“You can't price your way to success.”
YRC Worldwide, parent of the third-largest LTL carrier, YRF Freight, reignited debate over LTL consolidation when it expressed interest in acquiring Arkansas Best, parent of ABF Freight System, the sixth-largest LTL carrier. Arkansas Best said no, but that didn't quiet questions about whether another round of LTL consolidation might be in the offing. Since rejoining YRC Worldwide in 2011, CEO James Welch has brought the company back from the brink of bankruptcy. He argues a YRC-ABF combination would be different from the troubled acquisitions YRC Worldwide made in the last decade.
JOC: In May, you said improving freight density in your network was the key reason you considered acquiring Arkansas Best and ABF Freight System. Do carriers need to buy density?
Welch: Density is always the overriding concern that we look at. There are a couple of ways to approach density. You can either create it yourself, or you can acquire it. In the case of YRC Freight, we just took a step to rightsize our network and create more density internally through a major change of operations. You can't price your way to success, or most of the time you can't price your way into creating overall density that really works out over time. The economy plays a part in creating density. Obviously, if the economy improves, that solves the density problems some carriers have.
JOC: Four years after the end of the recession, LTL freight demand finally seems to be balanced, or even exceeding, LTL capacity. Will that, as you suggest, help solve the problem for carriers having a hard time broadening their margins, or is more consolidation really necessary?
Welch: I don't think consolidation is critical to the success of the LTL industry. It's about each carrier being able to manage its costs. It's a cost-versus-density issue. When you look at capacity, if you look at the trends over the last four or five years, the equivalent of a Yellow or a Roadway went away. Capacity versus tonnage has really improved over the past couple of years. If you look at the LTL industry through about mid-2008, capacity and demand were kind of balanced, and then from 2008 through 2011, tonnage fell off the map, which meant excess capacity. The two lines, tonnage and capacity, merge again in about the first quarter of 2011. SInce then, tonnage has outpaced demand, which shows capacity is much better than it was, from a carrier standpoint. So I don't know that consolidation is critical. Creating your own density, being careful with adding capacity, that's important. If a consolidation opportunity that makes sense comes along, fine. But right now I think the industry is in fairly good shape.
JOC: In recent weeks, many of the largest LTL carriers, YRC Freight among them, announced general rate increases ranging between and 4.5 to 5.9 percent. However, shippers surveyed by Wolfe Research in the second quarter expected LTL rates to climb only 1.6 percent this year. What are you hearing from your customers? Are shippers likely to accept higher increases when demand is relatively flat?
Welch: I think most customers of any size understand the industry has yet to fully recover from two things that occurred in the 2008-2010 time frame. No. 1, the economy was in recession, and No. 2, YRC Worldwide was having all kinds of financial issues. There was an effort by several competitors to put YRC out of business, and that really depressed rates. The emphasis some carriers put on helping YRC Worldwide get out of business wound up hurting them. Shippers that are aware of trends and what's happened in the industry know most companies need to recapitalize their fleet and see profit margins return to higher levels. The art of negotiation is alive and well, but most customers and companies understand there has to be an acceptable return on our investment.
And remember that at most LTL freight companies, the GRI only pertains to 20 to 30 percent of revenue, the rest is under contract. I feel OK about the progress we're making. The GRI signals intent, but a lot of things depend on that. The economy, capacity, the competitive mindset. A lot of companies announced a 5.9 percent increase, which shows some stability in the market.
JOC: What are some other factors that might affect pricing — does the way LTL carriers price need to change?
Welch: Well, there are a couple of things. One is our relationship with 3PLs. With the sheer number of 3PLs that are out there, I think it will be interesting to see how the true 3PL providers distinguish themselves from the rate resellers or rate shoppers. They'll be separated more over the next few years, as carriers become more selective about the 3PLs they do business with. The other thing that is becoming more dominant is lane-based pricing. Carriers as a whole are doing a better job than ever before at understanding lane balance and lane-specific pricing is becoming more popular because customers have the technology now to work with carriers on specific lanes. They used to just give a carrier a section of the country. Now carriers can differentiate what lanes they want.
We've been lane pricing for years but not to the level of granularity we have now. All of our companies work really hard at understanding our balance and where we can find opportunities that match up density with our cost structure. We're not as good as we need to be, but we're definitely making a lot of progress. The data that's available today is so much better than five or 10 years ago.
For more information on YRC Worldwide's recent activity, see: