LTL carriers seize pricing with rising yield, rates

There is a not-so-subtle change in pricing power away from shippers and toward carriers in the (less-than-truckload) LTL sector. Shippers may have already noticed discounts are falling, and rates are rising.
 
After about four years of cut-rate pricing due to the recession and trying to punch out financially ailing LTL giant YRC Worldwide, rival carriers finally are regaining pricing power even over their best customers, top executives and analysts say.
 
In fact, it may be this way for awhile. Rate increases in the mid-single digits, absent of any fuel surcharge increases, are being reported by many shippers and carriers as contracts renew. Many analysts are predicting LTL tonnage (and rates) will steadily rise not just this year, but through 2012 as well. But that still would not get LTL tonnage levels back to the peak levels of 2005-2006.
  
“It’s generally improving,” says David Ross, trucking analyst for Stifel Nicolaus is predicting 2-to-3 percent annual revenue LTL growth levels in 2011 and 2012, which is in sharp contrast to the heavy discounting that most LTL shippers enjoyed during the slump of 2007-2009.
 
In fact, Ross says if you had owned a basket of LTL stocks from 1985 through today, you would have underperformed the S&P 500 most years. That’s because of changing shipper patterns, modal share shifts (LTL has lost significant share to truckload and parcel since deregulation of the trucking industry in 1980), the Internet bubble (which left all asset-based companies behind for a few years around the turn of the century), and the continuing consolidation of trucking, he says.
 
The LTL sector is now about a $27.5 billion sector, down from 33.8 billion in 2008 because of the recession, modal diversion (mostly to truckload) and other secular pattern changes, according to Satish Jindel, who tracks the sector as principal of SJ Consulting, Pittsburgh.
 
As the sector recovers, LTL pricing is due for a power shift back to the carriers, analysts say. Pricing in the LTL industry has been moving higher (even excluding fuel surcharges) since mid-2010, he said, after YRC rivals “found religion on rate increases,” Ross said in a recent note to investors.
 
In fact, this shift has been in place since last summer with LTL carriers in total showing higher yields month over month. Ross sees this trend continuing throughout this year and “likely” through 2012, especially if carriers do not bring active capacity (people and trucks) back to the industry.
 
Ross is predicting 2-3 percent annual growth in volume in the LTL sector. That could rise even higher if truckload capacity is squeezed by any changes to hours of service of as implementation of the government’s CSA 2010 safety initiative on drivers occurs.
 
After several years of “advantage-shipper” in rate negotiations, Ross says the pendulum is turning and pricing power is returning to the carriers. Major LTL carriers did an unprecedented thing last year, taking two general rate increases (GRIs) in the same calendar year.

“We believe that is demonstrative of pricing power now shifting back to the carriers after years of advantage-shipper,” said Ross, who is predicting annual rate increases of between 4 and 5 percent this year and in 2011. That’s without any increase in fuel surcharges, currently running about 22-24 percent when fuel costs $3.15 a gallon, as it is currently.
 
Ross believes “active” capacity in the LTL sector— trucks, drivers, dockworkers—is currently “fairly tight,” and would only get tighter as the nation enjoys higher levels of economic activity. That would seriously tighten if the government were able to win greater regulation in drivers’ hours of service and as its “CSA 2010” initiative to crack down on unsafe drivers is further rolled out this year.
 
Carrier executives are girding for higher costs for everything basically—but especially for recruiting and retaining qualified drivers.
 
“The great recession took it out of the spotlight, but driver availability is the biggest issue facing the industry and will change several dynamics,” said Steve O’Kane, president of A. Duie Pyle Co., a major Mid-Atlantic regional LTL carrier. “Driver wages will need to increase.”
 
Bill Logue, president and CEO of FedEx Freight, the nation’s largest LTL carrier, says the supply/demand equation in the industry is “improving,” and carriers are openly courting rate increases from their customers.

“As volumes grow, we are working the yield side,” Logue told LM. “We are trying to decide what is good business for us. We’re asking ourselves, ‘Is this a good long-term solution for this shipper?’”
 
Logue noted that for the past two quarters, FedEx Freight has posted yield improvements of between 4-to-5 percent, and says rival carriers are performing nearly as well. Shippers are being urged to work with their carriers on yield in order to assure capacity later this year.

“It’s important that our customers have some skin in this game as well,” Logue said. “It’s been three or four tough years. We need to rebound.”