US less-than-truckload (LTL) carriers, long overshadowed by their larger truckload counterparts, are stepping into the spotlight this year.
They’ve avoided the plunge in pricing that has gutted the truckload spot market and challenged larger truckload carriers. And even as freight volumes decline, major LTL carriers are planning to expand.
That came as a surprise to many US shippers and even some trucking companies, particularly those that expected a “freight recession” in late 2022 and early 2023 to lead to an economic recession. Many shippers believed LTL rates would drop sharply alongside truckload rates and freight volumes.
Instead, many LTL shippers and carriers now expect LTL rates to rise in the back half of 2023, with capacity tightening thanks to the demise of Yellow, the third-largest US LTL carrier by revenue and fifth-largest by shipment volume.
The US economy is also performing better than expected. US real GDP expanded 2.4% in the second quarter, according to the latest estimate from the US Bureau of Economic Analysis. Just a few months ago, analysts were predicting GDP growth of 1.8% for the quarter. S&P Global, parent company of the Journal of Commerce, predicts GDP will grow 2.2% in the third quarter.
LTL pricing is moving higher while truckload rates continue to bounce along the bottom, according to interviews with carriers, shippers and logistics providers.
The uptick is not yet reflected in the US Bureau of Labor Statistics’ Producer Price Index (PPI) for long-distance LTL, which dropped 1% from May to June. That compares with a 4.3% drop in the long-haul truckload PPI in the same period.
The LTL PPI, however, is expected to turn positive. Truckload capacity, which is supplied by tens of thousands of carriers, is much more abundant than space for LTL freight, supplied by fewer than 100 significant LTL operators.
As such, carriers are continuing to expand their businesses and revenues. The 40 largest US LTL operators saw their collective revenues rise 17% to $57.8 billion in 2022, but the number of LTL carriers is shrinking as mergers and acquisitions consolidate smaller carriers, according to the Journal of Commerce Top 40 US and Canadian LTL Carrier rankings, compiled by SJ Consulting Group.
That consolidation will accelerate with the closure of Yellow, which leaves FedEx Freight, Old Dominion Freight Line (ODFL) and XPO as the three largest US LTL companies by annual revenue. And for the first time, that group will not include a unionized carrier.
Data-driven decisions
Overall, LTL carriers are emerging from three years of pandemic-related disruption better positioned to expand in 2024 and to take advantage of opportunities presented by a US economy that is growing at a faster-than-expected pace.
That’s no accident; it’s the result of more-informed decision-making and investment in the LTL sector, according to Mike Regan, chief relationship officer at shipper software firm TranzAct Technologies.
“Carriers have much better data about their business than they ever had before, and they’ve done a much better job of managing their assets because they have that data,” Regan told the Journal of Commerce. “And the pricing model is now based on financial-driven parameters,” namely profitability, “rather than market-driven parameters.”
Ten years ago, ODFL was one of the few LTL carriers that consistently priced shipments based on actual costs to achieve sustainable profits, even when the economy softened. Now, many LTL trucking companies have adopted a similar, more disciplined approach to pricing that eschews the type of deep discounting that pushed some LTL players into the red in 2009.
“We continue to highlight the importance of business mix and freight selectivity and closely monitor our revenue per shipment,” Fritz Holzgrefe, president and CEO of Saia, told investment analysts in a second-quarter earnings call July 28.
Saia is focusing “on things that we can control” as the LTL sector adjusts to the “current, well-documented disruption” caused by Yellow’s unfolding collapse, he added.
That includes charging higher prices for former customers of Yellow shipments shifting over to Saia.
“If you have a low-price competitor exit the market … customers that have service expectations, naturally, I think would gravitate towards Saia,” Holzgrefe explained. “For us, it doubles down on our responsibility to make sure that we’re paid for that high level of service, capturing those charges. The customer gets a lot of value for that, so we’ve got to be very, very diligent.”
A profitable revival
Thirteen years ago, the Journal of Commerce asked what a trucking renaissance would look like, compared with the much-heralded railroad renaissance of the 2000s.
“I believe this industry, speaking for LTL and truckload carriers, too, can be profitable and can sustain profitability,” David Congdon, then-president and CEO of ODFL, said at the time. “It just takes disciplined management to do it.” That sounds much like today’s LTL industry.
