DC Velocity - January 2010

BY MARK B. SOLOMON, SENIOR EDITOR
NATIONAL MOTOR FREIGHT
transportationreport

perdition

Are price wars putting truckers on a path to self-destruction?

WHEN DOES RATE-CUTTING MORPH INTO
throat-cutting?

That may be a reasonable question for trucking executives to ponder as they start 2010. That is, if they aren’t too busy beating each other up over pricing to think through the consequences of their actions.

As a grinding freight recession ended its third year, the rate environment for truckload and, in particular, less-than-truckload (LTL) services continued to weaken. Pricing trends in both categories deteriorated considerably in the third quarter from the first half of 2009, according to data culled from company reports and compiled by investment banker JPMorgan Chase. Even railroad pricing on commodities for which the rails compete with truckload carriers has been hurt by the weakness in truckload rates, according to the firm. Only ground and express parcel services showed a sequential pricing improvement through the first three quarters of 2009, according to the JPMorgan data.

Industry veterans have rarely seen anything like it. Michael Regan, CEO of TranzAct Technologies Inc., an Elmhurst, Ill.-based consultancy that over the years has negotiated and purchased billions of dollars of LTL capacity for shipper clients, says he’s seen discounts of as much as 90 percent below retail, or tariff, rates.

The pain is being felt across the carrier spectrum. For example, two of the healthiest LTL carriers, Old Dominion Freight Line Inc. and Con-way Inc., posted sub-par revenue and net income results in the third quarter of 2009, with the top executives at both companies attributing their

respective performances to declines in tonnage
and aggressive pricing competition.

“Overall, the business environment continues to present formidable challenges, characterized by weak demand, excess capacity, and pricing pressure. We expect these conditions to persist in the near term, diminishing the prospects for earnings growth,” Con-way President and CEO Douglas W. Stotlar said in a statement accompanying his company’s results.

William D. Zollars, chairman and CEO of YRC Worldwide Inc., the nation’s largest LTL carrier, said he doesn’t expect a meaningful economic or freight rebound during the first half of 2010 and that rate weakness will likely continue at least through that period. In an interview with TranzAct’s Regan, Zollars said YRC has been disciplined about pricing, noting it increasingly walks away from freight it deems to be unprofitable.

“We don’t want to be acting like our competi-
tors who are ‘fire-saleing’ things for various rea-
sons,” Zollars said in the interview.

Yet that didn’t stop YRC from discounting its rates by as much as one-third through at least the end of 2009. Jon A. Langenfeld, a transport analyst for Milwaukee-based Robert W. Baird & Co. who reported the YRC move in a recent research note, said the action represents more “pricing aggression” that will impede a meaningful recovery in prices and negatively impact LTL profitability well into 2010.