Each year, as the days get longer and skies sunnier, less-than-truckload motor carriers roll out general rate increases. The parade of GRIs is as sure a sign summer has arrived as highways clogged with beach-goers on Memorial Day weekend.
Those GRIs cover only non-contract tariff-based business, typically a smaller portion of the traffic handled by LTL trucking companies. Even so, they are a barometer that clearly signals where LTL pricing is headed, and in June 2013, rates are rising.
In the past month, ABF Freight System and UPS Freight announced 5.9 percent GRIs, effective May 28 and June 10, respectively. On June 10, FedEx Freight announced a 4.5 percent general increase in non-contract base rates, effective July 1.
Those rate hikes are averages, which means some customers will see much higher base rate increases in certain lanes and others may see lower or no increases. Much also depends on any shipper’s ability to negotiate and leverage volume.
Other large carriers are expected to follow the route blazed by ABF, UPS Freight and FedEx Freight over the next few weeks, posting general rate increases that reflect where they hope contract rates also will go as they negotiate with shippers.
The direction they hope for is up. Four years after the end of the Great Recession in 2009, LTL pricing is still 10 to 15 percent below “where it needs to be,” according to James Welch, CEO of YRC Worldwide, a $4.9 billion LTL operator.
Welch said the LTL industry has yet to recover from a fierce price war during the later part of the recession that was fought in part to drive YRC Worldwide, then losing hundreds of millions of dollars a year, over the financial cliff into bankruptcy.
Between the recession and LTL price war, the industry hit “a perfect storm for rates getting too depressed,” Welch said. “The LTL industry as a whole is still 10 to 15 percent below where it should be,” despite rates increases since the recession.
If rates are that depressed, the 4.5 to 5.9 percent average increases proposed so far are only one rung on a ladder LTL truckers have been climbing for four years. In 2012 and 2011, the largest LTL carriers announced 6.9 percent GRIs.
The money and expanded profit margins higher rates would bring in is needed to reinvest in aging equipment fleets, terminal networks and new technology and to pay higher labor and operating costs, carriers say.
How much of those general rate increases actually stick to LTL freight bills? More than was once expected, carriers say. In the run-up to the recession, GRIs typically disappeared quickly under the discount knife. That hasn’t been the case lately.
A glance at The Journal of Commerce average LTL revenue per hundredweight, a measure of pricing and surcharges, shows a rapid increase in yield from 1 percent in the third quarter of 2010 through the 11.3 percent in the third quarter of 2011.
LTL yield continued to rise in last year’s anemic economy, but at a slower pace. The JOC average, based on yield at publicly owned carriers, dropped to a 2.4 percent increase in the fourth quarter of 2012 and rose 3 percent in the first quarter.
The lower yield increase was reflected in slower sales. The 25 largest LTL companies increased combined revenue 4.5 percent in 2012 to $28.8 billion, compared with a 12 percent increase in 2011, according to SJ Consulting Group.
Only one of the 25 LTL carriers that The Journal of Commerce and SJ Consulting rank by revenue increased sales faster in 2012 than in 2011 — Wilson Trucking. The company boosted revenue 8.7 percent in 2011 and 9.8 percent in 2012.
The term trucking executives use most often to describe the LTL pricing environment these days is “disciplined.” In fact, LTL carriers can’t afford to return to the rate wars of 2009, when discounts often topped 80 or 90 percent.
“For LTL, end-market growth is slowing, and pricing discipline is here to stay,” Benjamin Hartford, an analyst at R.W. Baird, told the SMC3 Jump Start Conference in January. He predicted LTL rates will rise 2 to 4 percent on average in 2013.
Unlike their ocean carrier brethren, LTL trucking companies have tightened capacity considerably since the recession began in 2007, with terminal capacity at the 10 largest carriers falling 18.5 percent by 2011, according to SJ Consulting.
Those cuts in effect saw the equivalent of perhaps two large LTL carriers exit the business, without any big bankruptcies or shutdowns. That has helped carriers keep up the pricing discipline mentioned by Hartford and many trucking executives.
“LTL rates likely will climb faster than truckload pricing in the next couple of years because LTL trucking companies have further to go to recover their pre-recession margins,” Hartford told carriers and shippers at the SMC3 conference in Atlanta.
The fact that a price war or even a skirmish didn’t break out as LTL demand grew more slowly in 2012 indicates motor carriers are willing to take the time needed to climb that ladder out of the pricing basement, even if it takes a few years.
Market share gains today aren’t powered by lower rates or deep discounts, but by the type of sustainable profits that support expansion. Anyone who doubts that observation should check the earnings reports of Old Dominion Freight Line.