Freight volumes in the $83 billion less-than-truckload (LTL) market are down, yet profitability per-shipment is up. So, why is there this dichotomy in such a basic law of supply and demand?
“The current state of the LTL marketplace is still very good from a historical perspective, but slowed down a bit in the fourth quarter of 2022,” says Kent Williams, executive vice president of sales and marketing at Averitt, the nation’s 11th-largest LTL carrier. Analysts and top trucking executives say that this current market is a conscious result of decisions made several years ago by the industry collectively. Tearing a page from parcel giants UPS and FedEx, top LTL carriers began pricing their services more accurately and with more discipline, pointing out overweighted shipments, charging for necessary accessorial payments, and generally being smarter about how they ran their businesses.
“Longer term, it will be a great segment for transport,” says Satish Jindel, principal of SJ Consulting, a firm that closely tracks the LTL industry. “There are significant barriers to entry, and there are no new companies coming into the sector.” After LTL demand all but evaporated during the pandemic outbreak of 2021, carriers worked to improve their yields during the first half rebound last year.
That strategy worked better than most industry optimists expected. In fact, the LTL market’s surprising profitability and ability to not only exist, but to become the most lucrative and well-managed niche of the overall $830 billion trucking industry, is astounding to even veteran leaders in the sector. “This industry never ceases to amaze me,” says Chuck Hammel, president of Pitt Ohio, the nation’s 15th-largest LTL carrier. “It went from overcapacity to a slower demand almost overnight.”
This month, LM takes its annual look at the $83 billion LTL market. We examine the pricing power that market concentration gives to carriers; how shippers can offset whipsawing rates with strategic partnerships; how one of the biggest players in LTL freight is fine-tuning its operations for the future; and what shippers can expect from rates in 2023.
The trick in trucking is to precisely match the number—and location—of available trucks with freight demand. It’s easier said than done. In fact, it’s a bit of a high-wire act that the LTL industry failed during the past few recessions, largely because of one or two large carriers instigating price wars that affected nearly all the carriers.
This time seems different. Because the top 25 LTL carriers control more than 80% of LTL capacity, carriers have been able to use that market concentration to their advantage in terms of pricing—even as LTL shipments are declining.
In past recessions, when freight volumes were low, carriers dropped prices to attract business, but quickly raised them as demand rose. This translated to wide swings in pricing—as well as inefficient use of equipment and drivers.
But because so many shippers have formed longer-term relationships through strategic partnerships, LTL pricing has gone the opposite way this time. Strategic partnerships mean less volatile pricing because of transparency between the two parties, industry officials say. This is different than a transactional relationship which can be as volatile as the stock market.
“The LTL carriers seem to have figured it out,” says Bob Costello, chief economist at the American Trucking Associations (ATA). “They needed to shed some equipment, and that’s what they did.” That helps to explain why, in Q4 last year, while freight volumes were declining, the LTL sector operated 4.1% fewer power units than in a comparable period in 2021, according ATA data.
Pitt Ohio’s Hammel said that the pandemic rush to restock raw materials and inventory is over. “However, that’s not a bad thing,” he says. “Less demand is allowing companies to right-size their operation, and doing so is keeping their margins healthy.”
FedEx Freight, the LTL arm of FedEx Corp. and the nation’s largest LTL carrier, furloughed an undetermined number of drivers in December. It was all about matching power—both driver and equipment—as demand slackened during the normally slow first two months of the year.
FedEx Freight isn’t alone. Saia, the nation’s 9th-largest LTL, could delay plans to open 10 to 15 new terminals if the economy worsens, president and CEO Fritz Holzgrefe said during the carrier’s earnings call late last year. The LTL would pull back on its expansion plan in the face of shifting market demands or a “significant economic contraction,” Holzgrefe said.
Some LTLs are going in a different direction. Late last year, A. Duie Pyle, the nation’s 17th-largest LTL carrier, debuted service across West Virginia after expanding operations into Virginia earlier. “We’re thrilled to expand our direct service coverage and industry-leading expertise into West Virginia,” said John Luciani, COO of Pyle’s LTL Solutions in a recent statement. “Adding West Virginia to our network allows us to build stronger relationships with our customers and positions us to continue offering exceptional service to the entire Northeast.”
Similarly, market leader Old Dominion Freight Line, the 2nd-largest and most profitable LTL carrier, recently stated that it plans to continue its multi-year network expansion despite lower freight volumes late last year.
Adjusting to changes in freight volumes and rates is an ongoing, three-dimensional Rubik’s cube puzzle to LTL carriers and their customers. Because it’s so unpredictable, it creates headaches for everyone.
“Many shippers do understand the value and competitive advantage that’s created by partnering with carriers who offer reliable on-time service and low incidents of exceptions and claims,” says Averitt’s Williams, “as well as the competitive advantage that can be created by working with a carrier that acts as an extension of their business when delivering the shipper’s products to their customers.”
