Two years ago, the nation’s largest trucking companies were locked in a no-discount-barred price war that slashed less-than-truckload rates across the industry and cut into the bottom lines at FedEx Freight, Con-way Freight and YRC Worldwide.
Today, those carriers remain standing and LTL prices are rising, but the executives who led those companies during what amounted to a battle for survival for YRC are gone. Douglas G. Duncan, John Labrie and William D. Zollars have been replaced by Bill Logue at FedEx Freight, W. Gregory Lehmkuhl at Con-way Freight and James P. Welch at YRC Worldwide.
Sidebar: YRC Worldwide: Rogers Moves Up.
Last month, YRC Worldwide under new CEO Welch named Holland President Jeff Rogers president of YRC, the $2.6 billion long-haul LTL operating unit of YRC Worldwide and third-largest stand-alone LTL carrier. Rogers succeeds Michael J. Smid, who left YRC Worldwide in July. And at the end of the year, another veteran trucking leader, Wesley Kemp, will retire as president and CEO of ABF Freight System, the fifth-largest LTL carrier. Roy Slagle, another LTL executive with years of ABF experience, will succeed him.
Collectively, that’s a swift and sweeping shift in leadership at four of the country’s five largest LTL carriers, a leadership overhaul that represents more than a simple changing of the guard. It points to deep, often self-inflicted wounds that bled LTL carriers in the recession.
The management changes also herald what promises to be a long period of reconstruction at the largest LTL carriers and an era of opportunity for the next tier of companies as they attempt to raise rates and recover profits lost in 2009. With excess LTL capacity rapidly disappearing, carriers may have a shot at that in 2012, if the U.S. economy doesn’t fall back into recession — a big “if” at this point.
LTL carriers are reporting steady volume, even in a soft economy. Some carriers are purposely cutting volume, year-over-year, refusing lower priced freight to improve margins and showing surprisingly consistent market discipline.
Sidebar: FedEx Freight: Merging to Profit.
Like their truckload counterparts, they seem to be outperforming the broader economy, running on a route that’s much smoother than Wall Street.
“A lot of the fluctuations you see in the stock market are driven by headlines and not by the reality of what’s going on with freight tonnage,” said David S. Congdon, president and CEO of Old Dominion Freight Line, the sixth-largest LTL carrier in North America and the only publicly owned billion-dollar LTL player to earn a profit in 2009.
“LTL volume bottomed out in 2009 and the industry as a whole has rebounded about 21 percent since then, but we’re still 8 to 10 percent below the peak volumes” of 2006 or 2007, Congdon said.
However, he estimates LTL capacity in terms of terminals, tractors and trailers is down 13 to 14 percent from its pre-recession peak. “If that’s the case, I’d say we have a slight capacity shortage,” Congdon said.
LTL carriers suffered their worst revenue spasm in decades in 2009, with the 25 largest carriers losing almost a quarter of their 2008 revenue — $8.1 billion out of $33.3 billion — and regaining only $2.3 billion in 2010, a 9.4 percent year-over-year increase. Carriers offered discounts as high as 90 percent off book rates to fill trucks and keep lanes active.
LTL pricing has been going up since last year, although increasing more slowly than truckload rates. At the end of the third quarter, shippers were seeing annualized rate increases in mid-single digit percentages, according to carriers and analysts. “The industry is focused on margin expansion and improvement, and if you’re not focused on that, you’re not going to be in this business very long,” said Douglas W. Stotlar, president and CEO of Con-way, the $5 billion parent of Con-way Freight.
The next few years will be a time of realignment in LTL trucking. Instead of the “Big Three” carriers that dominated LTL through the beginning of the last decade — Consolidated Freightways, Yellow and Roadway — FedEx Freight, Con-way Freight and YRC now lead the LTL sector, followed by five other carriers with more than a billion dollars in revenue — UPS Freight, ABF, ODFL, Estes and R+L Carriers.
Combined, the “Billion-Dollar Eight” reported $17.3 billion in revenue last year, accounting for more than 60 percent of the total LTL market, according to data from SJ Consulting Group, a Pittsburgh-based transportation consulting firm.
That carrier group may grow in the next few years as more companies break the billion-dollar sales barrier. There were six LTL carriers with less than $1 billion but more than $500 million in revenue in 2010: Saia, Southeastern Freight Lines, Holland, Vitran Express, Day & Ross and TransForce. Four of them increased revenue more than 10 percent, with Southeastern growing almost 15 percent.
What shippers won’t see is a quick return to the merger fever that reshaped the LTL market in the first decade of the 21st century. Wounds caused by the epic consolidation of the last decade, a time when public companies across industries turned to mega-mergers with an eye toward investors and shareholder value, are still healing, especially at YRC Worldwide and FedEx Freight. Both companies have gone through painful reorganizations. With the economic wreckage left by the recession still in their rearview mirrors, truckers aren’t eager to repeat recent mistakes.
And really, they can’t afford to. Even if the banks were willing to underwrite massive mergers, leaders at several LTL carriers say they need to focus on margin improvement to reinvest in aging fleets and improve operations.
“I think we are where we’re going to be for some time, with eight to 10 well-run carriers with national footprints” dominating the LTL market, Stotlar said. “I expect to see a little consolidation,” he said, “but I would expect to see it among regional carriers that are trying to expand their footprints, not national carriers.”
LTL carriers, like their truckload counterparts, are more likely to purchase smaller companies in areas where they need capacity or a new line of business, as Roadrunner Transportation Systems did when it acquired Prime Logistics in August and intermodal drayage operator Morgan Southern in January.
Sidebar: Con-Way 'Recovering Margin'.
“I think you’re going to see more emphasis on profitability improvement than market share capture,” said Satish Jindel, president of SJ Consulting Group. “That’s going to be the theme of the LTL industry over the next nine to 12 months.”
Pricing is an important component of that theme. National and regional LTL carriers have raised their tariff rates and contract rates this year, and higher rates are holding in the third quarter, according to motor carriers and analysts. “There’s certainly been a shift in the focus of many of our industry peers to making a profit instead of just chasing volume,” Congdon said.
Commentary: Pricing Value.
Most LTL carriers took general rate hikes this summer, ahead of the usual fall GRI season, and held out for higher than usual rate increases of as much as 6.9 percent.
“Pricing is still the story, and (it is) going higher across the board in all regions,” Stifel Nicolaus analysts David G. Ross and Bruce Chan said in an Oct. 3 note to investors. At the end of the third quarter, LTL carriers were hiking contract rates 4 to 6 percent year-over-year, excluding fuel surcharges, despite slower economic growth and widespread uncertainty. “We believe rates should continue to rise (3 to 10 percent) in 2012, even if there is no economic growth, as carriers remain well below historical average margins,” Ross and Chan said. Stifel Nicolaus doesn’t expect the U.S. economy to expand faster than 1 to 2 percent in 2012, they said.
Longbow Research said LTL freight demand increased in September from August, following a normal seasonal pattern leading toward a fall shipping peak for trucking. “We are not seeing a major drop in freight or significant changes in customer ordering patterns,” analyst J. Douglas Woodrich said. General rate increases “appear to be taking hold at about 5 percent, a bit shy of most LTL’s 6.9 percent tariff increase, but solid nonetheless,” Woodrich said in a Sept. 22 note to investors. “We note a more serious discipline to capture higher rates.”