Less-than-Truckload (LTL) rates poised for a rebound

During the depths of the recession, the trucking industry found itself in a situation where shippers clearly had the upper hand when it came to pricing. This was true in both the truckload (TL) and less-than-truckload (LTL) sectors.

But since that time the economy has shown some gradual signs of a recovery, which subsequently led to a rate recovery of sorts on the TL side. Now, it appears, the LTL sector is catching up.

That was made clear in a recent research note by Dahlman Rose analyst Jason Seidl. Writing about his firm’s recent transportation conference, Seidl explained that “the LTL industry, whose recovery has lagged that of other modes of transportation, is experiencing a gradual return of pricing power, resulting from dwindling capacity and improved demand.”

This much is evident, with LTL transportation services provider YRC Worldwide (YRCW)—whose national and regional units represent roughly 12 percent of total LTL industry market share—telling shippers in a letter dated September 2 that it planned to implement a 5.9 percent general rate increase, effective September 20. Reasons cited by the carrier for the rate hike were rising healthcare costs, the price of highway infrastructure improvements, and environmental sustainability requirements that are all rising rapidly.

Last week, FedEx said that it plans to combine its FedEx Freight and FedEx National LTL operations, effective January 30, 2011, in an effort to increase efficiencies and reduce operational costs. A major component of the company’s approach to this strategy is centered on fuel management initiatives, more disciplined contract pricing, and reviews of lower-performing accounts that await adjustments, according to FedEx.

FedEx Freight President Bill Logue said FedEx has been closely examining its LTL network and the LTL market in an effort to determine how to get back to double-digit margins, explaining that FedEx believes it has to “formula” to do that.

And anecdotal evidence suggests that many LTL carriers are seeing rates recover and are turning their attention to rate increases, following a challenging 2009 for the sector in which LTL carriers to a degree were highly focused on driving volume gains with pricing power largely diminished.

What’s more, LTL carriers are also seeing marked improvements in pricing, volume, and weight per shipment in recent months, according to analyst reports.

In terms of how much LTL rates may go up, most estimates peg the increase to fall in the four-to-six percent range. Myron P. “Mike” Shevell, chairman of the Shevell Group, which operates leading Northeast regional carrier New England Motor Freight, told LM earlier this year that there could actually be double-digit rate increases in the next two years. Without this type of increase, Shevell said that “there will be a substantial number of carriers closing their doors or being unable to invest in their business.”

An LTL executive told LM that there is no question that LTL rates are starting to firm up on the yield side and it has become a focus for carriers—with all having some sort of yield improvement process to raise rates in place

This mindset is in tune with comments from Stifel Nicolaus analyst David Ross on a conference call his firm recently hosted.

Ross explained that the LTL industry is still very much in an overcapacity situation, adding that if active capacity remains tight as it is now that should allow rate increases to continue if carriers remain disciplined on equipment growth, adding employees to the payroll, and assuming volumes don’t decline.

“The LTL industry is more consolidated than the TL industry and that should allow them to raise rates from the unprecedented low levels we saw in the first quarter,” said Ross. “There is still excess capacity in the industry—and that needs to be resolved—but it will be dealt with in a few years once rates bounce off the bottom.

Spending on tractors and trailers has been postponed by many carriers during the downturn as carriers try to conserve cash, which cannot last forever said Ross, adding that the drivers of the rate increases that carriers are now seeking is to be able to replace equipment. And without sufficient rate increases that does not make sense for the LTL industry to hire more workers, buy new equipment or replace old equipment, he said.

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