LTL Pricing Hurts Industry
Traffic World, January 11, 1999
by Satish Jindel

Complex rating, classification system breeds mistrust among shippers, erodes profit margins for carriers

The LTL industry was deregulated for interstate traffic in 1980 and for intrastate traffic in 1995. During this period, it has transformed with bankruptcies, mergers and acquisitions. In spite of this consolidation, while a few carriers have prospered, the LTL industry as a whole has lost a significant portion of its share of the intercity freight market, which has dropped from 10 percent in 1983 to 6 percent last year. Meanwhile, parcel carriers have gained most of that traffic, increasing their share from 3.9 percent in 1983 to 9.5 percent last year.

Why has the LTL industry lost business while the parcel-express carriers have experienced double-digit annual growth? Many industry executives and analysts point to a weak economy and the Teamsters. However, the parcel carriers have thrived in this same economy and UPS, the largest parcel-express carrier, is also the industry's largest union shop.

The LTL industry needs to look inside for answers to its decline. Because of the growing emphasis on just-in-time and Quick Response, shippers and consignees now ship smaller shipments more frequently. Additionally, technological developments have modified product characteristics, thereby reducing the average weight and size of shipments. Moreover, the growth of third-party logistics business has converted heavier LTL shipments into truckload movements. But the LTL industry's response to these changes from both operational and pricing viewpoints has been inadequate. The industry still lacks competitive pricing programs for shipments below 500 pounds, and depends on a far too complex pricing structure.

Pricing Complexity

The current product classification and deficit rating systems are burdensome for the industry. Because LTL pricing is complex and difficult to comprehend, it breeds mistrust among shippers toward the carriers. This has led to the growth of the freight bill payment and audit business, which has increased the cost of accounts receivable and hurt the profit margins of the carriers. Yet, both parties are reluctant to change for fear of the unknown. While shippers accept limited liability from the parcel carriers, they insist on full-value liability from the LTL carriers.

The LTL pricing structure is a holdover from the regulated era when there was one major parcel carrier and a clear distinction between parcels and LTL shipments. At that time, UPS handled parcels weighing up to 70 pounds and did not offer shipment pricing to attract low-weight LTL shipments. Today, there are more parcel-express carriers aggressively seeking service-sensitive and high-yield LTL shipments. Restructuring pricing is essential to the future growth of the LTL industry. The major shortcomings of the current system are:

• The deficit rating system erodes profit margins for many shipments because 35 percent more weight is handled without any increase in shipping charges. For example, a 1000-pound Class 50 shipment has the same charge as a 735-pound shipment. And a 5,000-pound Class 70 shipment is priced the same as a 3900-pound shipment.

• The NMFC system for establishing the density and value of shipments is expensive, outdated, and complex. It includes 10,000 items and a simple product like paper is classified in as many ways as it is sold. Does it really matter what is in the box, if the density is known?
• The bill of lading is paper and labor intensive. Even after several refinements, it does not provide important details like the number of pieces in a pallet. In comparison, the parcel- express carriers have automated their processes (with UPS Online, FedEx Ship, MultiShip) for large and small shippers. 
• Full-value liability has placed the LTL industry in the insurance business with more risk-to- reward ratio than any insurance company would bear. While shippers should assume some responsibility, the LTL carriers have been reluctant to press for change. The hundredweight pricing by UPS, RPS and FedEx does not include full-value liability, suggesting that shippers would consider change in exchange for better pricing and operational system.
• The industry still depends on shippers for shipment weight. With no repercussions for stating lower weight on the bill of lading, LTL carriers lose profit dollars while handling additional weight.
• The industry continues to offer same-day on-demand pickup at no extra charge even to infrequent customers. In comparison, the parcel-express carriers collect an additional fee (from $3 to $5 per package) for same-day pick up for express (premium priced) service and next-day pickup for standard service. The LTL carriers do more for less considering that their average yield per pound is 10 cents, as compared to 35 cents for parcel carriers and 80 cents for express carriers.
• LTL accessorial charges are complex and require payment by consignee even on prepaid shipments. Consequently, the carriers have to waive these charges with large customers. With others shippers, it results in multiple delivery attempts, additional costs, unnecessary friction between the driver and the consignee, and perception of inferior service.
• The base rates are so out of line with the cost of service that even a one-time shipper can get 50 percent discount by asking. It feeds on mistrust and allows the parcel carriers to expose the pricing shortcomings of the LTL industry.

It is hard to find industries that price their services with such complexity. Some LTL executives point out that their pricing for large shippers does not involve this complex structure due to FAK rates and limited per-pound liability. Nevertheless, even the FAK approach leaves the industry with a perception problem and loss of higher-yield business from small shippers.

Future Implications

The LTL carriers offer certain operational advantages (shorter transit times in regional markets and fewer restrictions on shipment characteristics, for example) for the shippers. However, these advantages are lost in the complexity of the pricing structure. Hence, unless the LTL industry reforms its pricing system, it risks losing more profitable shipments to other segments of inter-city trucking. With simpler pricing by parcel carriers for multiple-piece shipments up to 3,000 pounds, and truckload carriers for shipments above 8,000 pounds, the LTL industry will be left to handle the less profitable and smaller portion of intercity freight. Because of the recent increase in parcel weight from 70 to 150 pound and aggressive promotions to attract heavier parcel shipments, the parcel-express carriers will accelerate this trend. Already, the Big three (Roadway Express, Yellow Freight System and Consolidated Freightways) of the regulated era have been replaced by UPS, FDX and CNF Transportation.

Whether it is the government, union or shippers that have limited the industry from implementing changes, the LTL carriers bear the responsibility of simplifying the pricing system. If the previous attempts have not been successful, then it is time to look 'outside the box'.

Jindel is a principal of SJ Consulting Group, Inc. in Pittsburgh, PA.