When the Great Recession began, UPS Freight President Jack Holmes sought advice from J. Harwood Cochrane, who founded the company then called Overnite Transportation in the middle of the Great Depression.
Cochrane told Holmes to start cutting costs while he could control the process and before he was forced to make even deeper cuts that could imperil customer service or score a deeper mark on the bottom line.
“He explained to me early on just how cyclical the LTL business is,” Holmes said, and how important it is to avoid being crushed when a cycle hits bottom.
Last year, less-than-truckload carriers scraped the bottom of the roughest economic downturn since trucking deregulation and a deep recession in the early 1980s shut down dozens of companies. Unlike previous cycles, there were no major carrier closures, but the top 25 LTL carriers lost 23.8 percent of their revenue last year, reporting about $25.2 billion in sales, according to SJ Consulting Group.
The nation’s largest LTL operator, YRC Worldwide, lost an astounding 44.3 percent of its revenue at its biggest unit, nationwide carrier YRC, over three years, and 32.4 percent of its regional revenue. Its sales fell from nearly $10 billion in 2006 to $5.3 billion in 2009. Since 2006, the company has lost more than $2.2 billion.
Despite massive aid from the Teamsters union and its banks, YRC Worldwide is struggling to avoid bankruptcy. Its fate may be decided this week when the results of a Teamsters vote on wage and pension concessions become clear.
If the recession was bad for the carriers, it was no better for their customers. Their transportation budgets and departments were shredded as sales plummeted, triggering or accelerating supply chain changes that will have long-term implications for LTL carriers and shippers as the new decade unfolds.
Pressured by shippers, truckload carriers, package integrators and even intermodal rail, LTL companies are trying to become something more than less-than-truckload. At the same time, they’re hoping to win back some freight they’ve lost — some say surrendered — by failing to match the efficiencies of other modes.
Since 1983, the LTL industry has had a compound annual growth rate of only 2.2 percent, according to SJ Consulting, compared with a 7.1 percent growth rate for the parcel market. To break free of a grinding cyclical pattern, LTL carriers — and in some cases customers — will have to rethink some practices and take a more disciplined approach to pricing and profit. Regaining its footing in a more crowded supply chain means thinking beyond the pallets that fill truck trailers and the hub-and-spoke network that has hindered attempts to scale back costs.
“We are multimodal now,” said Wayne Spain, executive vice president and chief operating officer at Averitt Express.
Cookeville, Tenn.-based Averitt, once purely a regional LTL carrier, now offers shippers everything from LTL service to intermodal rail on a regional, national and international stage. “A lot of the freight we’re looking for is coming into the United States on a boat, and we’ve got to capture it before it gets here,” Spain said. “What’s really changed for us is global reach.”
|That means paying attention to the recession-fed drive by shippers to be more nimble about transportation choices by mixing in transloading, reconfiguring distribution centers and managing supply chains that may have less inventory yet operate with greater complexity.
“The shipper is becoming less mode-specific,” said Danny Slaton, senior vice president of business development at SMC3, a trucking association in Atlanta that provides educational services and LTL pricing software for carriers and shippers.
“The shipper is not saying this is just an LTL or small package or truckload or intermodal shipment,” Slaton said. “He’s looking at various types of transportation and saying, what’s the price of moving this shipment from point A to point B, and what are the delivery requirements?”
And that is the challenge facing LTL carriers even as the country sputters out of the recession.
That’s because the defining capacity for those carriers isn’t really the familiar trucks on the streets and highways, but the terminals on the outskirts of cities that are tied together in networks that shuttle volume across the country in two to five days. But now, that freight can be transloaded and shipped in many ways. It’s moving in international circles, not just regional or domestic routes.
That was true before the recession, as witnessed in YRC Worldwide’s rapid expansion in the U.S. and China through acquisition and Con-way’s purchase of Contract Freighters, now Con-way Truckload. But the global economic crisis sped the trend, pushing it to a higher level and down to smaller carriers.
