Better operating margins are finally on the horizon for the less-than-truckload industry.
LTL profitability has been dismal for years, with most large carriers reporting operating ratios above 95. Such performance barely generates enough cash to pay for replacement trucks needed to stay in business, and during this period, carriers were criticized for lacking pricing discipline.
In this year’s second quarter, however, the publicly traded LTL carriers posted their best collective operating margin improvement. With a 2.2 percent increase in margin on a weighted average basis, the LTL improvement is better than the 2.0 percent improvement for the Class 1 railroads, 1.6 percent for the parcel carriers and 0.4 percent for the truckload carriers. These results suggest there is hope for the industry to attain a sub-90 operating ratio.
The weighted average operating ratio of 92.9 for public carriers is the best the LTL segment has experienced since 2007, though it’s not as good as the 91.0 operating ratio for truckload and 87.7 for parcel carriers. The biggest obstacle for higher operating margins is a lack of conviction among some LTL carriers that a sub-90 ratio is achievable. The LTL industry had an OR of 90 in 2005 and 89.9 in the second quarter of 2006.
The LTL segment is experiencing some of the best market conditions since 2005. With railroads still recovering from winter-related service problems in the first quarter, intermodal shipments are being converted to truckload. With the truckload segment unable to put drivers in seats, the shift from intermodal will further push lightweight truckload shipments to LTL carriers.
Though the recent yield improvement is driven by the driver shortage, the industry can’t rely only on such external factors for pricing discipline. With many LTL carriers having raised rates in recent months to improve their operating margins, they still fear that being more aggressive will result in loss of business. However, given tight capacity, if the marginal customers aren’t lost because of pricing, then companies aren’t raising rates to market levels and aren’t making best use of limited capacity.
Given such favorable market conditions, LTL carriers that fail to improve pricing are missing the opportunity to recover from years of poor margins. From 2008 to 2013, the LTL industry experienced yield growth of 5.1 percent. That compares with yield growth of 8.1 percent for truckload and 13 percent for ground parcel. Even the consumer price index grew 8.2 percent during this five-year period. For the LTL industry to sustain its value proposition, it must achieve margins on par with the truckload and parcel segments and consumer prices.
Now is the time for LTL carriers to raise rates aggressively and rapidly to reward employees with higher wages, shareholders with better return and even customers with reinvestment in equipment, technology and people to meet the rapidly changing supply chain.
When challenged to match the profitability of parcel carriers, LTL executives often cite limited competition in parcel segment for low LTL margins. While that might be a relevant factor, LTL carriers can learn about balancing capacity with demand from the parcel carriers. When demand exceeds capacity, industries raise prices to bring balance and improve their profitability.
Faced with similar capacity problems, the parcel carriers recently raised the rates on lighter bulkier parcels less than three cubic feet that were previously exempt from dimensional weight adjustments. The change is driven by the reduction in load factor of delivery vans and line-haul trailers from larger parcels.
The parcel carriers, however, gave shippers seven months’ notice to eliminate excess cube and packaging from the parcels. The parcel industry could have just replaced smaller vans with larger vans without any governmental approval. Such an action would have imposed a higher cost on the carriers and resulted in cross subsidy among shippers.
But, known for a lack of discipline in matching capacity with demand, the trucking industry is wasting resources and good will with the public by lobbying Congress to approve larger trucks. The carriers should let the shippers lobby Congress for larger trucks if they fear tight capacity.
Transportation managers seeking to hold down carriers’ rates should look internally at the numerous ways their shipping operation contributes to higher shipping charges, such as using premium services when a consignee isn’t able to take advantage of earlier delivery; tendering shipments that don’t optimize utilization of the carrier’s vehicles; and refusing to tender shipment via electronic manifest.
Most shippers won’t be pleased that LTL carriers are seeking such rate hikes, but to put such increases in perspective, transportation costs for most products represent about 3 percent of the product price.
So a 10 percent increase in the cost of transportation amounts to a 0.3 percent increase in the price of a product. This increase should be passed on to customers in the same way airlines are passing the recent 100 percent increase in air travel security fee on to passengers.
With many private and some public carriers consistently operating at below-90 operating ratio, it’s time for the entire LTL industry to achieve similar profitability.
Satish Jindel is president of SJ Consulting Group, with offices in Pennsylvania and India.