LTL Carriers Show Declines in Pricing as Shippers See Benefit of Overcapacity

This story appears in the Aug. 24 print edition of Transport Topics.

All nine publicly traded less-than-truckload carriers reported classic signs of overcapacity — tonnage and pricing falling simultaneously — during the second quarter of this year, leaving the industry unable to capitalize on the 47% decline in diesel prices from the corresponding time in 2008.

Meanwhile, some shippers ac-knowledged that they are enjoying declines in real freight rates beyond the drop in fuel surcharges.

“The recessionary economy and lower freight levels have resulted in increased pressure on industry pricing during the second quarter,” said Robert Davidson, chief executive officer of ABF Freight System and its parent company, Arkansas Best Corp.

“Second-quarter margins deteriorated, compared to the prior year’s quarter, reflecting tonnage and yield declines,” said Rick O’Dell, CEO of Saia Inc. “This is due to the weak shipping environment and lower yields impacted by increasingly competitive pricing pressure,” he said.

LTL consultant Satish Jindel, who is based in Pittsburgh, estimated that real pricing, measured by revenue per hundredweight before fuel surcharge, declined by 3.3% for the public carriers from the first quarter to the second. He said the situation was exacerbated by growing LTL capacity.

“Capacity is being added, even when the economy is down. It’s absolutely awful. Companies are expanding capacity by adding terminals or expanding the number of doors in terminals,” Jindel said.

Con-way said its total second-quarter revenue per hundredweight declined by 17.4% from the similar time in 2008 and by 6.7% without fuel surcharges.

Old Dominion is the only other LTL carrier that reports yield both ways, and that company said its total decline was 11.6% — 0.1% before the fuel surcharge.

“There’s no question there’s overcapacity in the LTL industry,” said Steve Ahern, manager of LTL and expedited transportation for chemical and plastics manufacturer BASF Corp. He said he does not expect a substantial change in the LTL volumes his company will ship during the current quarter.

“We seem to have hit the bottom of our downward spiral. We’re down 35% in LTL volume in ’09 from ’08. We’re seeing real declines in LTL rates,” Ahern said.

Industrial maintenance products manufacturer NCH Corp. is shipping a little more with LTL, said Matt Ehlinger, the company’s director of corporate transportation, but he did not forecast any rapid growth in less-than-truckload volumes.

“We’ll continue to see flat shipping volumes or a slight increase,” he said of the company’s near-term plans. Ehlinger agreed that real freight rates before fuel surcharges are in decline, and said he has heard of shippers rebidding their contracts because of that.

“More of that is going on now than we’ve seen traditionally. Some shippers are shortening their cycles,” Ehlinger said of the pricing-evaluation process.

In comparing the 2008 and 2009 second quarters, the average U.S. price of retail diesel fuel fell 47% to $2.341 a gallon from $4.417.

A review of second-quarter reports by public LTL carriers showed that Con-way Freight and Old Dominion Freight Line did best, posting operating ratios below 95 for the quarter; three carriers roughly broke even before interest and income taxes, while four had operating ratios over 107. Operating ratio measures expenses as a percentage of revenue.

Con-way had the best second-quarter operating ratio, 92.5, followed closely by Old Dominion with 93.2. In the break-even range were Vitran at 99.1, Saia at 100.2 and UPS Freight. UPS Inc. does not report Freight’s OR, but during the UPS earnings call company executives described Freight as “back to breaking even” (click here for previous story).

ABF had a quarterly operating ratio of 107.8, FedEx Freight posted an OR of 111.2 because of a noncash accounting adjustment, and YRC Worldwide’s two divisions had a 114.3 for regional work and 127.4 on the longhaul side.

Across the sector, revenue per hundredweight before fuel surcharge declined between 7% and 17.4%, compared with the same time in 2008. Vitran Express had the least decline and Con-way Freight the most. The average was a 12.4% decline.

All nine of the public carriers also reported year-over-year declines in tonnage and the number of shipments. Con-way, Saia and UPS Freight managed to keep their losses to less than 10%. Vitran was about 10% below year-ago levels, and all others had volume losses in excess of that percentage.

YRC Regional’s volume declines exceeded 20% relative to last year’s quarter and the longhaul division saw tonnage and shipments decline by more than 30%.

In a note to clients, stock analyst Edward Wolfe stated he thinks “industrial volumes are likely to lead consumer volumes in the eventual recovery,” but the rebound will probably occur gradually, barring an extraordinary event.

But Jindel said the LTL business is going through a substantial change, partly because of weak industrial production. “There’s not that much industrial production left in the United States. Most of it has gone overseas,” Jindel said. “The good old days don’t always come back.

At the beginning of this decade, longhaul LTL was considered a mature, low-growth business, while regional work was expanding dramatically, Jindel said. The regional side of the business has also reached the stage of maturity.

“The LTL industry is not a thing of the past, but it’s mature with growth that’s more flat. Carriers will have to gain market share from each other because the pie is not increasing,” he said.