Commentary: Don't Bet on High LTL Rates Despite YRC Troubles
American Shipper + Shippers' NewsWire, December 30, 2009
by Satish Jindel

Many reports suggest that the less-than-truckload industry will experience high, single-digit price increases with the demise of a large carrier, similar to what happened when Consolidated Freightways (CF) closed in September 2002. Even with YRC Worldwide on the ropes, believers should note that the LTL industry is much different today than eight years ago

First, CF closed in September, the start of the peak shipping season. If YRC should fail - and that's not a foregone conclusion - the first quarter is the weakest shipping season. Second, the LTL industry was at full capacity in 2002 whereas today it is 35 percent over capacity, or double the market share of YRC, the largest LTL carrier. Third, when CF went under the economy was strong with an unemployment rate of 5.7 percent. In 2010, the economy is much worse with an unemployment rate of 10.2 percent.

There are also significant differences in the carrier base available to capture dislocated customers compared to fall 2002. At the time, most of CF's shipments moved to rival long-haul carriers Yellow Transportation, Roadway (both of which are now part of YRC) and ABF Freight System. Today, there are more than a half dozen national or inter-regional carriers with long-haul service.

A closer examination of the two companies also shows that CF and YRC lack many similarities. At least 70 percent of CF's shipments moved in lanes with transit times of three-days or more, while a similar amount of YRC freight moves in lanes of two days or less. That means more than 20 other LTL carriers now have an opportunity to go after those shipments.

CF also was a single U.S. operation, while YRC owns a large national carrier and three regional ones, each with different levels of profitability. It's possible that all the subsidiaries may not close at the same time.

The battered economy also means the pricing environment is different today. LTL pricing was already increasing at a low single digit rate when CF closed. Yet the fourth quarter 2002 yields of the remaining Big 3 carriers only rose 4.8 percent, or 2 percent if adjusted for the long-haul characteristics of CF shipments they gained. During the past year of challenges at YRC, competitors have set shipper expectations for lower prices with aggressive discounting in an effort to gain market share from YRC.

Another factor that should keep a lid on rates is that supply chain efficiencies since the beginning of the decade have helped drive down LTL shipment volumes. More shippers have turned to third-party logistics providers that exploit the over capacity and consolidate shipments to keep rates for their customers at current levels. Finally, major cause of the LTL industry's poor health is the decline of the manufacturing sector in recent years. Now, the distribution and retail sectors represent a much larger share of LTL shipments, enabling non-LTL niche carriers to enter the competitive mix for shipment diversion.

YRC has a difficult road trying to satisfy creditors and customers alike while trying to return to profitability, but one shouldn't assume its end is inevitable. YRC is expected to receive more than $100 million from the U.S. Treasury, once it files its 2010 tax return, for prior year taxes that are now fundable with losses in 2008 and 2009. Also, the Teamsters union could draw on its White House connections to push congressional passage of a pending bill that would ease rules governing multi-employer pension plans, which place a burden on a handful of unionized companies without broader industry participation.

The bottom line is that the LTL industry is unlikely to experience anything beyond a low single-digit rate increase if YRC fails. With many LTL carriers looking to fill their excess capacity, higher profits will come from lower incremental cost associated with any additional shipments and from attracting the right mix of shipments.

Satish Jindel is president of SJ Consulting Group, Inc. with offices in Pittsburgh and India.