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The Reinvention of LTL trucking
The COVID-19 pandemic, e-commerce boom, and technology are reshaping the less-than-truckload sector of the trucking industry in lasting ways.
Welcome to the fourth edition of The Fifth Wheel with Bill Cassidy, a weekly look at a particular aspect of trucking and transportation that’s on my mind or in the news or just caught my eye. Something of a reporter’s notebook. I’ll also post occasional insights and reflections on transportation history.
“Our goal number one is to haul only the freight that fits our mission. And our mission is to make money. We're not in the business of hauling freight just for the pleasure of hauling freight.”
-- Alain Bédard, chairman, president & CEO, TFI International
It hasn’t been a full week since my last missive, but I wanted to talk LTL – less-than-truckload – a bit before we get too far away from the recent second-quarter earnings reports (most of them were released while I was visiting family recently). The LTL sector is “on fire” right now, as one source put it last week, with rising e-commerce and industrial freight demand and spillover from both truckload and parcel sectors squeezing LTL capacity and pushing up rates.
The publicly traded LTL companies have all done well in the economic recovery, maintaining the pricing discipline that has replaced price jockeying based on deep discounts off decades-old tariff rates. LTL carriers have shown willingness to turn away customers that refuse to pay the price they want them to pay to cover costs and provide profits that enable reinvestment. This is not the LTL industry of the early 2000s, let alone the 1990s and 1980s. Why, you ask? Here’s one reason:
“LTL is becoming more central to the consumer ecosystem, as the growth of e-commerce creates more demand for the staging of smaller quantities of goods closer to consumers.”
— Matt Fassler, chief strategy officer, XPO Logistics
LTL carriers are still very dependent on industrial freight, the historic core of their business, but less so than they were five or 10 years ago, and less than they were before the pandemic accelerated e-commerce by five to seven years (according to DHL). That’s going to have a big impact on their future operations and bottom lines.
For one, LTL carriers will be better able to absorb shocks from the industrial cycle than in the past. But as demand for “staging of smaller quantities of goods closer to consumers” grows, so will the need for LTL capacity in the form of terminals, doors, and dockworkers and truck drivers.
Let’s look at a few quarterly results from leading LTL carriers:
FedEx Freight, the largest US LTL carrier and trucking company, increased revenue 38 percent and its operating profit 173 percent in its fiscal quarter that ended May 31, posting an operating ratio of 83.9 percent (the lower the OR, the more profitable the company). Remember, this is the company that imposed “targeted volume controls” on select customers in June.
Old Dominion Freight Line, the second-largest LTL carrier, saw revenue rise 47 percent in the second quarter and net profit jump 82.4 percent. ODFL posted an historically low operating ratio of 72.3 percent. XPO Logistics, the third-largest LTL carrier, increased North American LTL revenue 36.5 percent, operating profit by 267 percent, and brought its operating ratio down to 82.7 percent.
“We're at 248 service centers today and think that we've got a list of sort of 35 or 40 locations on our long-term plan that we want to continue to add to the network and support additional market share opportunities for us and if we have to build them, we we will.”
— Adam Satterfield, CFO, ODFL
ODFL, the most profitable of the publicly owned LTL companies, is putting those profits into expansion, a strategy that helped the carrier double the size of its network over the past 20 years. The LTL sector increasingly is divided between those that can use profits to add capacity, such as ODFL and Saia, and those that are shrinking their networks and looking for greater efficiency to bolster or restore profitability.
Yellow, which is in the process of consolidating four separate subsidiaries, increased revenue 29.3 percent and turned from a $4.6 million operating loss a year ago to an operating profit of $27 million, generating an operating ratio of 97.9 percent. The company did have a $9.4 million net loss in the quarter thanks to non-operating expenses, an indication that it’s not clear of the problems that have led to years of losses at the former YRC Worldwide. But Yellow is making progress.
“While we are not where I expect us to ultimately be on a consistent basis, by executing our yield strategy, we are carefully managing the volume of freight in our network. This allows the network to operate more efficiently, particularly in high volume lanes.”
— Darrel Harris, president, Yellow
TForce Freight, the former UPS Freight and fifth-largest US LTL carrier ranked by revenue, had an operating ratio of 97.1 in the fourth quarter last year. Since being acquired for $800 million by TFI International, TForce Freight has knocked that OR down to 90.1 percent. The big difference? Higher rates and accessorial charges. In an extremely candid earnings conference call, TFI chairman, president and CEO Alain Bédard discussed adjustments made at the former UPS operation. For example, take this comment on trailer detention charges:
“We have a customer whereby we have about 400 trailers of freight every day for appointment. And this customer was paying a very cheap rate of $19 a day, OK, after five days, so we've corrected that for $50 after two days.”
That’s a 163 percent increase in that accessorial, and even more considering that it’s being imposed after two days rather than five days. A customer that was holding onto a trailer four days previously paid nothing, and now pays $100. And that’s not the only cost increase TForce Freight customers are dealing with. More from Bédard:
“We were running this large account [with a] 120 percent OR. I mean, what is this, guys? What were we smoking when we give the rates to this guy? So, July 1, we addressed the situation with this shipper. We addressed a lot of situation like that.”
We’re witnessing, I believe, a serious re-working of the top tranche of the LTL industry. I didn’t mention the fourth-largest carrier, Estes Express Lines, here as they’re a privately owned company, but like ODFL and Saia they are expanding, diversifying, hiring, and experimenting with new technology. We’re also seeing increased interest in LTL from third-party logistics companies and digital marketplaces such as Uber Freight. The acquisition of AAA Cooper Transportation, a multi-regional LTL player, by Knight-Swift deserves a column of its own.
Transformation is perhaps too big a word for what’s happening, but I would say this re-invention. Here are some recent stories from JOC.com on the topic:
ODFL accelerates expansion as rising volumes redraw LTL map (Aug. 10, 2021)
Uber Freight, BlueGrace link up to deliver LTL capacity (July 15, 2021)
E-commerce draws Knight-Swift to LTL sector with $1.35 billion deal (July 6, 2021)
LTL capacity ‘fragile’ as carriers realign networks: Yellow CEO (June 29, 2021)
LTL market only getting tighter: FedEx Freight (June 25, 2021)
LTL sector reaching ‘turning point’ for carriers, shippers (June 16, 2021)
Also, I want to give a shout-out to S.L. Fuller, an editor at Transport Dive and Supply Chain Dive, for this insightful story on TForce Freight:
Thanks for subscribing to this newsletter. For those that don’t know me, I’ve been the senior editor for trucking and domestic transportation at The Journal of Commerce and JOC.com since 2009. Before that, I spent 13 years as managing and executive editor at Traffic World, a weekly magazine once owned by the JOC.
I started covering the trucking beat in 1984, at Fleet Owner magazine. The first trucking company I visited (February 1985, I believe, along with Fleet Owner editor-in-chief Daniel P. “Mike” Eigo) was A-P-A Transport, a regional LTL carrier in North Bergen, N.J. A-P-A shut down in 2002. It’s founder, Arthur Imperatore, later famed as a New York-New Jersey ferry operator died last year.
I can be reached at bill.cassidy@ihsmarkit.com, on Twitter at @willbcassidy, and on LinkedIn.