STB Signals Landmark Change in LTL Pricing is Coming Soon
The Surface Transportation Board's May 7 Ruling
The STB made two decisions. First, it rescinded antitrust immunity for rate bureaus. Second, it removed the immunity for freight classification, under which committees composed of carriers set standard measurement criteria for specific commodities. These changes, when they take effect, will have a profound effect on North American shippers and carriers.
The Surface Transportation Board has proposed revoking the authority of motor carriers to engage in collective rate making and freight classification. This is a decision that could alter how many motor carriers in the United States and Canada set freight rates. The National Motor Freight Classification (NMFC Class Rate with discounts) system has been in use for decades and has been a key tool used in developing LTL tariffs. This comprehensive system has been based on assigning a class to 18 sets of commodities based on density, stowability, ease of handling and liability). LTL pricing is then associated with each class of freight.
New LTL Pricing Methodologies Must Be Established
There are several issues associated with this decision. First, there will still be a requirement to establish one or more systems of classifiying LTL shipments so as to create an orderly and logical way to perform LTL pricing. The NMFC did provide a national standard for classifying LTL freight. Many shippers have come to rely on this system. As noted in one of our earlier blogs, other costing methodologies have been proposed. Pallet based pricing and commodity rate pricing, each of which is based on a similar set of cost components have been around for some time. Making a change to such a long established and well accepted process could result in some upheaval for carriers and shippers until some competing and reasonably universally accepted LTL pricing systems come into widespread use.
Which New or Existing Business or Organization Will Create and Manage these Costing Models?
While carriers will not be allowed to work together to perform any type of collective rate-making activity, there will still be a need for some business organizations to create and maintain LTL pricing methods. There are organizations today such as SMC3, the former Southern Motor Rate Bureau, that would be a natural intermediary to create and manage a new pricing system. Their Czar Lite tariff could be one potentially acceptable LTL pricing model. However, SMC3 would have to change its business model. Rather than engaging in collective rate making, the organization would have to focus more on pricing design, tariff publication and ancilliary LTL pricing services. There are other companies that either specialize in transportation costing methodologies or that perform a carrier/shipper liaison role (NASSTRAC) that might wish to fill the void. Of course, the U.S. Department of Justice would have to sign off on any new processes that are put in place.
Expect a Delay
The STB's proposed deadline for compliance with the new law was September 4, 2007. The National Motor Freight Traffic Association, a carrier group that sets weight and density standards through the National Classification Committee for thousands of shipments, petitioned the STB on May 18 for a 14 month extension. Their suggested date would be Nov. 4, 2008. There is no doubt that additional time is needed to devise new rate making processes and to determine the appropriate compliance procedures.
While some large shipper groups have praised the STB's decision, other groups have argued that there is no other universal standard and have expressed concerns as to how shippers would be able to manage their LTL freight. It is reasonable to expect a delay in the implementation date but it is likely that this ruling, possibly in an amended form, will have a profound impact on LTL pricing. Shippers and carriers should monitor developments in this area very carefully since this will be a major change. At the same time, LTL costing experts and entrepreneurs should use this as an opportunity to develop and "test the waters" for new LTL costing methodologies.