Density is king for motor carriers. Running in lanes where trucks are full is not only efficient; it is more profitable, in part because the carrier can hold its rate. Does it also hold true for shippers that service is best on active lanes?
Among the top measures of carrier performance shippers watch is delivery when promised and pick up when promised. If a carrier is loading for a lane where it has plenty of freight, it could direct-load to a destination terminal and avoid some stops and handling between the shipper and consignee. This can also have a positive effect for another critical metric, shortages and damage. More handling means more opportunity for a part of a load to be damaged or lost.
One of the areas where lane density works against a shipper, however, is on rates. If you're in a heavy head-haul lane, carriers have less need to negotiate on rates or service because their available capacity is full. If, on the other hand, you're in a prime backhaul lane where a large number of carriers are chasing a few loads, you're negotiating against unfilled capacity and a prospect of an empty or partially empty backhaul run for the carrier.
The ability to put equipment and drivers on the road is partly dependent on the carrier's financial condition and also on current market conditions. There are some broad measures that are publicly available or easily accessible that can provide some insight into overall carrier performance. One of these is Morgan Stanley's Truckload Freight Index. Though it is a proprietary tool developed by the equity analyst, it is widely reported.
The Truckload Freight Index gives a weekly snapshot of freight demand vs. capacity on the truckload side. While there are major differences between truckload and less than truckload (LTL) and the markets and types of shippers they serve, the Index offers a sense of which way volumes are trending. Currently, it is pointing up, but barely. In its report for the last week in June, Morgan Stanley analysts said the index was better than the historical trend, "but hardly improving enough for us to suggest there is a meaningful rebound in the truckload environment." Incremental supply and demand were leveling, said Morgan Stanley, and the rebound in demand may be pushed out to late in the third quarter or even into the fourth quarter of 2007.
Carriers have been a little heavy on capacity as a result of widely reported fleet pre-buys related to the 2007 emissions requirements. Some of the effects of the advance purchases of equipment were moderated by a shortage of drivers. The net effect for shippers was that in the truckload segment, capacity was less of an issue than it had been in prior quarters, but there was not an overwhelming overcapacity. In the LTL segment, where driver turnover is typically lower than in truckload and the supply of drivers remains more constant, capacity was further ahead of demand both before and after the pre-buy.
Freight volumes had slowed in part because companies were working off inventory excesses that had built up towards the end of 2006. Consumer demand had also slowed. And, the impact of the housing downturn and a drop of demand in domestic autos were both filtering through supplying industries that support those markets.
Some large shippers were also putting out very large bid packages, says Stifel Nicolaus, another analyst firm. This had the effect of depressing pricing.
Summing up the big picture, new home sales were down in the Spring, housing starts had fallen 24.2% in May (year on year), retail sales had grown only 1% in May, international air cargo volumes had started to decline in March, West Coast port traffic growth slowed to 2.8% in April, and truck tonnage dropped in April.
In its report, Stifel Nicolaus said that at national LTL carrier ABF, daily tonnage was down 6% to 7% in the second quarter. Con-way saw year-on-year tonnage decline 8% in the fourth quarter, but it was starting to see positive tonnage comparisons by March 2007. Those volume increases could be the result of some softening of pricing, the analyst observed.
Some markets were responding to different drivers. In the Northeast and East, capacity was tight, offering an opportunity for companies like Old Dominion Freight Lines, which grew tonnage 7% in the first quarter of 2007, to maintain stable pricing. Privately held regional carriers like Pitt-Ohio Express (also serving the Northeast) were growing, though fewer of their numbers are publicly reported.
The volatile market has exacted a price from carriers and shippers alike. Companies like ABF have seen some volume erosion in part because it maintains a tight pricing discipline. Commenting in its earnings preview, Stifel Nicolaus suggested ABF "should emerge as [the] last remaining long-haul, unionized LTL carrier, after the next sector down cycle." Essentially debt free, ABF appears to be holding onto its cash and maintaining stable pricing in anticipation of a tough market ahead.
Other carriers have been on the acquisition trail. Perhaps the largest acquisition recently was Watkins, which has become the long-haul LTL operation within FedEx. The integration of Watkins' Canadian operations also gave FedEx a strong LTL presence in Canada. Smaller acquisitions have also been moving forward. Vitran's acquisition of PJAX extended its network in a bid to fill some of the gaps in its planned nationwide network.
The situation in LTL looks a bit like the years before deregulation when carriers systematically acquired companies to obtain operating authority in the states those carriers served. But in the current environment, where virtually every carrier has nationwide operating authority, the goal is to expand by acquiring density. It's not the operating rights carriers are pursuing; it's the customer base and freight.
Non-union Saia has been expanding. It is among the companies reporting positive tonnage comparisons year on year (the others Stifel Nicolaus singles out include Old Dominion, FedEx Freight, and Vitran). Saia's expansion strategy appears to have benefited from the sale of Jevic. It could be in line for an even larger windfall if Central Freight Lines should close, suggests Stifel Nicolaus.
