Clearing Those Blurred Parcel/LTL Lines
Transport Topics, February 16, 2009
by Andrew Litvin

The recent UPS 2009 rate increase announcement includes higher hundredweight rates and a change in the billable weight calculation for less-than-pallet-load parcel shipments. This year, shippers will see higher billable weights and a higher rate per pound compared with 2008. The compound effect of these changes will make the value proposition of less-than-truckload service more competitive.

Shippers may find it attractive to shift their LPL shipments back to LTL carriers, substituting UPS Freight for that corporation's parcel services, for example. Parcel LPL services now generate about $2.6 billion in revenue for UPS and FedEx, down from $3.5 billion before both expanded their own LTL operations. The latest hundredweight rate changes will affect shippers and the changing competitive landscape of the LTL market.

UPS is increasing the minimum average billable weight in the lower, denser tiers for both air and ground parcel hundredweight shipments. National Motor Freight Classification classes 50, 55, and 60 are seeing the largest increase. Each ground shipment with an average package weight of 20 pounds or less will be billed at 20 pounds per package, increasing the total billable weight. With the general rate increase before discounts, this leads to an increase of up to 39% in total charges, almost entirely due to the billable weight increase, which is a bitter pill for any shipper to swallow during current economic times.

These increases will make ground parcel hundredweight a premium option for LTL shipments in classes covered by Tiers 1 and 2. Shippers using air services fare even worse as the billed rate increase may be as large as 95% over 2008, making airfreight and deferred airfreight attractive alternatives for air parcel hundredweight shipments. Because of the relationship of hundredweight to parcel rates, these increases still leave hundredweight rates lower than those based on individual parcels.

Shippers embraced the introduction of LPL service in the early 1990s as it offered an ideal alternative to LTL for parcel shipments collectively weighing less than 1,000 pounds ( 70% of the LTL target market). UPS Hundredweight and FedEx Ground Multiweight services targeted lower-weight LTL shipments, many at LTL minimum pricing, that LTL carriers did not covet due to their low revenue per shipment. Shippers rewarded the parcel carriers, helping UPS become the largest "LTL shipment carrier" in the country by 2000 with LPL service revenue of about $3 billion, greater than that of any LTL carrier.

Shippers were drawn by the superior technology of parcel carriers. While LTL shipments are often manifested on paper bill-of-lading documents with potential manual look-ups for commodity classifications, parcel carriers offered technology to increase shipping dock productivity and customer satisfaction. Electronic manifesting, electronic billing, online tracking visibility and service guarantees were all key technological differentiators for parcel carriers' LPL services. Individual labeling with LPL service reduced the incidents and provided a sense of security to shippers.

LTL carriers mobilized and began to close the technology gap with parcel carriers, though there is still room for improvement. Many national and regional LTL companies now offer online shipping tools, including Web portals for bill-of-lading creation. Now LTL and parcel shipments can be invoiced electronically on the same bill with transportation management systems such as UPS Worldship.

With UPS owning an LTL carrier, it became important for UPS Hundredweight to not compete directly with LTL. Its operational structure runs parallel parcel and LTL networks that overlap service for shipments of 150 pounds or more. With the changes announced for 2009, it appears that UPS is looking to synchronize these services so shipments are carried in the most optimal network. The rating change is an approach to encourage shippers, through pricing, to move LPL shipments that are more efficiently handled by the LTL network of UPS Freight.

With the acquisition of Overnite in 2005, UPS also reduced its promotion of LPL hundredweight service. Since then, LTL shipments increased 8% and experienced a 7% decline in the average shipment weight. These factors, along with an increase in revenue per pound shipped and a lower average weight for new LTL shipments of about 180 pounds, suggest that UPS was already switching parcel/LPL shipments to its LTL service.

After the initial sticker shock, these 2009 rate changes should have a positive impact on shippers, UPS and the LTL market. Shippers will be motivated to tender multiple parcel shipments to the most suited parcel or LTL carriers, and benefit from changes LTL carriers make to attract these shipments. UPS gains from the changes as the shipments that stay within the parcel hundredweight network will generate higher margins. And LTL carriers will benefit from regaining what were once LTL shipments.

The change in service, shipment visibility, and manifesting implemented for these shipments will also help LTL carriers with their other shipments. When the dust settles, use of the system and increased competition within the LTL market may lead to success for all involved.

Andrew Litvin is an Analyst at SJ Consulting Group, Inc. Founded in 1993 by Satish Jindel, SJ Consulting Group, Pittsburgh, provides strategy, marketing, pricing, merger and acquisition, and operational advice to the transportation and logistics industries.