Sometime in the past quarter, the wheels came off the less-than-truckload industry.
LTL carriers face their biggest economic challenge since deregulation in 1980, and companies are having to adapt to a changing LTL landscape and changing shipper distribution patterns to survive the recession.
Unlike truckload carriers, LTL operators’ heavy reliance on a network of cross-dock terminals and a large fleet of trucks requires a steady volume of freight to soak up fixed costs. That business model has collapsed under its own weight in this recession without the consumer demand to prop it up.
A new model is rising from the rubble, and it includes some different and unusual faces: Third-party logistics operators, brokers and even truckload carriers looking for new sources of freight are quite willing to dip into the LTL pool for market share.
“We’re getting a lot of LTL opportunities from truckload type customers where we can manage the relationship pretty effectively because we already know them and are doing business with them,” said John P. Wiehoff, chairman and CEO of C.H. Robinson Worldwide, a third-party logistics company and transportation broker.
The $8.5 billion company is still expanding its LTL traffic, although at a slower pace. It increased its LTL volume percent in 2008 and 5 percent in the first quarter, even as volumes plunged at asset-based LTL carriers.
It’s not just large multimodal companies that are after LTL shippers’ freight. Oklahoma City-based Smart Lines, a truckload broker, recently launched an LTL division to capture smaller shipments that could be aggregated into truckload shipments.
“Ultimately, the cost differential is huge if you can do it,” said Greg Roush, president of the company and whose grandfather, Carroll Roush, founded onetime national LTL giant Roadway.
But truckload carriers facing falling volumes also are putting more of their gaping capacity onto spot markets looking for even smaller LTL shipments to get revenue out of their trucks, and that’s helping pull down pricing.
“The truckload carriers are eating into the LTL business,” said Satish Jindel, principal at SJ Consulting. “And you have more 3PLs working with shippers looking for ways to optimize their transportation. Where do the savings come from? It comes from the skin of the carrier.”
And those LTL carriers are operating with plentiful trucking capacity chasing business. A report by investment research firm Avondale Partners released last week said 480 trucking companies went out of business in the first quarter. They were mostly small companies, however, holding only about 1 percent of the market.
Avondale analyst Donald Broughton said the failure rate for trucking companies in the first quarter was only about half what it was in the same period last year. Falling fuel prices, he said, likely have helped some financially troubled companies survive after some stepped to the precipice last year.
“The industry has not seen the bankruptcies that took capacity out after 2001,” Jindel said. “Instead, you have had a couple of new players, UPS and FedEx, coming in and bringing a new approach in dealing with pricing and service. They have brought brand names, new technology and a new value proposition to the market. Many LTL carriers haven’t known how to respond.”
YRC Worldwide, the nation’s third-largest trucking operation by revenue, has come to symbolize the LTL industry’s dilemma.
YRC racked up a $257.4 million loss in the first quarter. That followed a $244.4 million loss in the fourth quarter of 2008 and a $974.4 million loss for the full year.
YRC merged its two national long-haul carriers, Yellow Transportation and Roadway, on March 1, to create YRC National Transportation, a move most financial analysts and industry experts believed overdue. But that integration — accelerated in a rapidly weakening competitive landscape — led to service disruptions that YRC admits cost the carrier customers, at least temporarily. It also led to more price-slashing by competitors, led by nonunion carriers FedEx Freight and Con-way Freight.
So far, the $9 billion LTL giant has survived the storm. It still controls more than 20 percent of the LTL market, even after seeing average tons per day fall 29.5 percent at YRC National and 27.7 percent at its YRC Regional business in the first quarter compared to the first three months of 2008.
And the storm is still rising, as LTL carriers of all stripes chase rapidly declining tonnage with intense price cuts.
Aggressive bidding by shippers and carrier discounting led to a 6.8 percent year-over-year decline in pricing in the first quarter among the publicly traded LTL carriers. Yield among the major LTLs was down 6.7 percent for the quarter compared to the same period last year as tonnage for the carriers plunged 17.3 percent.
The battle to the bottom is showing little sign of slowing down. “We’re seeing LTL carriers get very aggressive on spot volume quotes,” said Jeffrey G. Tucker, CEO of Tucker Co., a Cherry Hill, N.J.-based freight broker. “They’re using their smaller 28-foot (trailers) to take freight at rock-bottom prices.” Tucker estimates those prices to be 40 to 50 percent below what they were before freight volumes began a steady decline two years ago.
