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The Current State of the LTL Freight Industry

During the Great Recession, the LTL freight industry experienced a “near death” experience as declining freight volumes, excess capacity and falling rates conspired to dramatically reduce revenues and profits. The LTL market shrank from more than $33 billion U.S. at the peak in 2006 to $25.2 billion at the recession's trough in 2009. As we approach the mid-point of 2015, the fortunes of this industry look much brighter. Here’s why.

The industry has consolidated

Looking back over the past 25 years, only 4 of the top 50 carriers are still in operation. Over the past 10 years, there has certainly been a changing of the guard at the top. As noted in a recent Stifel transportation report, “Old Dominion has replaced FedEx Freight/Con-way Freight as the most profitable carrier in the industry. USF was bought by Yellow Roadway to become YRC Worldwide before it nearly went the way of Consolidated Freightways, Overnite became UPS Freight, Central Freight Lines went public then private, Vitran was sold in pieces, Saia sold Jevic (which then went bust), and Roadrunner acquired Dawes and Bullet to become the only national asset-light general commodity LTL carrier. The industry is more concentrated than ever . . . “

The report goes on to report that “the top-5 (U.S.) carriers have roughly 55% of the market. And those top-5 - FedEx Freight, YRC Worldwide, Con-way Freight, UPS Freight, and Old Dominion Freight Line - are all either historical disciplined pricers or have been burned in the past by their undisciplined ways or have no choice but to push price to improve margins.” The Canadian market is quite similar with TransForce, Day & Ross and Manitoulin dominating the LTL sector. Unlike the truckload sector, consolidation means more leverage and pricing power for the top LTL players.

Today’s LTL Carriers are leaner and meaner

The Great Recession also forced LTL carriers to shrink their bloated networks to leaner operating machines. These networks feature fewer hubs and more direct service lanes.

The U.S. Economy continues to improve

The slow but steady uptick in the U.S. economy has meant more freight moving throughout the LTL carrier networks. More density means more profit.

The driver shortage limits truckload capacity

During the Great Recession, truckload carriers took large LTL shipments to keep its fleets moving. The ongoing driver shortage is constraining truckload carriers in the selection of the customers they wish to serve. Successful carriers in this sector are focusing more on yields and balancing their networks than on hauling heavy LTL shipments to fill their trucks. More of this freight has moved back to LTL carriers. The driver shortage remains more of a problem for truckload rather than LTL carriers.

Lower fuel costs are helping LTL carriers

Lower fuel costs are helping LTL carriers in two ways. First, lower fuel costs reduce operating costs. Second, LTL carriers, to the surprise of many shippers, have raised their fuel surcharge levels.

Major LTL carriers now using dimensioning machines and scanners

The major U.S. LTL carriers have adopted or are in the process of adopting dimensional pricing. This type of pricing applies to (1) bulky, lightweight items like toilet paper or a fleece blanket; and (2) packages that have a lot of empty space. LTL carriers are rapidly investing in expensive, on-dock, three-dimensional size measurement capturing machinery to accurately capture the dated needed to apply this form of pricing. Dimensional pricing will have a significant impact on the profitability of low density LTL freight.

Twin 33 foot trailers may be on the horizon

The U.S. Congress is considering an amendment to the transportation funding bill to increase the federal size limit for combination trailers. Currently, two 28' pup trailers is the longest combination vehicle across the 48 contiguous states, but it has been proposed to expand this to a maximum of two 33' trailers, increasing potential linehaul capacity by 18%. The gross vehicle weight limit of 80,000 pounds would not also be raised, but that shouldn't limit the benefit of a change to the longer trailers, as most freight "cubes out" well before it "weighs out." Initially, this new rule would be good for LTL carriers that can incorporate twin 33's profitably into their networks.

How long will the good times last?

The question is what will happen during the next recession? Consolidation and buoyant volumes do wonders for pricing discipline. When the next recession hits, will LTL carriers repeat their mistakes of the past and raid each other’s freight to fill their trucks? Will the benefits of 33 foot pup trailers and rate increases dissipate? We will have to wait and see. In the meantime, if the economy can stay healthy, this should be a good time for the LTL fright industry.

 

Dan Goodwill & Associates (www.dantranscon.com) provides freight transportation consulting services to shippers and carriers throughout North America. Follow Dan on Twitter @DanGoodwill. To stay up to date on breaking news in energy and transportation, obtain a free subscription to Dan’s Transportation Newspaper (http://paper.li/DanGoodwill/1342211466).  For all the latest developments on the 2015 Surface Transportation Summit, click on #STS15 on Twitter.

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