Deep discounting slashed less-than-truckload rates in the third quarter as carriers tried to knock the nation’s largest LTL trucker, YRC Worldwide, out of business. No one delivered that knockout punch, leaving some of the bigger discounters with thinner profits and a lot of expensive freight to haul at bargain-basement prices.
In a scenario similar to last summer’s Asia-Europe ocean container trades, some truckers quoted prices so low they seemed to be giving space away, discounting base rates as much as 90 percent. “Pricing is terrible, unless you’re a shipper, and then it’s great,” said Lee Clair, a partner at consulting firm Norbridge.
“I would probably say (LTL rates) are 10 to 12 percent lower than they were a year ago, based on our experience, and some traffic managers have probably done better than that,” said Greg Roush, president of Smart Lines, a freight brokerage in Oklahoma City.
With YRC preparing a debt-equity swap that would secure new long-term lending agreements and capital, competitors are being forced to rethink their pricing strategy.
“If you make a decision to force a competitor to the sidelines, and they don’t go out of business, then what you’re left with is a lot freight booked at a crappy price,” said Mike Regan, president of TranzAct Technologies, the Elmhurst, Ill.-based freight payment and transportation management company. “That will affect your model.”
Carriers may try to back off steeper discounts, but the “rate restoration” sweeping the ocean container industry won’t be easy in trucking. Excess capacity in the LTL market approaches 20 percent, and shippers with sales battered by the recession face enormous pressure to keep their costs low, too.
Trucking officials don’t have high hopes. “We’re not anticipating growth from the economy for the rest of this year, and not much from the first half of next year,” William D. Zollars, chairman and CEO of YRC Worldwide, told analysts on Oct. 30.
Industry sources say a prolonged period of low pricing for shippers and meager returns for carriers is likely unless YRC fails, an economic recovery fills empty trailers, or truckers cut more capacity from their networks to effectively limit supply.
“Why do carriers have trouble letting money sit in their pockets?” said Satish Jindel, president of SJ Consulting in Pittsburgh. “They should all freeze capital expenditures. You don’t need to replace tractors and trailers in LTL as often as truckload.”
Regan used the term “predatory pricing” to describe LTL carrier behavior. To an extent, he said, the predators did well. He estimates YRC’s market share is down from 23 percent to between 18 and 20 percent. But if YRC holds on, it may be increasingly difficult for other carriers to keep discounting at the same levels.
“For the most part, pricing being quoted today is not sustainable,” Earl Congdon, executive chairman of Old Dominion Freight Line, told analysts on Oct. 22.
ODFL, considered a model of pricing discipline, said its rates were flat and even up slightly in the third quarter. Its revenue per hundredweight — often used to measure pricing activity — rose 0.9 percent, after excluding lower fuel surcharge revenue.
Meantime, its competitors, both long- and short-haul, chopped prices.
“It’s extremely competitive in the regional markets, too,” said David Congdon, president of the Thomasville, N.C.-based company. When volume is low and motor carriers can’t build up lane density, “pricing is about the only weapon they have,” he said.
That weapon can backfire on its wielder, however. FedEx Freight and Con-way Freight, the nation’s second- and third-largest LTL carriers after YRC, reportedly were among the price leaders in the last quarter. Memphis-based FedEx Freight’s operating profit plunged 98 percent to $2 million in the quarter ending Aug. 31, while shipments declined 14 percent and yield dropped 13 percent.
Low prices hurt Con-way Freight when it had to rapidly ramp up its work force to handle a third-quarter gain in volume, increasing its variable costs and rendering that freight less profitable. Pricing levels in the third quarter “were more aggressive than we would normally take,” President and CEO Douglas W. Stotlar told analysts.
That helped push Con-way Freight’s operating profit down 62.7 percent to $22.8 million on $692.8 million in revenue, even though tonnage per day rose 5.1 percent from a year ago. Its yield declined 10.5 percent, excluding the impact from fuel surcharges.
There are some signs of a truce in the price war. “My sense is there’s a firming in the marketplace. It’s already beginning,” Roush said.
Zollars echoed, “We have seen pricing stabilize,” though he told analysts he still expects “strange competitive behavior with different customers and different locations.”
Carriers on pricing’s bleeding edge now have the unhappy task of asking customers to accept lower discounts — the equivalent of rate hikes. “Those carriers,” Earl Congdon said, “are not going to be able to operate with the prices they’ve been quoting.”
Contact William B. Cassidy at email@example.com.