Pricing discipline, reliance on e-commerce aiding LTL carriers amid COVID-19 downturn

The $46 billion-a-year less-than-truckload (LTL) sector is faring relatively well economically during the downturn in freight demand as a result of closures associated with the COVID-19 pandemic.

Analysts point to newfound pricing discipline, more accurate rating due to precise dimensional pricing, and more reliance on home deliveries in the surging e-commerce market as reasons why the LTL sector is faring better economically than the larger $340 billion truckload sector.

According to statistics compiled for LM by SJ Consulting, while carriers in both segments have seen volume declines, LTL carriers have done a better job of maintaining profitability. The group of LTL carriers’ collective operating ratio improved in four of the last five quarters, including in Q1 2020, when the COVID impact was first felt.

Analysis of LTL profitability by the publicly traded carriers shows that despite a 4.1% drop in shipments per day, the LTL carriers actually improved their collective operating ratios by 2.1% in the first quarter. That’s despite a dropoff in freight in March due to closures related to the economic shutdown in many quarters. This group of carriers includes Old Dominion Freight Line, YRC Freight, Arkansas Best and others.

“The publicly held LTL carriers have shown a continued ability to achieve rate increases even in light of lower demand,” Satish Jindel, president of SJ Consulting, told LM. “Their pricing has stayed consistent.”

Jindel explained that’s due to both pricing discipline within the LTL sector and selecting and charging rates for the correct characteristics of their freight.

“I don’t think their ORs will get better because of the decline in shipments per day, but the pricing discipline is holding up,” Jindel added.

By comparison, analysis of the largest publicly held truckload carriers shows an erosion of both loads per day and operating ratio. This group of carriers includes such TL giants as Knight-Swift, Schneider, J.B. Hunt, Landstar, Werner and others.

During the first quarter, these TL carriers saw a 1.6% drop in loads per day. As a result, these TL carriers endured a 1.3% erosion of their operating ratios.

Truckload and LTL “go hand in hand” usually, according to Brian Thompson, chief commercial officer for SMC3, a data and solutions provider to help optimize LTL freight transportation across the supply chain.

But he said one of the most significant trends coming out of the COVID recession is LTL carriers’ ability take advantage of Americans’ increasing reliance on home delivery for large bulky shipments as well as smaller necessities.

“Home delivery is very, very costly for LTL carriers,” Thompson said. “These deliveries take a lot of time. Carriers prefer a quick turnaround at a warehouse, get it on the dock and move on.”

Instead, with home deliveries, LTL carriers are not delivering multiple shipments to a single residence, efficiencies parcel giants UPS and FedEx enjoy. Instead, they are facing additional costs, but hoping to absorb them through better planning and operations.

Jindel agreed, saying: “One thing helping the LTL guys is they are benefitting from the growth of e-commerce. Some of the largest e-commerce retailers are now very large LTL shippers. That is contributing to pricing discipline.”

Still, the e-commerce market is not without its pratfalls, either.

“Adapting to a world with excess capacity as well as more frequent, inefficient home deliveries means that it’s going to be a challenging market for carriers through the rest of the year,” Thompson predicted.

That’s already in evidence. Old Dominion Freight Line, the perennial leader in LTL profitability, often posts operating ratios around 80 while compiling $4 billion annual revenue as the second-largest LTL carrier in the country.

But even ODFL has been hit by the freight slowdown. It reported revenue per day dropping by 16.2% year over year because of a 12.1% decrease in LTL tonnage per day and a decrease in LTL revenue per hundredweight.

In the second quarter, ODFL reported a 16.7% decline in LTL shipments per day. Weight per shipment rose 5.4% even though shippers were sending a 12.1% decline in LTL tons per day.

For the first six weeks of the second quarter, ODFL reported LTL revenue per hundredweight and LTL revenue per hundredweight excluding fuel surcharges decreased 4.7% Y/Y and 1.4% Y/Y, respectively.

Jindel noted that LTL carriers’ pricing discipline is a “sea change” from past years and a lesson learned from the 2008-09 Great Recession. Recent bankruptcies and cessation of LTL giants Consolidated Freightways (in 2002) and New England Motor Freight (last year) have taken a toll and remain fresh in current LTL executives’ minds.

“They remember CF and NEMF,” Jindel said. “They know it takes just a minute to fall off a cliff. But it takes weeks and months to climb back up.”