US LTL industry looks healthy with higher contract rates

LESS-THAN-TRUCKLOAD (LTL) carriers in the US are in excellent financial health, a major turnaround from a decade ago when the industry was in shambles

21 August 2019 - 19:00

LESS-THAN-TRUCKLOAD (LTL) carriers in the US are in excellent financial health, a major turnaround from a decade ago when the industry was in shambles. Nowadays, the carriers have been able to consistently hike contract rates, and in most cases, the increases have stuck.

The overall LTL top-line picture reflects the sector's strong position. Revenues in 2018, which included fuel surcharges, exceeded US$42.6 billion, representing a 10.4 per cent increase compared with 2017 levels, according to data from consultancy ShipMatrix. In the early part of the decade, revenues were in the low $30 billion range, reported New York's FreightWaves.

The change in fortunes is the result of LTL carriers wielding their natural advantage - what Cowen & Co analyst Jason Seidl labelled an 'oligopoly'. Defined as 'a state of limited competition in which a market is shared by a small number of producers or sellers', it's an appropriate term to describe today's LTL sector.

In 2018, the top 10 carriers generated $31 billion of revenue, equal to 73 per cent of the total market, according to ShipMatrix data.

In addition, all carrier executives described the pricing environment as rational, with the exception of situations where new bidders on a lane may propose below-market pricing to establish a foothold.

Saia, Inc posted a 6.7 per cent increase in contract renewal rates for the quarter. XPO Logistics, Inc toted up a 5.2 per cent gain coming off a 3.7 per cent increase in the first quarter. Yet XPO's full-year revenue will be flat to slightly down year on year, and CEO Brad Jacobs told analysts that already-soft tonnage may decline further if industrial production declines.

Old Dominion Freight Line reported renewal rate increases that its executives said were comfortably above its cost inflation levels. Yet CEO Greg Gantt was not optimistic about a change in the macro outlook for the rest of the year, though he said August's tonnage data is likely to be decent.

Building a sustainable LTL network, with its complex web of terminals and touch points, is a high-risk and expensive endeavour. In the northeast and mid-Atlantic, the challenges are compounded by high labour costs due to the presence of unions.

As a result, the barriers to entry are high. In addition, the enormous pool of LTL supply that existed in the 1960s and 1970s began thinning out after the trucking industry was deregulated in 1980 and carriers lost their tariff protection. Supply has been shrinking since then.

The spate of bankruptcies, closures and consolidations, combined with fewer entrants, created the capacity constraints that spawned what Ward Transport and Logistics vice president Bill Ward called 'one of the best rate markets in a generation'.

At the same time, the universe of big players has increased significantly in the post-deregulation world, said LTL pricing analyst Don Newell. Before deregulation, there were hundreds of mid-sized carriers, but Mr Newell noted that the top tier at the time consisted of Yellow Freight Corp (which eventually became YRC), Roadway Express, Inc and Consolidated Freightways, Inc.

Consolidated went out of business in 2002, though its regional LTL operation remained until 2015 when XPO acquired it. Roadway was acquired by Yellow in 2003.

It would be hard to find an LTL C-suiter to admit publicly that the pace of rate hikes will level off. Yet, Mr Seidl of Cowen said that all bets are off if the broader economy goes sharply south. However, rates are so high right now that it would take a few quarters before price deflation would make carrier executives uncomfortable, he added.


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