It is hard to find anyone who has anything good to say about the LTL freight market. Analysts at investment firm Stifel, Nicolaus & Co. expect trucking rates charged by less-than-truckload motor carriers to remain low through the holiday season and into the first quarter of 2010. In a note to investors, the firm's transportation analysts said they expect LTL volumes to pick up 3 percent to 5 percent in 2010 as retailers slowly restock inventories. The increase in freight traffic could be slightly higher or lower, depending on how quickly the economy recovers from the recession, they said.

The report noted that fuel surcharges, and fuel costs, are far lower than a year ago, meaning they aren't as much an issue in pricing and contract negotiations. And with low demand, there is still plenty of overcapacity in the industry. The good news for shippers is that fuel surcharges are not having as big an impact on costs as they did a year ago. For example, in the second quarter of 2008, carrier fuel surcharges were averaging an amazing 33%. In the second quarter of this year, they averaged 13.6%, according to Stifel's research. "With average fuel surcharges today well off highs of last summer . . . and accounting for roughly 12% of the average shipper's bill, they are less important today in pricing negotiations," Stifel analysts say. "Volatility in fuel prices is not good for carriers' margins or shippers' budgets, in our opinion, because it does not allow for proper pricing or planning." Low fuel surcharges is not all good news for LTL carriers that were deriving a significant source of profits from the more elevated fuel surcharges of the past.

A recent survey of LTL market participants conducted by Longbow Research in Independence, Ohio found that "aggressive and unprofitable pricing tactics are widespread as carriers focus on fighting for market share. Perhaps the carrier most effectively executing this strategy is Con-way Freight. In a recent interview, Con-way's CEO Doug Stotlar told Reuters "we have more aggressively priced than we historically have. We've captured some market share because of that." Stotlar also said overall he sees the pricing environment in the industry stabilizing now after an extended period of decline, driven down by excess capacity and weak demand.

This view was challenged by Earl Congdon, the CEO of Old Dominion, another major LTL carrier. Mr Congdon cited the economic downturn and trucking overcapacity as culprits behind "the worst pricing environment we've ever experienced." He also said in an interview that some of the pricing trends likely stem from deliberate moves to undercut YRC, the large but financially challenged player in the LTL shipping market.

Another key factor in the hostile pricing environment is the massive amount of LTL bidding as freight buyers try to secure aggressive rates and carriers seek as much market share as possible in an era of overcapacity. In addition to the long-running slump in demand, the overcapacity issues are being driven in part by a lower-than-expected number of bankruptcies for such a slow market. According to the latest data from FTR Associates, only 370 trucking fleets went bankrupt in the second quarter of this year, for example, "a number similar to the rate at the peak of the last upturn" says FTR's report. None of the tier 1 or even tier 2 LTL players has left the scene in the past year.

"Lenders are reluctant to foreclose because of the extremely low prices for used equipment and to avoid having to book losses on sensitive balance sheet reports. The main effect is to swell the number of surplus vehicles competing for freight, now around 200,000 units. Volumes are stabilizing but rates will be under pressure until there is a strong market-clearing of unprofitable fleets." As the economy picks up and the market for used truck equipment returns, some lenders may change their “carrier prop-up” strategies.

In their report this week, Stifel, Nicolaus & Co. suggested that rates for less-than-truckload services will remain low into the first quarter of next year, unless YRC shuts down or other carriers exit the market. That's good news for freight buyers but also means carriers on the “bubble" could struggle with another quarter of lower revenues, putting them at risk.

On Friday, YRCW reported a third quarter loss of $158.7 million. Despite sequential improvements from the second quarter and modest profits in its regional and logistics businesses, the company is still far from breakeven. While YRC continues to restructure labor agreements and extend debt repayment terms, YRC's future remains in question.

Longbow analysts say the carrier's chances of survival increase the longer it keeps its door open and the economy picks up. "The bankers, union, and large shippers want YRC to survive, in our view. In short, the bankers do not want the assets, the union doesn't want more job loss, and sophisticated shippers do not want to see roughly 18% market share leave due to the impact on competition."

Certainly, freight buyers are pulling for YRC to survive. According to Stifel's estimates, if YRC were to fail today, it would "immediately cure the overcapacity and increase rates." When former competitor Consolidated Freightways shut down in 2002, “within 90 days rates up were by almost 9 percent,” said Mike Regan, president of TranzAct Technologies. “If something were to happen to YRC, I wouldn't be surprised to see rates go up at least as much,” he said.

The Stifel, Nicolaus view is that “YRC will run out of money by the end of 1Q10, absent a restructuring and/or miraculous freight rebound." The Longbow view is that “since most of the stakeholders appear to want the company to survive, we believe there is a greater probability that it does barring the economy heading into a double dip recession."

Are there lessons to be learned from history? After decades of battle, there are two large players that remain standing in the small parcel market, FedEx and UPS. These two companies just happen to be well positioned to reap the benefits if YRC exits the LTL market. Most large LTL carriers that have been in YRC’s position in the past did not make it, but none have had the ongoing support of unions, bankers and customers.

The fact is that the showdown in the LTL market is fast approaching. The battle lines are drawn. On the one side you have a multitude of LTL carriers, national and regional, with much stronger balance sheets that YRC. YRC’s competitors continue to land “body blows” with what some folks characterize as below variable cost or “predatory” pricing to drive them off the road. With year/year revenues at YRC down almost fifty percent, these body blows are taking a toll. It should be noted that these price battles are damaging the entire industry, not just YRC. With its debt repayment terms having been extended twelve times, YRC has had more than nine lives.

On the other side is YRC, with the support of its unions, creditors and customers. It is fighting a valiant battle through its rightsizing and customer retention activities. If YRC doesn’t make it, this will bring capacity into line with business volumes. It will create pricing stability and shippers will face increased rates. If YRC prevails, the spotlight will shift onto the other weak players in the industry. Pricing below variable costs is not sustainable and there will likely be casualties among the other LTL companies left standing. It is a fascinating story, the transportation story of 2009. It should reach its inevitable conclusion in 2010. Stay tuned.