For a quick gauge of where truck pricing is headed, check tire prices.
Tire manufacturers such as Michelin and Bridgestone are jacking up the price of truck tires and retread rubber this summer by 9 to 12 percent, depending on make and market. The price increases reflect the rising cost of raw materials such as natural rubber and petrochemical-based synthetics, driven up by overseas demand.
Higher costs where the rubber really meets the road are one factor behind the general rate increases announced by some less-than-truckload carriers in early July.
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UPS Freight started the July 4 holiday with its own fireworks, a 6.9 percent general rate increase. Fort Smith, Ark.-based competitor ABF Freight System quickly matched UPS Freight with its own 6.9 percent increase.
Other LTL carriers are likely to follow suit, although they may not all match the rate hikes sought by UPS and ABF. The 6.9 percent increase they’re pursuing is the largest in recent years, matched only by FedEx Freight’s GRI last November.
Financial analyst Ed Wolfe of Wolfe Trahan in New York expects other LTL carriers to follow UPS Freight and ABF “with similar mid-single-digit GRIs over the next several weeks.” That would boost LTL rates just before the peak shipping season.
LTL rates are already increasing, as better carrier yield or revenue per hundredweight in the first quarter demonstrated.
“For the first time in 11 quarters, we expect each of the public LTLs other than YRC Worldwide to be profitable in the second quarter,” Wolfe Trahan said in a note to investors. “LTL pricing is going in the right direction as the largest carriers remain very focused on improving rates.” The research firm said it expects a 4.9 percent increase on average in LTL yield for the quarter, excluding fuel surcharges.
The GRIs are ambitious, and they don’t affect the majority of LTL freight. Most LTL freight moves under rates negotiated and set, usually for a year, by contract. But the GRIs raise the pricing bar in carrier-shipper contract negotiations.
Analysts and industry observers were surprised by the size of the rate hikes UPS Freight and ABF are chasing. GRIs typically fall in the 5 to 6 percent range. When a company announces a 6.9 percent increase, “that’s an indicator they think they can get it,” said Mike Regan, president of TranzAct Technologies, Elmhurst, Ill.
Since the end of the recession, GRIs have been sticking. Historically, shippers whittled them down by negotiating discounts. Carriers say that isn’t happening so much today as shippers place greater importance on reliable capacity and service.
With a 6.9 percent increase, shippers with “good contracts” might see absolute rate increases of 2 to 3 percent, once discounts are accounted for, Regan said.
“The question will be how disciplined the carriers can be in keeping a firm stance in rate negotiations,” said David G. Ross, a director at Stifel Nicolaus.
Right now, they’re pretty disciplined, said Regan, whose company handles freight payment and transportation management for carriers and shippers. “They are much more disciplined than in years past. They understand where they want their equipment running and how they want it to be utilized,” he said. “Their rates are telling you everything you need to know about their operations.”
Truckers typically issue GRIs early in the year or in the fall. Last year, UPS Freight announced a 5.9 percent GRI in September. Now the carrier is calling for “a 1 percentage point higher GRI that will take effect 2 ½ months earlier than a year ago,” Wolfe Trahan said.
That may run counter to a slowing economy, but trucking appears to be bucking economic trends, reporting higher volume and pricing and outperforming the general economy.
“We saw our highest order volumes of the year last week,” John White, president of the U.S. Xpress truckload operation, said in the last week of June. The truckload carrier said business bounced back in June after slowing in April and May.
In interviews, some LTL carrier executives said they saw volume increase as the second quarter drew to a close in June. They are being more selective about the freight they take and their pricing.
Behind trucking’s stronger pricing power in the truckload and LTL segments is a shortfall in available capacity. There were far fewer trucks to haul freight in the second quarter of 2011 than before the recession. Equity research firm Stifel Nicolaus estimates the truckload sector lost 20 percent of its capacity during the recession because of bankruptcies and downsizing.
LTL carriers that had excess capacity last year now see it dwindling, as the defining factor in capacity shifts from terminal doors to available drivers and equipment.
There’s still room to grow, said Ira Rosenfeld, a spokesman for UPS Freight, but tighter capacity coupled with rising operating costs is priming truck pricing.