The move to more disciplined management can be seen in LTL carriers’ operating ratios (ORs), which indicate profitability by showing operating expenses as a percentage of revenue. ODFL, for example, had an annual operating ratio of 90.7% in 2010, leaving a profit margin of 9.3%. In 2022, ODFL’s OR was 70.6%.
Saia reported an OR of 83.1% in 2022, compared with 98.7% in 2010; ABF Freight System had an OR of 87.3% last year — and paid workers a profit-sharing bonus — compared with an OR of 103.8% in 2010, when the company operated at a loss.
Carriers with an OR of 90% or higher are now the exception, rather than the rule. TForce Freight, formerly UPS Freight, expects to post 92% OR in 2023, but that’s still a significant improvement from 97.1% when it was acquired by TFI International in 2021.
For the most part, LTL carriers “know where they want to run their trucks and what it will cost them to run those trucks,” Regan said. “That’s not insignificant. Most shippers don’t want to face that reality.”
Regan’s comments may seem harsh, but they reflect longstanding shipper expectations of LTL carriers offering low rates to gain market share.
But the reality is that LTL carriers are not chasing market share as aggressively as they did in the 2000s, when Yellow acquired Roadway and USF Freightways. Yellow’s revenue in 2006 approached $10 billion.
During the Great Recession in 2008-09, LTL competitors discounted customer rates by as much as 90% from base tariffs. That type of pricing is now long gone, replaced by strategies that emphasize profitable growth, rather than growth for the sake of gaining market share.
“There are some people on the periphery who are more aggressive when it comes to pricing, but generally all the large carriers are disciplined,” Christopher Jamroz, executive chairman and CEO of long-haul LTL carrier Roadrunner, said in an interview. “The major LTL carriers have had to learn to be disciplined.”
That’s true for Roadrunner, which underwent a major restructuring of its network and services over the last few years. “Lack of discipline tends to wind up in tears,” Jamroz said.
Regan said shippers need to match that discipline when it comes to LTL procurement. That means developing a written LTL strategy that encompasses outbound and inbound transportation. “What you don’t know about the LTL space today is going to cost you money,” he said.
Adding supply chain value
Disciplined management is only one factor reshaping LTL as the sector enters its second century. It was in the 1920s that trucking companies converted US railroads’ less-than-carload business to LTL.
A hundred years later, shippers are helping to redefine LTL by demanding more from their carriers, said Satish Jindel, president of SJ Consulting Group.
“There’s a greater level of sophistication and increased complexity in supply chains due to the globalization of trade,” Jindel told the Journal of Commerce. “LTL carriers that move shipments from 10 or 20 different customers on a truck are playing a bigger role in bringing efficiency to supply chains.”
Tom Nightingale, CEO of AFS Logistics, said LTL was previously “viewed as something that you’d like to avoid, if possible. It’s relatively expensive compared to truckload and relatively slow compared to parcel, but it’s never gone away. It continues to fill a needed tweener gap in the market.”
That “tweener gap” has grown wider as e-commerce has accelerated, even before the COVID-19 pandemic.
“LTL used to be an exception,” said a retail logistics manager who asked not to be identified. The growth of rapid delivery demand that led to smaller, more frequent shipments has fed LTL expansion in recent years, pulling carriers that had primarily focused on industrial verticals deeper into retail supply chains.
“Today, we’re moving more small shipments, so we need to have that LTL option,” the logistics manager said. The option works best in the warehouse or distribution center to fulfillment center middle-mile lane.
“We have to evolve with shipper expectations,” added Lori Blaney, senior vice president of sales at Roadrunner. “Shippers are looking for reliable carriers that are easy to do business with. They want partners who are really good in the areas where they focus, not people who can do all things.”
Shippers also have a need for data that only grows more insatiable.
“Consumers have evolved, shippers have evolved, and LTL has had to evolve along with them,” Blaney said. “LTL was never seen as a tech-oriented industry, but now we’re using AI [artificial intelligence] to perfect our network. It’s a completely different world than we knew 15 to 20 years ago.”
Source: JOC