In previous economic cycles, Williams adds that “there always seemed to be a carrier or two that would react to slowdowns by cutting rates to unsustainable levels in an effort to replace declining shipments due to softness in the economy. Most of those carriers are no longer in business today.”
Yellow Transportation, which controls about 10% of the LTL market, is the biggest wild card.
It’s closing about 10% of its 290 terminals as part of its long-term strategy to implement a network efficiency plan. As of now, plans to create a “super-regional” LTL network—dubbed “One Yellow” that formerly consisted of long-haul Yellow Freight and regional carriers Holland, New Penn and Reddaway—are in a holding pattern.
Their combination of long-haul and regional freight networks in the West has already been completed. That optimized more than 4,600 ZIP code pairs affecting 89 terminals, Yellow said. Similar combinations in the Central States and Eastern coverage areas were expected to be completed by early this year, but have been delayed.
The combination was to have included Holland, its Central States regional carrier. That change of operation has been put on hold, the company told the Teamsters union. The move is now planned for “spring or early summer,” according to Yellow’s notice to the union.
Perhaps more than some competitors, Yellow has been affected by excess inventory in its retail customers’ supply chains. Usually, retail makes up around half of a typical LTL carrier’s load mix. More than half of Yellow’s 10 largest customers are in retail, says Yellow officials.
“Throughout 2022, we have consistently kept our focus on improving the quality and profitability of the freight moving through our network, and that continues to be our plan as we execute the final steps in the transformation to One Yellow,” says Yellow CEO Darren Hawkins.
According to Hawkins, the carrier went into the transition with a straightforward set of goals that would define success. “First, we stood the terminals up to begin operating as a super-regional network.” Still, Yellow is transforming itself while shipments per day are dropping. Analysts are citing bloated inventory levels in the retail sector as the cause.
Predicting recessions is never easy. The economic crystal ball for 2023 is particularly cloudy because there are so many unpredictable factors—lingering economic effects of the pandemic; shortages of heavy truck equipment that have led to pent-up demand; the possibility of overcapacity; the lingering truck driver shortage as well as other factors.
But while carrier officials were predicting a soft market at the start of this year, rate increases are necessary to offset carriers’ costs for nearly all of their vital services—equipment, labor, fuel, insurance and real estate.
“I expect that there will be some pressure on rates in the first half of 2023 because there generally is some available capacity across the LTL networks,” says Averitt’s Williams. “The challenge that exists on the carrier side is the stark reality that our operating costs have continued to increase in every aspect of our business at quite an alarming rate.”
Hammel of Pitt Ohio says that its same-store sales were down about 8% year over year in 2022. The slowdown was mostly in industrial freight, as Pitt Ohio does little retail business. “We remain optimistic, but we’re watching closely what actually happens so we can make adjustments,” he says.
Allan Miner, president of Cleveland-based CT Logistics, a major freight bill payment company, says that the economic slowdown “all depends on which industry they’re servicing.” For instance, autos were soft during 2022, but consumer goods increased. “It’s probably an overall wash for shipments because automotive and other verticals are down, but other verticals may have increased.”
In the meantime, Old Dominion Freight Line (ODFL) announced a 4.9% general rate increase (GRI), which was about 2% less than parcel giants UPS and FedEx took in their small package arena. DHL went even higher in the small package market, raising rates for U.S. account holders by 7.9%, effect Jan. 1.
“We must continue enhancing our high-quality service network and systems to meet and exceed our customers’ expectations and deliver on our promises,” says Todd Polen, vice president of pricing services at ODFL. “At Old Dominion, we’re committed to delivering our premium value proposition of on-time, claims-free service at a fair price.”
Nevertheless, most LTL carriers stood firm on their general rate increases that took effect in January. Most were in the mid-single digits, but the actual increases varied widely by customer, lanes and other freight characteristics. Some, like Pitt Ohio, avoided GRIs in favor of a customer-by-customer evaluation of how a particular shipper’s freight fits its network.
“They’re standing pat in their lanes because shippers are looking for next- or second-day delivery as far as 800 miles—and that’s what LTL carriers do best,” says Miner. “They can do it, but you’re going to pay for it. Shippers who want service will pay a fair price. But because of inflation, cost will be more than it was in the past.”
As for 2023, Miner says that he’s “cautiously optimistic” for the industry. But he adds that the real geopolitical factors affecting U.S. economy—trade relations, politics, supply chains,
China—are out of shippers’ control.
Still, LTLs should fare better than the rest of the trucking industry because of barriers to entry in the sector. It’s virtually impossible to build the necessary hub-and-spoke network of hundreds of terminals—a simple fact that has limited any new significant entrants in the marketplace since FedEx Freight began in the mid-1990s.
“The thing I focus on is capacity, and that has not come from any new companies,” analyst Jindel says. “So, you’re able to hold on to the rates you have.”
Jindel adds that shippers can help themselves on rates by eliminating bad shipping habits such as crowded docks, inefficient shipping patterns and high accessorials. “If you have high shipping habits, you can have lower rates,” he says.