2015 LTL Roundtable: Finding level ground

In the less-than-truckload (LTL) market today, few things are a certainty.

The reasons for this have become readily apparent. The bulk of the market share, for example, is very top heavy, with only a few major players truly controlling market scale and volumes. Another reason is the proliferation of things like the increased usage of transportation management systems (TMS), as well as the number of third-party logistics providers (3PLs) and brokers that are now helping shippers secure the best LTL rates possible—but putting distance between that traditional shipper/carrier relationship.

And given the short span of LTL hauls relative truckload (TL) pricing is paramount. That’s especially evident when considering how much attention dimensional pricing has recently received in conjunction with rising speculation that the sector’s traditional classification-based pricing system has run it course.

However, even with these market headwinds, LTL volumes are seeing slow and steady growth, while prices are witnessing decent gains—with most contract renewals seeing a jump of around 3 percent.

In order to gain first-hand insight into the inner workings of the LTL market, Logistics Management has enlisted the services of three top industry analysts.

Joining us on the panel are David Ross, managing director at investment banking firm Stifel; Thom Albrecht, managing director of transportation equity markets at BB&T Capital Markets; and Peter Moore, program faculty at the Center for Executive Education at the University of Tennessee, adjunct professor at the University of South Carolina, and author of Logistics Management’s monthly “Moore on Pricing” column.

Logistics Management (LM): What is the state of the LTL market and what are the biggest LTL-related challenges facing shippers?

Thom Albrecht: From what we see, the LTL market has been in a bit of a soft patch, starting in March and continuing since. Three primary reasons account for this. First, the overflow freight that LTL carriers got in 2014, as a result of tight TL capacity, has gone back to TL carriers. Second, industrial production has dramatically slowed, with the first quarter declining 0.7 percent from the 2014 full-year growth rate of 4.1 percent. April was down almost 1 percent.

Third, the strong U.S. dollar has hurt the demand for U.S. exports. Freight patterns feel fairly normal on a seasonal basis, although when compared with an epic 2014, comparisons will be challenging all year. From 1980 through 2010, the LTL industry shrank in comparison to the TL industry, but in each year from 2011 to 2014, LTL shipments have grown faster than dry van TL shipments. We believe e-commerce is one of the reasons for this and is a positive long-term development for LTL. 

Peter Moore: Thom is right on. At the same time, the LTL market is consolidating with less than a dozen carriers handling the majority of regional and national business. Smaller operators are being squeezed with higher costs and constant pressure from buyers on price.

We’re also starting to see shippers shift to more standardized methods of bidding at a time when systems are finally allowing both shippers and carriers to break classification-based rates into more realistic price models that reflecting cost and service needs. Transportation-savvy shippers need to take back ownership of transport bidding and begin collaborative methods.

LM: Most people acknowledge that the regulatory crunch on trucking affects TL more than LTL. That said, how and in what cases do regulations affect LTL shippers?

David Ross: Regulations will likely affect LTL shippers in the form of higher rates, as TL drivers will continue to cost more. In turn, we’re going to see TL rates rise significantly while LTL rates will bump up—but it won’t be as severe of a bump.
Albrecht: Operationally, the LTL industry tends to feel regulatory changes less than TL. However, financially, the impact can be draconian to LTL carriers. The for-hire TL market is roughly $300 billion and a 1 percent change in capacity, or $3 billion, would be about an 8 percent impact to LTL capacity. Nothing in the proposed pipeline of regulations will make it easier for trucking capacity, regardless of niche, to be brought on.

Moore: Regulations will most certainly have an impact on LTL in the areas of hours-of service, limiting drive time. But don’t forget, traditional safety regulations for safe driving, hazardous materials, and occupational safety continue to challenge drivers and carrier management. Training and insurance costs will continue to climb as regulatory pressures grow across both LTL and TL.

LM: How are overall market conditions affecting capacity and rates in the LTL space?

Ross: Volumes are a little better than a year ago right now. So it’s not too tight, but it’s not loose either, as carriers are still getting base rate increases on new contracts in the 3.5-percent to 4-percent range. We believe that the lower fuel surcharges are making these increases easier to take for shippers, as their total LTL bill is likely down year over year, even after the rate increase.

Albrecht: Pricing has remained quite healthy despite the soft patch. Most carriers, public and private, are seeing contract renewals in the 3-percent to 6-percent region, with some seeing even greater yield increases after mix adjustments. Pricing may decelerate later this year, partly due to bumping up against tougher pricing comps in the second half of last year, but we do not envision pricing falling below carriers’ cost pressures. 

