DC Velocity - June 2012

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FLAK OVER ‘FAK’

Despite the marked improvement, LTL carriers still face two big structural problems. The first is that large shippers continue to use their volume clout to beat back attempts at rate increases; the second is that carriers regularly misprice “Freight All Kinds” (FAK) shipments tendered to them. As a result, carriers undercharge for shipments that weigh more than they realize, allowing shippers to pay lower rates than they should. Because of those two issues, pricing is “still not where it needs to be” to enable carriers to earn their cost of capital, said Ross.

Rogers of YRC Freight said the issue of
FAK mispricing has been around for
years but has become more prevalent
with the increasing influence of third-
party logistics service companies (3PLs),
which tender a large percentage of loads
that generate FAK rates. He said YRC
tries to avoid 3PLs that are just “price
shoppers” and works instead with those
intermediaries “who bring us new busi-
ness and take cost out of our pricing
structure.”
Logue of FedEx Freight said the sector
needs to move away from “classifica-
tion” pricing, where rates are deter-
mined by the characteristics of com-
modity classes, to a more simplified
structure based on shipment distances,
or “zones,” and density. The latter
approach, long used by FedEx’s core
parcel customers, would be a “game-
changer” for LTL if adopted, Logue said.
He added, though, that such a move
would likely be a long and complex
transition for shippers and carriers.

Satish Jindel, president of Pittsburgh-based consultancy SJ Consulting, said at a recent industry conference that the current classification rate structure “creates no incentive for shippers to adopt good pricing practices.” Many LTL users have enjoyed a pricing windfall over the past 30 years, and the flip side of that can be found in the paltry increase in carrier yields, Jindel noted.

In 2011, LTL rates per hundredweight—the most commonly used barometer of carrier yields—stood at $16.71, according to SJ Consulting data.

In 1983, they were at $14.08 per hundredweight. The annualized 0.6-percent gain has been dwarfed by the annualized 2.6-percent rise in the cost of labor and trucks, SJ data shows.

SLOW ROAD TO RECOVERY

As an example of the pricing needs of one carrier, YRC’s rates would have to rise about 8 percent above where they are today to restore and maintain consistent profitability, according to Charles W. Clowdis Jr., a trucking executive for decades and now head of transportation advisory services for the consultancy IHS Global Insight.

Rogers of YRC Freight said an 8-per- cent across-the-board increase “is not going to happen” given current market conditions, though on some lane segments the carrier is securing increases higher than that. A key challenge facing YRC is that its customer mix is tilted more heavily toward high-volume corporate business than the company wants. Rogers said, however, that he’s more comfortable than he’s been in years asking large accounts for rate hikes. In the meantime, YRC continues to target noncorporate accounts that would be willing to pay higher rates for service, he said.

Rogers said the carrier doesn’t “need
an 8-percent increase” to be consistently
profitable and viable. He said, “getting to
where we need to be will not be based on
price.”
The LTL industry, which lives and dies
on freight density and network efficien-
cy, knows that pricing actions alone
won’t return it to sustained profitability.
The housing industry, which played a big
role in LTL’s performance until its own
meltdown in 2007, remains unsteady.
Without much future contribution from
housing, Ross expects LTL tonnage to
grow just 1 to 2. 5 percent annually this
year and next. Even a modest 2- to 3-per-
cent increase in 2014 would depend on at
least a moderate housing recovery, he
added.

Ross said he does “not believe carriers should rely on pricing alone to restore necessary margins, as network efficiency and cost control remain highly important.” ;