Yield, Cost and Sales Management are Keys to Recovery in the LTL Transportation Sector
The less than truckload segment of the freight market was hit particularly hard during the Great Recession. This asset-heavy component of the freight market faced a number challenges. Truckload carriers siphoned off some of the larger LTL shipments, parcel carriers picked off a segment of the smaller LTL loads, and overcapacity placed downward pressure on rates while less volume adversely affected the economic viability of the sector. To make matters worse, some of the industry leaders targeted YRC’s freight, the struggling LTL giant, further eroding their profitability and the profitability of the entire industry. The total revenue in this sector declined by an estimated 25 percent during the Great Recession. It regained only a fraction of this volume in 2010. The industry is still trying to dig out of the hole that was created.
A variety of variables are helping to put the industry on stronger footing. Tight truckload capacity and higher truckload and intermodal rates have encouraged some shippers to shift some freight back to LTL transportation. With driver shortages, LTL carriers are being selective as to what they will move and are opting for smaller, more profitable shipments. The slow pace of the economic recovery is serving as a moderating force on inventory levels.
At the same time, truckload carriers are reserving their capacity for direct to customer full load deliveries and cutting back on multi stop partial truckload shipments. Some of this tonnage is moving back to LTL transportation. With tighter capacity, this allows LTL carriers to raise rates. “The mix is shifting more toward the lighter-weight LTL, but that’s a good thing because it adds to our density on our pickup and delivery routes,” commented David Congdon, president and CEO of Old Dominion Freight Lines. “Our business is strong, and it’s taking up a lot of our excess capacity.”
The top 25 LTL carriers in the United States control 87.6 percent of the market. Nine companies with in excess of $1 billion in sales account for 77.1 percent of the business. Most of the major LTL players are showing good increases in tonnage. Not all of the top 25 LTL carriers are benefiting evenly from the improving economy.
A look at a few key pieces of data helps explain the variation in results. Saia, UPS Freight, Con-way, Roadrunner, FedEx Freight and ODFL are all showing increases in yields of 8 percent or more. YRC National and Regional and ABF Freight have produced increases in yield of about 2 percent. YRC blamed the poor increase in yields on customer mix, a reliance on national account customers that come with volume discounts, heavier shipments and “relatively” stable pricing year/year. ODFL did a better job of balancing costs, freight mix and other variables than other publicly traded companies.
FedEx Freight, one of the companies seeking market share during the economic downturn lost $250 million over its last four quarters. Con-way also added low priced freight to gain market share and paid a big price when a surge in inventory restocking forced the company to handle high volumes of low margin freight. ODFL kept its rate discounts in place during 2009 as profits declined.
ODFL had an OR of 91.0 in quarter 1, 2011 while ABF, YRC National and FedEx Freight had OR’s over 105. Clearly targeting the right accounts (e.g. smaller, local customers with higher margins), cost management (e.g. matching capacity to business volumes, choosing when to move overflow truckload shipments versus lighter LTL freight) and yield management (e.g. limiting rate discounting, driving rate increases in line with cost increases and market conditions) are the keys to driving greater profitability in this sector.