to home consumers. That’s because B2B provides greater density and stronger yields than B2C. So most LTL companies are focusing on commercial traffic. However, the lure of e-commerce is strong because it’s growing at an annual rate of more than 15% year over year.

Analysts warn that this isn’t an easy market to crack. Truckload giant J.B. Hunt and LTL leader XPO Logistics are already in the last-mile market in a big way along with giant publicly held companies with vast resources such as Ryder and Forward Air.

“My advice is that if you’re not in the last-mile market now, it’s a little late,” adds analyst Jindel. “Everything in last-mile is different—the driver, the trucks, training, the DNA is completely different. It’s different bumping up against a dock and delivering freight than delivering to someone’s home.”

Last-mile operations might make sense for a trucking company with a big presence in retail. Other than that, analysts say, the high fixed costs of last-mile deliveries to homes and remote locations make it a daunting proposition, but one that can pay off handsomely.

“LTL companies should be in last-mile,” says Broughton. “The ongoing growth profile and margin potential of last-mile should make it a market segment that’s difficult if not impossible to ignore. Those companies that could easily add it to their service portfolios, but don’t do so at their own peril.”

The rate situation

Pricing for LTL carriers is forecast to rise at a greater rate than for truckload (TL) carriers. One reason is market share concentration. The Top 25 LTL carriers control nearly 80% of the $44 billion or so market. But the Top 25 truckload carriers barely have 10% of the $320 billion TL market.

Until about five years ago, motor carriers had waited about 35 years since the Motor Carrier Act of 1980 deregulated their industry to get a favorable pricing environment. That market is expected to continue to weigh against shippers in the LTL arena, but not so much in the full truckload space.

“Costs continue to increase in trucking mostly around driver and benefit costs and toll roads,” says Pitt Ohio’s Hammel. “We’re still getting increases from our customers, albeit lower than early 2018.”

Analyst Jindel is forecasting LTL contract rates to rise 3% to 4% this year, while TL rates should rise maybe half that much. But analysts say shippers can build in a hedge to those price increases by producing more “driver friendly” freight—that is, freight that is accurately weighed, readily available and easily accessed by drivers who increasingly are operating under severe time restraints.

“Simply put, every shipper has the ability to offset that rate increase by improving their operational practices,” adds Jindel.