With carriers in the LTL market heading toward a third year of pricing leverage over shippers, some industry observers are starting to whisper that the remarkable run for the truckers may be throttling back. But a series of interviews with carriers, shippers and trucking industry experts suggests pricing in the LTL arena is holding firm and that shippers should brace for rising costs again in 2006.
"It's certainly not a shipper's market at this point, not from what we are seeing," said Harold Friedman, senior vice president at Data2Logistics, a Princeton, N.J.-based freight payment company.
Although some major LTL carriers revealed weakening LTL yields in their fourth quarter 2005 financial statements, the industry will continue to command higher rates by rolling out more sophisticated and premium services to meet shippers' just-in-time requirements. The driver shortage, although more a factor in the truckload sector, presents a natural barrier to unbridled capacity growth, and wage increases designed to attract new drivers will be passed along to the customer.
"We see LTL rates going up no less or no greater than they have been in the past," Friedman said. "We think if anything, shipper costs have declined in the recent past because of decreasing fuel costs rather than through discounting or softening of market rates."
"We see discounting holding firm," he said.
"Since October, our system has been tracking LTL rate increases ranging from 5 to 7 percent, especially on the West Coast and with smaller carriers lacking economies of scale," said Ken Hazen, President of CTSI, a transportation software and freight bill audit/payment provider. "Beyond the obvious diesel price issue, this surge was driven by equipment, labor and insurance costs; the new low-emission engines; and even capacity issues, which is normally a truckload problem."
Freight brokers say they already are projecting healthy rate increases this year as shipping increases and that the only roadblock to rising prices would be an economic slowdown. "We know that the LTL carriers are going to announce their rates in the April to June time frame, and [rate increases] will probably be in that 5.5 percent range," said Allan J. Miner, president of CT Logistics. "Once one big guy does it, they all fall in line."
Tom Sanderson, president and CEO of 3PL Transplace, said the company's freight brokerage business is looking for LTL rates to rise 2 to 3 percent this year, with published pricing higher but carriers discounting some of the increase back to shippers.
"We don't see much of an opportunity to have rates for shippers decline or stay flat," Sanderson said.
The suggestions that the rapid rate growth of the last year-and-a-half was at least slowing down has come from a number of quarters.
Citigroup Research said in a report by investment analyst Scott Flowers that LTL price inflation slowed down at the end of 2005. LTL rates in December were up 4.9 percent over December 2004, the slowest monthly expansion since April 2004, said Flower, and rates fell 1.9 percent from November to December, a period when pricing usually is flat. In another report, Chad Bruso of Morgan Stanley said results from LTL giant YRC showed "pricing appeared to be a mixed bag but generally appeared weak."
"We operate in a competitive environment. I wouldn't want to say that there is not risk on pricing," Herbert A. "Bert" Trucksess III, chairman, president and CEO of SCS Transportation, said during a Jan. 25 conference call with analysts.
"What I would tell you is that pricing for us in 2005 was good, and what we have been seeing in the fourth quarter was also good," he said. "I guess we'll just have to see what happens in 2006, but I'm still encouraged at the overall environment."
Andy Williams, with M33 Integrated Solutions in Greenville, S.C., predicts even higher rate increases are in store.
"I think we'll see similar to what we saw last year, a 5- or 5.9-percent rate increase across the primary LTL carriers," Williams said. "I think you'll actually see some of them this year in the lower 6 [percent range], across some of your more high-tiered LTL carriers. I wouldn't be surprised at all to see FedEx come in at 6.1 percent or 6.2 percent. They're a value-added-based provider and there's a different pricing level associated with that."
Williams based his remarks in part on a presentation given by FedEx Freight President and CEO Douglas G. Duncan at the recent SMC3 conference. Duncan said the industry is "experiencing very high demand" and suggested a recent estimate by The Colography Group that LTL shipments will grow 3.8 percent over 2005 levels is conservative. The increasing demand placed on carriers to provide next-day service is transforming trucking into a value-added player in the supply chain, he said.
"The value-added piece that we serve in the supply chain makes us differentiated, and it also gives us the ability to differentiate on pricing because we're providing something to the customer that they're not getting someplace else," said Duncan.
Gary G. Girotti, vice president with supply chain consulting firm Chainalytics, said the driver shortage, reduced productivity caused by federal hours-of-service rules and high fuel prices are behind carriers' cost escalation. He concurred with Duncan that carriers have adapted to these limitations to stay profitable.
"Carriers are responding intelligently, which is - no offense - unlike history," Girotti said. "... The carriers, being larger, are getting more sophisticated. They're not chasing volume anymore. The main reason being, they can't [add] volume into a network that they can't get the drivers for.
"They're becoming more advanced in how to do yield management-type things and how to put margin on lanes, and that's what they're going after."
But rising LTL base rates are misleading, some say. What shippers ultimately pay to move freight depends more on the relationships they engender with core carriers, the discounts they negotiate and the efficiencies they reap from their supply chains.
Tom Fischbach, with Transportation Management Group in Chicago, said the 5 percent or better rate increase discussed at the SMC3 conference is "probably accurate on the LTL side, but that's also a misnomer because they'll take the increase, but you turn around and negotiate a better discount with them."
Fischbach, a former Gillette transportation manager who advises shippers, is skeptical of the justifications for LTL rate increases. "What issues are there within the LTL market that would cause the cost to go up 5 percent [or more] in the next year?" he asked. "There really isn't any. Capacity is not an issue. [It's] just because the environment is there to get a rate increase. They're riding on the shirttails of the truckload industry on the capacity issue. But if you know enough, you can keep them down. You can negotiate better prices."
At the SMC3 conference, there was talk of more collaboration between shippers and carriers in the rate-setting process. Some logistics executives spoke of steering their clients away from carriers' proprietary rate bases to standard rate bases, using systems such as SMC3's CzarLite LTL pricing software.
Shippers are beginning to understand "that in some cases, it's in their better interest to level the playing field and be able to optimize their understanding of where one carrier stands as opposed to other carriers in specific lanes," Williams said. "... What you're able to do is analyze different carriers across a level playing field from the front end rather than trying to determine and find the peaks and valleys in each individual carrier's rate base."
Girotti, whose firm offers a price bench marking service for shippers, said rate-saving opportunities exist in changing transportation modes, in shifting from or to LTL or parcel carriers, making network adjustments, using dedicated trucking assets and improving the visibility of shipments.
Shippers must take the initiative, he said.
"There's only two ways to reduce your rates. You either get the carrier to reduce his margin ... or you change his cost structure such that he is able to give you a cheaper rate," Girotti said.
"You can't do it with all the carriers in your network," Girotti added. "Typically, you should work with a few of your key carriers to be creative; the others are there for capacity. Pick your four or five core carriers and work closely with them and try to figure a way to change their cost structure to benefit you and them."
Many of the rate-saving suggestions made by logistics firms are being implemented by toothpaste, personal care and household cleaners manufacturer Colgate-Palmolive. Edward Connally, logistics administration manager in Smyrna, Ga., said the company is containing costs by working with its regional carriers, forecasting equipment needs and shifting more freight to dedicated shipments.
"Annually, we'll create a budget based on our previous year's payment history on a per-lane basis. Within that budget, we're hearing the same thing everyone else is - that there [will be] increases," he said.