There’s a word being bandied about the trucking industry this summer to describe a change in attitude toward pricing and profitability, and it’s not a word commonly associated with highly competitive truckers before the recession.
That word is “discipline,” as in pricing discipline, and it’s increasingly used to describe the backbone less-than-truckload carriers are showing shipper customers in contract rate negotiations and in steep general rate increases.
Anyone who doubted LTL carriers had the mettle to push up pricing after slashing rates to tatters two years ago need only look at the double-digit increases in revenue per hundredweight, or yield, LTL carriers reported in the second quarter.
Old Dominion Freight Line led the LTL industry’s club of billion-dollar carriers with a 14.2 percent improvement in yield from a year earlier to $14.74. Fuel surcharges accounted for 17.2 percent of that increase, but even without them ODFL increased its yield 8.2 percent. That points to gains in efficiency and higher pricing that helped the carrier boost quarterly profit 83 percent, to $39.4 million, on a 30 percent jump in revenue.
The most dramatic sequential quarterly leap in yield — 7.2 percentage points — helped lift ABF Freight System back into the black after 2½ years of cumulative quarterly losses totaling about $198.5 million. Holding company Arkansas Best reported a $5.3 million net profit while LTL subsidiary ABF Freight posted an $8.2 million operating profit on $498.6 million in revenue. The trucking company’s yield, including fuel surcharges, rose 9.5 percent year-over-year.
Although Judy R. McReynolds, Arkansas Best president and CEO, was pleased, she wasn’t satisfied. “The progress made so far does not produce sufficient returns for our shareholders nor does it allow us to adequately recapitalize the business,” she said.
She sounded a warning to customers that is echoing across the LTL landscape, one that to shippers increasingly sounds like “stand and (then we will) deliver.”
“Further profitability gains should result from improved pricing on ABF’s existing account base,” McReynolds said. “Our focus on growing business with customers who value ABF’s high level of service and wide range of logistics offerings should also positively impact our profitability.”
Translation: If you don’t think our service is worth the price, take your freight elsewhere.
With other carriers adopting similar strategies, big bargains for shippers, if not over, certainly are more difficult to find. “Our measured pricing actions have resulted in deselecting a number of unprofitable accounts,” said Rick O’Dell, president and CEO of Johns Creek, Ga.-based carrier Saia.
At $12.80, Saia’s second quarter LTL yield was up 9.6 percent from a year earlier, and was 2.7 percent higher than the first quarter. “This is part of a slow but steady improvement plan and is a welcome change from the challenging pricing and volume environment in which we had been operating the past several years,” O’Dell said.
Saia increased its year-over-year profit 41 percent to $8.3 million as its revenue rose 15 percent to $266 million. It also hauled more freight, with shipments accelerating 3 percent year-over-year and weight per shipment rising 1.5 percent.
Roadrunner Transportation Systems, the fastest-growing LTL carrier in 2010, also increased tonnage 2.7 percent in the quarter, despite a sputtering recovery.
“Tonnage growth was flat mid-quarter as a result of sluggish freight demand, but rebounded slightly in the month of June to 4.6 percent,” said Mark DiBlasi, Roadrunner’s president and CEO. Despite sluggish demand, Roadrunner increased sales 30.4 percent from a year earlier to $208.3 million and posted a $7.4 million net profit.
More freight wasn’t always wanted. Con-way Freight cut its tonnage per day 8.3 percent from a year earlier as it cleared bottom-drawer freight from its network.
The carrier’s yield increased 11.2 percent year-over-year as sales rose 2.8 percent to $839.8 million and the carrier’s operating profit more than doubled to $39.2 million.
High freight volume walloped Con-way Freight in 2010, flooding its network in the wake of an LTL price war and driving up labor and transportation costs.
The flagship unit of Con-way spent much of 2010 culling lower-priced freight and laying the groundwork for higher LTL rates. “We will maintain our focus on pricing discipline and initiatives to improve margins” in the second half of 2011, said Douglas W. Stotlar, president and CEO of parent company Con-way.
Carriers mostly won low to mid-single-digit increases in contract rates from shippers during the second quarter, according to carrier executives and financial analysts. To an extent, tighter truckload capacity and higher truckload rates pushed some shippers toward LTL carriers, absorbing more of their capacity.
Will LTL carriers be able to hold onto pricing discipline if the economy remains sluggish or stalls? Post-recession industry dynamics — especially higher operating costs — make it unlikely most LTL truckers will repeat the steep discounting of 2009, when the LTL industry suffered its worst contraction in decades, losing a quarter of the revenue it had in 2008, any time soon.
That price war came partly because of the downturn, but was also the result of a bid by some carriers to carve away business from struggling YRC Worldwide.
Nationwide carrier YRC looks more stable, and its yield, minus fuel surcharges, actually edged up 0.1 percent in the second quarter, according to a J.P. Morgan investor report. The carrier’s total revenue per hundredweight rose 6 percent year-over-year.
A weakening economy could blunt price increases this year but many believe higher LTL rates are on the horizon.
“We still believe pricing will be significantly higher in both TL and LTL in 2012,” David G. Ross, an analyst with Stifel Nicolaus, said in a note to investors on Con-way’s earnings. LTL carriers are gaining pricing momentum, he said, “due to a much greater degree of market concentration.”