LTL Sector Outlook Brightens as Rate Hikes Stick, Experts Say

This story appears in the Oct. 11 print edition of Transport Topics.

Following recent rate increase announcements by three major less-than-truckload carriers, industry experts said the LTL sector has turned the corner toward profitability, with shipment volumes, tonnage and rates all improving, but not yet soaring.

Second-quarter LTL results were mixed (click here for previous story), but managers and analysts said fleets are more disciplined, and rate increases are sticking, even if there is still too much capacity relative to demand. Fleet managers also said that, while business is good enough to keep operating, it is not yet at a level that merits large-scale hiring and equipment buying.

UPS Freight said Oct. 1 it would raise its general rates by 5.9%, effective Oct. 18. Earlier that week, FedEx Freight said it would raise LTL general rates 6.9% on Nov. 1, and ABF Freight System raised its general tariff 5.9%, effective Oct. 1.

“We’re aggressively looking for increases because we have to correct these [pricing] numbers,” said Mike Moran Jr., vice president of Moran Transportation & Distribution, Elk Grove Village, Ill. “We’ve gone to our 20 largest customers and gotten increases from all of them and there’s been little backlash.”

Moran said he has not seen a surge in business, but that the past two or three months have shown steady improvement, allowing him to boost pricing above the unsustainably low rates of a year ago. Moran, chairman of the Distribution & LTL Carriers Association, said members have reported similar experiences.

“The pendulum has begun to swing a bit toward carriers,” said UPS Freight spokesman Ira Rosenfeld. “The economy’s improving and we’re seeing all carriers trying to recoup some of what shippers took advantage of over the last two years.”

“I’m paying more now,” said the logistics director of a major LTL shipper who is also active in shipper groups. “Some carriers have said, ‘I need X% more, and here’s why.’ ”

Speaking on the condition of anonymity because he works for a large public company, the shipper said there is plenty of LTL capacity available, but the market has tightened and carriers are backing away from the desperation rates of recent years.

“I can’t find fault with that. If a carrier goes out of business it doesn’t do anyone any good,” the shipper said, adding that at business conferences he has heard stories of 15% to 20% increases, depending upon the traffic lane and shipment characteristics.

General rate increases, such as those announced by the three large carriers, actually do not affect many shippers. Frequent customers usually have LTL contracts, but the rate increases often serve as a benchmark of carrier intentions and some contracts are expressed as a discount off the general rate.

Steve O’Kane, president of A. Duie Pyle Cos., said he has seen a firming of rates, but there is still a great deal of competition.

“We’re trying to improve yields, and I think everyone in the industry would agree that’s sorely needed,” he said.

Pitt Ohio Express does not have a general rate tariff, said Chief Marketing Officer Geoffrey Muessig, but it has been improving yields. In general, he said, Pitt Ohio has enjoyed slowly improving volume and tonnage since April and now it is about 5% to 6% better than a year ago, with growth from new customers, existing customers and new services, such as heated LTL into New England and Canada.

He also said the company’s longhaul business, which is executed through the Reliance Network with six other regional LTL carriers, is five times larger than it was two years ago.

“It’s more possible to make rate adjustments in 2010,” compared with last year, Muessig said, adding that “we’re in much better shape than a year ago, but we still have quite a way to go.”

Muessig said Pitt Ohio does not yet have enough business at a sufficient level of pricing that it can contemplate significant expansion of its rolling stock or roster of drivers.

Moran said he would like to see rate increases of at least 15% to 20% so that LTL carriers can buy new and safer equipment, give drivers raises and get a better rate of return.

LTL and parcel industry consultant Satish Jindel said recent earnings statements show the less-than-truckload sector as being at a disadvantage.

“FedEx and UPS in the parcel sector have operating returns of more than 10%, the big truckload carriers are getting about 10% and during the second quarter the average LTL carrier made 3.3%. It’s dismal,” said Jindel. The problem is particularly acute, he said, because LTL carriers have larger asset bases than do truckload companies, which do not have to maintain extensive terminal networks.

Jindel said the LTL sector is now benefitting from a combination of incrementally better volumes and more steadfast pricing discipline. A year ago, he said, carriers were cutting prices to buy volume.