Less-than-truckload carriers spent the better part of last year stuck behind truckload operators, struggling to raise rates. They gained ground in the first quarter as excess capacity crumbled and freight demand grew, and they expect to do better as the year moves on.
The largest LTL carriers reported higher pricing and yields in the first quarter, and some of their confidence comes because the gains are partially tied to the carriers choosing freight more carefully to wring out more profit per pound. Higher pricing is only part of that strategy, and perhaps not the most important part.
Rising operating costs, including for fuel, can quickly erode any gain in profit unless those costs are identified, controlled and accounted for in pricing.
Trucking operators that blamed bad weather for poor first quarter results “need to learn their costs,” said Satish Jindel, president of SJ Consulting Group.
Barring a sharp retraction in the economy, shippers should brace for higher rates.
“Our contacts indicate that LTL carriers are much more disciplined in pricing ‘volume LTL freight’ (large truckload competitive shipments) as 2011 demand ramps up versus the prior year,” Longbow Research analyst J. Douglas Woodrich said in an April 26 note to investors. “Industrywide general rate increases in late 2010 are sticking and slowly working their way into higher contract rates.”
Some LTL operators are drafting in truckload’s wake. Shrinking truckload capacity and higher truckload rates are pushing some business to higher-priced but more service-intensive LTL, making it easier for LTL carriers to increase their pricing, some trucking executives say. They see opportunities for higher pricing, depending on the type of freight and the availability of drivers.
“One of the things that makes the opportunity for us to raise prices pretty significant in the recovery is the potential capacity shortage in the truckload market and the way railroads rationalize capacity with price,” Rick O’Dell, president and CEO of multiregional LTL carrier Saia, said in a recent interview. “It makes it easier for us to pass on price increases, even though I anticipate a slow recovery.”
Saia was one of several LTL carriers that reported substantial gains in yield, or revenue per hundredweight, in the first quarter. Johns Creek, Ga.-based Saia’s yield increased 8.2 percent from a year earlier, propelled by higher rates and fuel surcharges. Surcharge revenue surged 14.1 percent as diesel prices rose.
Old Dominion Freight Line, Roadrunner Transportation Systems, Con-way Freight, UPS Freight and Saia scored the strongest yield gains among public carriers. ABF and YRC Worldwide reported smaller gains in revenue per hundredweight.
But contract LTL rates grew only in the low to mid single-digit range in the first quarter, according to a variety of sources. At YRC Worldwide, “contractual increases are up north of 3 percent coming off a year when they were negative,” Chairman, President and CEO William D. Zollars said May 6.
LTL pricing is “firming” as the recovery and seasonal freight demand absorb capacity, Zollars said. “In all of our channels, we’re seeing pricing improve in a month-to-month basis.”
But YRC struggled to increase prices. “Yield is a very complicated subject,” Zollars told investment analysts. Both of the $4.3 billion company’s trucking units — nationwide carrier YRC and the regional group that includes Holland, Reddaway and New Penn — improved yield 1.8 percent, the smallest first quarter increase reported by a public LTL carrier. Zollars blamed that on changes in customer mix, greater reliance on larger national account customers that come with volume discounts, heavier shipments and “relatively” stable pricing year-over-year. “We did not cut our prices in 2010 as much as others, so the year-over-year increases are not the same,” Zollars said.
ODFL didn’t slash its rates in 2010 either, and managed to raise its revenue per hundredweight 11.1 percent.
YRC continued to chop away at its network during the first quarter, closing or selling more than 30 terminals, bringing its total facility count in the national network down to 296. Yet the country’s largest standalone LTL carrier still has 10 percent overcapacity, Zollars said.
Although he agrees it “makes no sense to grow volume at the expense of profitable freight,” Zollars said, “At a 90 percent capacity level, volume is still important to YRC.” Unfortunately, much of the company’s volume gain — a 6.3 percent daily shipment increase at YRC National and 9.8 percent jump in daily shipments at YRC Regional — came from large corporate accounts rather than more profitable local accounts and spot business looking for capacity in a tight market, he said.
“The corporate channel is less profitable than the local, and it’s growing faster as customers gain confidence in our ability and bring business back,” he said.
ODFL did a better job balancing rates, costs, freight mix and the other variables than other publicly owned competitors. Excluding fuel surcharges, ODFL’s yield rose 6.4 percent from a year earlier. ODFL anticipated pricing growth of 5 to 6 percent in the first quarter, before surcharges. Its profit soared 180 percent.
“We’re continuing to see good strong trends going into 2011,” President and CEO David S. Congdon said before the end of quarter. “The potential for a trucking renaissance depends on sustained financial health and profitability.” In ODFL’s case, he said, “I think we’re starting to see that.”
Contact William B. Cassidy at email@example.com.