How Recent STB Rulings Benefit LTLs
Transport Topics, July 30, 2007
by Satish Jindel

The recent Surface Transportation Board ruling relating to further deregulation of the less-than-truckload industry has upset some affected parties, based on responses that include seeking a delay in the effective date to court challenges.

No doubt, the ruling will require carriers, shippers, rate bureaus and organizations supporting the freight classification system to change their practices with LTL freight and pricing. However, it was long overdue. The industry was first deregulated in 1980 and has had 27 years to prepare these changes. In comparison, other deregulated transportation industries have not had such lead time to implement free-market price structure.

Arguments in defense of the current rating and classification system are no longer valid. While National Motor Fright Classification provided an approach to deal with four major transportation characteristics of LTL freight - density, stowability, ease or difficulty of handling and liability - that task is not as challenging today as it was in 1970s, when information technology was largely untried in the industry.

Moreover, NMFC has not helped the industry deal with numerous shortcomings in its pricing structure, such as billing for proper shipment weight, differentiating charges for a product based on either quality or lack of packaging and deficit rating.

It seems NMFC has held back the LTL carriers from using new pricing solutions that would have benefited the industry. Case in point: The three major parcel carriers handle about 24 million parcels per day, or more than 30 times more than all LTL shipments. These parcels contain almost all commodities represented in NMFC. Yet the parcel industry has found solutions using technology to capture weight and cube of these millions of parcels with a rate structure fair and equitable to all shippers and types of parcels.

Even with the extent of technology deployment in the LTL industry, most carriers do not get paid for the accurate weight of the LTL shipments handled. While many less-than-truckload carriers still do not correct shipment weight for differences up to 50 pounds, parcel carriers adjust charges for shortfall by even a few ounces in a parcel's weight.

Besides capturing density, the air-freight and parcel industry (that includes the hundredweight service handling shipments weighing up to 1,000 pounds) has developed solutions to capture charges related to difficulty of handling, stowability and liability without NMFC or anti-trust immunity.

Even LTL carriers now deviate from NMFC on liability in contracts that represent over 80% of all shipments transported.

While stowability and difficulty of handling are major characteristics that impose high cost on the carriers, these attributes are relevant for less than 10% of all LTL shipments. Though improper pricing of these shipments can mean profitability or loss for LTL carriers, these characteristics can be handled as well or better without NMFC - as demonstrated by the air-freight and parcel industry.

For example, parcel carriers deal with such characteristics via special handling fees that either help recovery of such charges or encourage shippers to improve packaging, thereby lowering their operating cost. This ability of parcel carriers has helped them generate about ten percent of their revenue from such surcharges, but it is hardly 2% for the LTL carriers.

Looking ahead, LTL carriers and shippers can expect to gain from the changes that will result with pricing deregulation. Expect solutions that will provide for full recovery of charges for the exact weight of a shipment and higher charges for same commodity tendered without proper packaging.

Commodities on a pallet often are charged the same amount as fully crated ones, though there is a big difference in handling costs. Just visit a LTL terminal and look at machinery-type shipments tendered, but only strapped to a pallet. Only a few shippers will be assessed such special handling charges, but most shippers will benefit from eliminating this cross subsidy that has kept LTL from gaining shipper cooperation on such hard-to-handle shipments.

The anticipated changes in LTL pricing will affect carriers and shippers differently, but certainly will lead to more spending on IT to monitor shipment characteristics for proper rating.

Beyond an improved pricing system for the LTL carriers, new technology will help reduce costs by better load planning on intercity transportation lanes and local delivery routes, capture detailed data on the four major transportation characteristics, and accurately count the pieces in each palletized shipment, mix of pieces and weight of each piece and whole shipments.

With the advanced technology and resources at the new "Big Three" LTL companies - YRC Worldwide, FedEx and UPS, two of which are also the largest parcel carriers - expect them to take a lead with innovative pricing solutions for the LTL industry.

For smaller carriers, this situation will encourage them to accept one of these carriers as the pricing leader and mirror their approach for capturing the shipment characteristics and annual rate increases and overcoming any negative effects from the recent STB rulings.

For carriers unable to make such transition, the new deregulated environment will fuel another round of industry consolidation.

The new solutions triggered by this pricing deregulation will benefit LTL shippers and carriers in ways hard to imagine earlier.

Based near Pittsburgh, SJ Consulting works with less-than-truckload carriers and shippers.