Old Dominion is among the beneficiaries of a volatile market in the Northeast. The high cost to serve the region contributed to the closing of APA, Red Star and G.O.D. The closures led to tighter capacity in the region, but the overall volume drop has nonetheless contributed to slower tonnage growth.
Facing some uphill battles, the integration of UPS Freight has reportedly been difficult for parent UPS. It also faces the prospect of the non-union acquisition being organized by the International Brotherhood of Teamsters (IBT). Only one terminal has so far voted to accept IBT representation, but most industry observers are assuming that after IBT General President James Hoffa announced the carrier as a target for organization, it was only a matter of time before the remainder of the operations would be organized. The Teamsters will use the contract negotiated for the Indianapolis terminal as the model for the broader effort. But before that will take place, the Teamsters and UPS are negotiating on the contract governing its parcel operations.
YRC Worldwide, the largest LTL carrier in the US, with an estimated 30% of the market, will face some integration issues of its own and could also face organization efforts by the Teamsters. Over the next two years, YRC will start integrating the linehaul and terminal networks of its Roadway Express and Yellow Transportation LTL operations. According to Stifel Nicolaus, integrating the two units, which continued to operate independently following the Roadway acquisition, "could prove challenging." The network rationalization and integration was actually expected shortly after the acquisition, but a dramatic rise in freight volumes that accompanied the strong growth of the US economy made it possible for YRC to stick to its initial promise to operate the units independently.
YRC didn't stop with the acquisition of Roadway Express, and now its network includes the group of regional carriers from USF. The non-union operations within YRC are also a target for the Teamsters and the issue is likely to come up as the company sits down to negotiate on the National Master Freight Agreement which expires at the end of March 2008.
There's clearly no shortage of challenges facing the LTL industry. Freight volumes in some sectors will continue to be affected by consumer confidence, employment levels, and interest rates. The weak US dollar, on the other hand, has been good for US exports, which is, in turn, good for the truckload and intermodal sectors. With volumes and revenues on the line, will the LTL sector continue to have the capital to spend on acquisitions or to invest in operations?
For shippers, this leaves a delicate balance between rate relief, which may seem attractive, and service, which is vital. In this respect, shippers indicate the five service attributes that are most important include pick-up when promised, delivery when promised, no shorts or damage, effective problem solving, and competitive pricing, says research/consulting firm Mastiogale.
Mastiogale conducts semi-annual surveys of shippers to determine which factors are most important in measuring service and then which carriers perform best overall and in each of those categories. It follows up the core survey with personal interviews.
Taking a small slice of the Mastiogale database and looking at who is in the top 10 in each of the highest ranked service attributes offers an interesting profile of the type of LTL carrier that performs best. That profile is that there is no simple profile. Most carriers with high ratings are regional. Some entered the business after deregulation; others are over 70 years old. Some are still family run; others are publicly traded or have investors or officers who are not part of the founding family. The carriers are based in all regions of the country.
The carriers are basically all regional but not geographically concentrated. Smaller companies with fewer terminals appear to have an edge over the larger carriers. One reason could be closer control over operations. National carriers' ratings may suffer partly because some select terminals have problems while most provide good overall service at a high standard.
There's clearly a service culture at work among the carriers that shippers rate highly. Four carriers are present in the top 10 of each of the five attributes. Another carrier is present in four out of five.
Setting aside the competitive pricing attribute to keep the comparisons on strictly service related factors, there are 15 carriers mentioned. The pattern seems to be that the carrier that picks up when promised typically also delivers when promised. Or, almost equally, the carrier that delivers when promised doesn't have issues with shorts and damage.
Whether the carrier companies were founded in the 1930s, 1950s, or they are children of deregulation, and regardless of their region, it appears that service is a core value in the top ranked companies. Looking at earlier lists, many of these same companies appear repeatedly.
Acquisitions may take a toll on a carrier's rating. Hitting bumps along the way while integrating an acquisition can be disruptive or merely an inconvenience. Some more serious problems can plague a carrier and its reputation for a much longer time. The Mastiogale study asks only about carriers the shipper is using, so it reflects performance, not just reputation (good or bad).
Pricing is also a tough issue, and the perception of value when weighed against price can cost a carrier points in any rating system. This becomes more acute with an acquisition where a carrier with a reputation for lower service suddenly comes under the stricter rate discipline of the acquiring carrier. Shippers may perceive the upward pressure on pricing negatively when weighed against service.
Any number of factors contribute to shippers' perceptions of how well a carrier serves them, but the core issues of on time pick ups and deliveries, not damaging the freight, and stepping up with effective solutions when problems do occur continue to be paramount with shippers. To some degree, the carrier's financial stability and its ability (and willingness) to invest in the tools and training to achieve those goals will influence service. Proper hiring, which can come back to the ability to offer competitive wage and benefit packages, also comes into play. A management team that knows and promotes the company values—consistently--may be equally important. But for shippers, the measurable difference shows up in service.
Selected LTL Operating Ratios
Forward Air .........................................79.2
Old Dominion ......................................89.9
Con-way ..............................................92.0
ABF .......................................................93.7
Saia ......................................................93.9
YRC .......................................................94.8
VitranFrozen Food Express ..............98.5
Source: Stifel Nicolaus