Rising equipment, fuel and driver costs, government policies favoring multimodal transportation, and customers’ environmental concerns will add to the pressure.
Averitt, which had about $760 million in revenue last year, according to SJ Consulting, is far from the only LTL company expanding its portfolio to embrace different types of transportation. Pittsburgh-based Pitt Ohio Express this year launched a regional package delivery business in its mid-Atlantic territory. Estes Express Lines, based in Richmond, Va., offers volume truckload and brokerage services as well as global air freight and ocean services.
Thomasville, N.C.-based Old Dominion Freight Lines last month expanded a year-old less-than-containerload service linking vendors in China with importers in the U.S.
LTL’s unfolding transformation is matched by structural changes in the truckload segment, where long-haul trucking is giving way to regional truckload and intermodal rail, led by Schneider National and J.B. Hunt Transport Services. Intermodal trucking now accounts for 55 percent of J.B. Hunt’s revenue, and long-haul king Schneider National is shifting capacity to its regional division.
Above all else, changes in shippers’ supply chains are driving this evolution.
“Goods come in all shapes and sizes, in small and in big numbers, shrink-wrapped and loose, international and domestic, and what customers want me to do is find the best way to move them and to show them as they’re moving,” Holmes said. “They want the tools they need to manage their business. It’s as much about helping shippers figure out how to move the goods as it is about moving the goods.
“If you’re going to be there, you have to do more for the customer.”
The definition of LTL hasn’t changed, Holmes said. “True LTL is still goods the shipper wants moved on a pallet, either multiple goods shrink-wrapped or heavier freight. The issue is, when do those goods mode shift?”
The answer is, much more often than they used to.
“How much LTL do you think Wal-Mart is moving in its trucks right now?” asked Hank Mullen, an LTL pricing consultant and president of The Visibility Group. “That LTL freight hasn’t just gone to the integrators and truckload carriers, but to private fleets as well.”
Changing inventory strategies, the repositioning of distribution centers and the overseas origin of many goods are key factors in that shift. So is pricing rooted in a complex product classification system, according to Mullen.
Despite heavy inventory restocking this year, inventory-to-sales ratios are low and supply chains lean. Shippers are using both just-in-time and just-in-case replenishment strategies for varying products and markets. Slow-steaming container ships and faster intermodal trains complicate the picture.
In many cases, however, the shippers and goods LTL carriers depended on for decades have disappeared or shifted business overseas. The decline of the traditional LTL industry is tied to the long-term decline of U.S. manufacturing, once the origin of much of palletized LTL freight.
In its early days, Averitt primarily served the LTL shipping needs of apparel manufacturers in the South. “At one time, we did a tremendous amount of business with women’s, men’s and children’s clothing, all from shirt factories and knitting mills in Tennessee and in the region,” Spain said. “That business is gone; none of it exists today. Those shipments are now coming to the U.S. as imports from Mexico, South America or Asia, and we had to figure out how to capture them.”
For Averitt, that meant extending its LTL network to include “de-containerization” facilities at U.S. ports in Southern California and along the U.S. East and Gulf coasts. “We actively solicit business coming in by water,” Spain said. “Our facility in California captures containers coming into the country and transfers goods to our network, so the shipping lines don’t have a problem getting containers back.”
Large U.S. LTL carriers increasingly are capturing those containerized goods closer to their overseas origin point.
UPS and ODFL are expanding expedited LCL services designed to compete with international air freight. Last month, ODFL added seven Chinese ports to its LCL service linking Asia with the U.S. West Coast.
Post-recession, LTL carriers will look to expand services through partnerships and the deployment of new technology, rather than acquisition alone. YRC Worldwide, for example, recently sold its in-house logistics subsidiary and is looking to improve and extend relationships with third-party logistics companies.
Like railroads and truckload carriers, 3PLs are both partners and competitors for LTL truckers. “They have changed the landscape, set the bar really high for technology, and they control a ton of business,” Spain said.
Contact William B. Cassidy at email@example.com.