LM: What are some practical steps shippers can take to better collaborate with their LTL carriers?
Ross: Share data and respect the driver’s time. The more data an LTL carrier has about a shipper’s freight, the better price the shipper can get. Otherwise, the shipper may initially get a low price, but the carrier also may come back for rate increases if they see the freight profile is significantly different than what they were told. 

Also, in pricing freight with an uncertain profile, there should be some extra margin built in for potential deviations from the initial assumption; so, it’s unlikely that the shipper gets the best rate without providing significant data, in our view. In addition, the quicker a shipper can get a driver in and out, the less the carrier needs to charge, as its driver costs would be lower.

Moore: Instead of trying to commoditize LTL services through arms-length bidding, shippers need to change the paradigm. LTL operations have dozens of cost variables.  Reducing these to discounted rate tables or simple dimensional ranges is a strategic mistake. Technology can enable the collaboration of shippers and carriers on a detailed operational basis, creating win-win contracts that allow for tweaking rates for areas where the shipper and carrier networks have opportunities for optimization.

Albrecht: Shippers should publish competitive metrics; provide access to upper management at least once a year; go to your incumbents before you launch a bid in order to be open about what you’re thinking about; have fair payment terms; honor bid commitments; and give sufficient time to implement lanes after bids are awarded. I’m sure the list could go on—there are plenty of things to do to be a ‘shipper of choice.’

LM: Dimensional pricing continues to gain traction in the LTL market. If dimensional pricing (dim) becomes commonplace, how should shippers approach this major shift in how LTL freight is priced?

Albrecht: Currently, I don’t envision a wholesale shift to dimensional pricing in LTL, although dimensional technology will grow in acceptance and could be used to affect 30 percent to 50 percent of LTL shipments within the next five years. But at this juncture, I don’t envision the National Motor Freight Classification [NMFC] system being tossed aside.

Ross: Well, we see some carriers that are already pricing off of dim costs, but backing into ‘the right price’ or appropriate discount in the old NMFC system. Most shippers pay dim for other modes anyway, so we don’t see it being that big of a switch.

Moore: I agree with David. Dimensional pricing is the first step of the revolution in LTL and parcel pricing models. This first step favors carriers as it focuses attention on capacity utilization while averaging other factors such as risk, time of shipment, service levels, and equipment choices. However, if the NMFC is to be replaced, shippers need to insist that all the cost variables be on the table.

It’s important to note that many of these variable costs are a direct result of poor shipper management practices and will need to be on the table as well. Thus, dimensional freight models are a first step in collaborative pricing—but only a first step.

LM: What is your take on the increasing role 3PLs and brokerages are playing in the LTL sector?
Albrecht: The growth of 3PLs and brokers into LTL will not be reversed. Done correctly, especially not using blanket pricing, these third parties represent a win-win for small shippers as well as for the carriers that don’t have the resources to find infrequent shippers.

Moore: The commoditization of LTL services that was the rage among procurement professionals until recently is being replaced by collaboration. At the same time, the 3PLs and broker services are growing at double digits, as shippers find that they have neither the talent nor the appetite for sophisticated freight planning and procurement. 

At the end of the day, 3PLs can play a key role in consolidating freight, raising density in networks, and providing valued-added services.

Both 3PLs and brokers are often very helpful to the small, unsophisticated shippers and bear the cost of sales and administration on small accounts. However, some brokers are being challenged, as smart shippers and their carriers are reviewing the broker’s traditional high margins in LTL arbitrage. Some are finding that, together, their margins might be better spent in direct collaboration and network sharing.

LM: What will the LTL market look like five years from now, and what do shippers need to do now in order to be prepared?

Ross: It will likely be hauling more freight with fewer carriers, and shippers need to prepare to work closely with those carriers to mitigate rate increases.

Moore: The market will continue consolidation, and parcel carriers, including USPS, will expand and practice co-opetition to cover last mile and return services. Shippers will see the replacement of today’s rate tables and match-pay systems with airline type capacity booking of LTL with a selection of variables in risk, speed, service level, and mode. Rates will be housed on the carriers’ computers as a single source, minimizing audits and enabling universal automatic payment. 

Albrecht: David and Peter are both right about the market probably
getting smaller. I would expect three to five carriers in the top 25 to be sold or merged into other LTL carriers. I’m not sure about any further consolidation within the top 10 or 12 carriers.