UPS, ABF Raise Rates 6.9%, Heralding Industry Increases

UPS Freight and ABF Freight System, two of the nation’s largest less-than-truckload carriers, recently announced general rate increases of 6.9% each, a move analysts said heralds an industry push to higher rates.

UPS Freight spokesman Ira Rosenfeld said the LTL unit of UPS Inc. has spent $100 million on tractors and trailers over the past two years and generally has worked to upgrade its network. UPS Freight announced its in-crease July 1, to phase in Aug. 1.

“We’re prepared for growth, and the industry is tightening. It’s a soft economy, but it’s growing and we expect more growth in the second half of this year than in the first half, and more growth in 2012 than in 2011,” Rosenfeld said.

General rate increases do not directly affect contract shippers, the more important part of any LTL carrier’s customer base. ABF announced its GRI July 6; it takes effect July 25. “Rates will increase by about 6.9%, although the effect on specific lanes and shipments will vary,” the ABF statement said.

FedEx Freight, the largest North American LTL carrier, had showed its ability to raise prices in its quarter ended May 31.

However, other carriers and industry analysts said the sluggish economy still hems in the ability of some LTLs to insist upon higher rates to compensate them for rising driver wages and equipment costs.

Analyst David Ross told clients of Stifel, Nicolaus & Co. that the rates move “supports our positive LTL pricing thesis. We expect others to follow, and the question will be how disciplined the carriers can be in keeping a firm stance in rate negotiations and how disciplined they will be in adding capacity.”

Geography plays a role in what a company can do, said Glen Merkel, president of Davis Cartage Co., Corunna, Mich.

“Business has improved over the last few years. It’s picking up a little, even in Michigan, but it’s nowhere near the 2007 peak,” said Merkel, past chairman of the Distribution & LTL Carriers Association.

“We’ve been through the gates of hell, though, so we’re starting our recovery from a very low point,” Merkel said of other Great Lakes-area businesses that are tied at least somewhat to the automotive industry. He said the truckload side of his business is growing more quickly than the larger LTL side.

“Market conditions are mixed, by region and by carrier,” said Satish Jindel, the Pittsburgh-based industry consultant who works with LTL and parcel companies.

The Southeast, for instance, has a large roster of LTL competitors, while New England is more sparsely populated, Jindel said.

The FedEx Corp. earnings report of June 22 showed a significant earnings swing at the company’s LTL unit (6-27, p. 3). Freight lost money for six quarters in a row, through February of this year, but for the three months ended May 31, it broke the streak and made $42 million on quarterly revenue of $1.31 billion, posting an operating ratio of 96.8.

FedEx has emphasized the corporation’s yield management campaign and a willingness to cull poorly paying freight.

“FedEx Freight remains focused on both yield management and profitable growth,” said Freight spokeswoman Debra Phillips.

Logistics manager Steve Ahern of BASF Corp. said he sees rates rising in a fairly orderly fashion.

“I’ve been hearing of 2% to 4% increases. These are reasonable and moderate and we can live with that,” said Ahern, an executive committee member of Nasstrac, the National Shippers’ Strategic Transportation Council.

“A couple of years ago, it was one-sided in favor of shippers, and then last year, the carriers got more aggressive. Now it’s relatively balanced, though,” Ahern said.

Looking to the near future, Ahern said he does not see LTL carriers investing in capacity in terms of drivers and trucks. “They’re in a replacement mode only,” he said, adding that he would like to see some of the money go into needed improvements for service and reliability.

“If they provide the complete package, they’ll get better rates. Carriers talk about technology and reliability, but they need to back it up,” Ahern said.

A. Duie Pyle Inc., a Northeastern regional LTL, is enjoying strong volumes but also grappling with high costs, said company President Steve O’Kane.

“Our volumes are very, very good. We just set a record volume for June, and the company has been in business for 87 years. Our customers are busy,” O’Kane said.

Pyle is outsourcing some of its linehaul shipping to truckload carriers and paying overtime to cope with high demand. Therefore, he said, Pyle is charging more for its services.

“Rates are on the way up, but they’re not going up nearly as fast as they fell in 2009 and 2010,” O’Kane said. “We’re still not yet back up to where we were in 2008.”

Switching from revenue to expenditures, he said the driver shortage — long a prime concern of truckload carriers — has invaded the LTL sector. The company is running a driver school to train potential employees and paying more to attract experienced drivers, he said.

The drivers will be sitting in highway tractors that cost Pyle $105,000 each, up from $65,000 in 2006, O’Kane said.