DC Velocity - January 2010

ent overcapacity—the consensus among analysts is that there is 20 percent excess capacity in the LTL sector—truckers have spent the better part of 2009 slashing rates to win or keep business.

At the same time, carriers remained loath to remove capacity, keeping the supply-demand scale firmly tilted in favor of shippers. Satish Jindel, head of SJ Consulting, a Pittsburgh-based consultancy, says with the exception of YRC, no major LTL carrier took out capacity in more than single-digit amounts last year. By contrast, YRC removed up to 30 percent of its capacity by shuttering several regional operations and cutting 190 terminals from its YRC National unit during the 2009 integration of Yellow Transportation and Roadway Express into the new entity.

Most of the predatory pricing was
aimed at taking share from YRC to
drive the financially troubled carri-
er out of business and eliminate a
large source of supply. However, it
appears those plans will have to be
put on hold. A November 2009
agreement under which YRC’s
bondholders planned to exchange
their debt for 1 billion newly issued
equity shares—a deal that will allow
YRC to eliminate nearly $400 mil-
lion in 2010 interest payments and
give it access to a revolving credit
line of more than $100 million—is
likely to keep the trucker afloat at
least through the end of 2010. This
gives YRC critical breathing space to
remain competitive with a smaller,
more efficient network that Zollars
said “fits our business volumes pret-
ty well.” At this writing, the swap
had yet to be consummated.

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ways to remain competitive. “We think carriers, once they realize YRC’s financial situation isn’t as precarious as it was, may step back and create some stability in pricing,” says Jindel.

That could actually be good news for shippers, who while having benefited from a year-long rate gift that kept on giving, understand that in the long run, a carrier’s inability to earn an adequate return may deter it from making the investments needed to deliver a quality product.

Regan of TranzAct believes shippers have picked most of the low-hanging rate fruit and should not expect carriers to slash prices much further for fear of failing to cover even their variable costs. “The bigger shippers have already grabbed the bulk of the savings that are there,” he says. Regan expects LTL rates to remain flat year over year, barring any unexpected developments.

Light at the tunnel’s end?

There may be some light at the end of this very dark tunnel. Truckload rates, which normally lead LTL pricing by many months, appear to have bottomed in late 2009 and are poised for an upward spike. If history is any guide, LTL rates should firm up sometime in 2010.

But these are not ordinary times. Unlike the LTL category, the truckload sector has already seen a significant reduction in capacity during the recession. LTL overcapacity is likely to remain an issue even after freight volumes recover.

Another and perhaps more profound trend is a shift in what Jindel called a shipper’s “product characteristics.” Tonnage has traditionally been the bread and butter of LTL carriers. Yet the goods being produced today are lighter and smaller than ever before, leading to painful declines in tonnage tendered to the carriers.

Jindel says much of this lighter, smaller freight is being increasingly “converted” to parcel services, a factor that may explain why parcel pricing held up relatively well through most of 2009. The analyst says the shrinking in cargo size and weight is a long-term trend, and LTL carriers must reposition their value propositions accordingly or risk losing more business to parcel companies. “This is a more important long-term issue for LTL than pricing,” he says.