Con-way, the country’s sixth-largest trucking company last year with $3.5 billion in trucking revenue, had an operating loss of $150.3 million in the first quarter, including a massive goodwill write-down charge. That compares with a profit of $54 million in last year’s first quarter. Although Con-way lost money in the first two months of the quarter, the company said it returned to profitability in March, thanks to a seasonal upturn in business and market share gains.
“There are some signs that our freight volumes may be nearing a bottom,” Con-way President and CEO Douglas W. Stotlar said. “However, feedback from our customers as well as trend data for industrial output and inventory levels indicate that shipping volumes are likely to remain restrained, certainly for the short term.”
Arkansas Best, which like YRC manages unionized labor force across a sprawling LTL network, lost $29 million in the quarter as revenue fell 23.3 percent to $323.1 million. Tonnage per day decreased 15.7 percent in the same period, and its operating ratio, a key measure of operating efficiency, worsened to 108.3 percent from 97 percent in first-quarter 2008.
Arkansas Best and its ABF Freight System business says a new round of cutbacks mean the trucker will be about 20 percent smaller than it was only three years ago.
Even UPS Freight, which has been reaping significant cross-selling benefits from parcel shippers using its express delivery parent, conceded it fell into the red starting in the second quarter.
Still, UPS Freight spokesman Ira Rosenfeld, pointing to recent service enhancements and the rollout of the company’s Quantum View visibility tool, said the carrier remains focused on growth beyond the downturn.
“We are not pulling back, we are expanding,” he said.
“Yes, the pie is getting smaller. But that business is moving to better companies that are adding services and expanding their networks,” Rosenfeld said. “We are focused on expanding our share of the market and positioning ourselves for the recovery.”
Some of UPS’s customers are positioning themselves for the recovery as well, but not by expanding. Specialty food manufacturer and retailer Hickory Farms is paring down its rail and truck networks and building stronger relationships with fewer carriers. The move is designed not only to shave costs but also to prepare for a stronger economy with the potential of stronger but fewer carriers from which to choose.
“We’re not going to take the easy dollars now,” said Ty Hanline, director of logistics for Hickory Farms. “A lot of carriers are throwing up whatever rates they can to keep trucks moving on both the LTL and truckload side. We want to build partnerships for the longer term. My style is to build relationships and do systemic things, not just beat up carriers on price.”
Mark Whittaker, vice president of transportation at Pepsico, which uses LTL and truckload for moving freight from manufacturers to distribution facilities, is also strengthening relationships in anticipation of tighter capacity and fewer players.
“We’re trying to keep these guys viable by giving them a good book of business to help reduce the inefficiencies in their business,” Whittaker said. “If I have a location that’s delaying our carriers, I have it fixed so trucks aren’t sitting there idling just because we don’t have our act together. You can’t take your eye off the fact these guys have to be there for you whether the environment favors shippers or carriers. No short-term plays are going to help you in long run.”
Tighter relationships among carriers and shippers will help each secure freight and capacity when the economy bounces back, but a turnaround could take longer than predicted.
Debra Pluchino, vice president of freight broker and logistics company GMG Transportation, estimates trucking rates have dropped to the lowest levels in 10 years.
“I think it will take the industry several years to recoup that,” she said. “But there has to be a turnaround if we want to maintain quality transportation.”
If YRC survives long enough to boost service and rebuild its profit, the carrier could act as a further check on rates once the economy turns around, with shippers as the beneficiaries.
“I feel good about our national integration, and I think it will improve our position as a market leader,” said William D. Zollars, YRC chairman, president and CEO.
But Zollars can’t control the recession, which places more pressure on YRC to perform every day. The carrier is in danger of breaching covenants on its senior loans if it doesn’t have minimum earnings of $45 million in the second quarter or meet other minimums later in the year.
Zollars also can’t control the credit agencies, which on April 27 revised YRC’s credit standing from positive to negative because of the company’s poor quarterly results and the state of the LTL market.
“YRC is hard to predict,” Jindel said. “It depends on what happens with (pro-labor legislation), the economy and the competition — too many variables, not to mention what they do to manage the business model that they have in front of them.