When assessing the current state of the less-than-truckload (LTL) market, it is not hard to see that there are a lot of things working in its favor, whether it be favorable pricing levels, especially compared to the same period a year ago, as well as an increase in freight activity towards the end of the first half of the year, too.
In a recent research note previewing second quarter earnings, Stifel analyst Dave Ross took a look back at the first quarter. Ross noted that weight per shipment was up throughout the LTL sector for the sixth straight quarter, which, in turn, led to the highest average shipment size going back to 2014.
“This is due to the stronger industrial economy and the heavier-weight shipments that are coming from the [truckload] capacity crunch,” he wrote.
Addressing pricing, Ross observed that on a year-to-date basis, LTL revenues are up 10% or more for LTL carriers through either volume or yield gains, coupled with pricing up in the 4%-to-7% range.
While pricing and strong economic fundamentals lend itself to good financials for carriers, the LTL sector is not without its challenges, though. To be sure, like on the truckload side, driver availability is an issue, with Ross calling it “as challenging as ever for LTL carriers.”
What’s more, there is another challenge in the LTL sector that directly impacts LTL shippers not getting what they need from carriers, with carriers widening embargoes on shipments in certain parts of the United States.
For all intents and purposes, LTL carrier networks are completely saturated and operating at full capacity. What does this mean? Well, in the words of one LTL carrier, it impacts its ability to respond to what it used to call the buffer issues. When there is a sudden spike in demand or a sudden change requiring extra trucks, they simply don’t have the capacity to provide those trucks to shippers.
These developments have led to some things that the LTL sector has never seen, adding that the volume and number of freight embargoing occurring is “stunning,” regardless of region.
We are seeing carriers tell shippers that ‘we simply cannot handle the extra volume. Some carriers are suspending service guarantees, saying that they can no longer guarantee a consistent level of service throughout their networks. [Shippers] can react and say that is not right or fair, but that is the reality.
On an anecdotal basis, we used a customer with roughly $65-to-$70 million in annual LTL spend as an example.
This customer is opening up a facility in Washington and asked us for some carriers to use for this new facility. We gave them four carriers, and he said ‘bad news, Mike, three of the four we are already doing business with and they told us they will not accept any additional volume in the network right now.’ Think about that. Carriers are telling shippers they will not accept any more freight above their normal run rate, which has never happened, save for the Brownout of 1997, when FedEx said, ‘look, we are not taking on any additional UPS business.’
A few different factors that are driving this current LTL turmoil. One is a stronger economy. With second quarter GDP expected to come in at least 2.5%, he said that is sustainable for the LTL sector. But were GDP to hit 4%, he said that could lead to a more dire environment as the current freight network is not equipped to sustain GDP growth at that level.
You are also seeing shippers willing to take trucks they used to deploy for truckload runs now breaking those down via LTL, because they cannot find trucks. So carriers are now getting inundated with those types of requests, which is why they are going to have to adjust their pricing as they don’t want to handle that freight. This is what I call the precision trucking initiative, which is creating all sorts of demands on networks that people have not fleshed out yet.
Other issues related to these LTL freight turndowns, could arise from must-arrive-by-date and OTIF (on-time and in-full) requirements by large retail shippers like Wal-Mart and others.
Many large LTL carriers are sending the market a signal and if you are not picking up on that signal, you will be in trouble.
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