By William Cassidy, Journal of Commerce –

With an almost audible snap, the doors of capacity slammed shut on hundreds of less-than-truckload (LTL) shippers this week, as the largest US LTL carrier, FedEx Freight, reportedly cut off service to as many as 1,400 customers Monday to restore balance to its network. The purge, first reported by FreightWaves, hits shippers amid an unprecedented capacity crunch affecting all transportation modes.

“My inbox is lit up,” Mike Regan, chief relationship officer at TranzAct Technologies and a prominent US shipper consultant and advocate, said Monday of e-mails related to the FedEx Freight action. “This is exactly what we have been warning shippers would happen” as capacity tightened, Regan said. “If you want an LTL carrier to haul your freight, you’ll have to adjust your expectations. Or pay more.”

An LTL executive who requested anonymity said e-mails from shippers started flooding his inbox Friday. “This places more capacity limitations on an already imbalanced market,” he said, referring to FedEx’s action. “Part of the limitation is a labor shortage, but this is just a very bizarre market. There is not one transportation mode that is immune from the imbalance in supply and demand right now.”

FedEx Freight declined an interview request, but a spokesperson acknowledged in an e-mail that the carrier is working “directly with select customers to address capacity concerns” as LTL freight demand rises. “The impact of the [COVID-19] virus has generated elevated volumes, and we continue to experience high demand for capacity and increased operating costs across our network,” she said.

“Until further notice, FedEx Freight has implemented targeted volume controls designed to minimize network disruptions and balance our capacity and demand to avoid backlogs across the country — particularly in the most capacity-constrained [FedEx] Freight service centers,” she said. “FedEx continues to keep commerce moving and deliver critical shipments during the COVID-19 pandemic.”

At the moment, “obviously the shippers are scrambling like crazy,” said Tommy Barnes, long-time transportation executive and current CEO of MyCarrier, a multimodal platform aimed at shippers. “The other LTL carriers are saying, ‘Don’t give this freight to me, because I don’t have the capacity either.’ Shippers are going to be going in circles looking for trucks, but there aren’t a lot of options.”

FedEx Freight is not the only LTL carrier trying to control volume, although other carriers are taking different approaches on a different scale. They may dial back the number of shipments in certain lanes, bypass congested terminals, or refuse shipments to certain locations. Carriers are also turning away non-contractual volume and using price and accessorial charges to change shipper behavior.

LTL at a turning point

FedEx Freight’s “targeted volume controls” will have a rolling impact on shippers across the LTL freight sector and beyond. The impact will not fade in a month or a quarter or two. Thirteen months of sustained rising freight demand and a widespread shortage of labor up and down supply chains has brought the LTL trucking sector, and the shippers that depend on it to move palletized shipments, to a turning point.

In coming months “we might get a little softening in the truckload space, but what won’t change is the tight nature of the LTL market given the strength of e-commerce,” Adam Blankenship, chief commercial officer and executive vice president of BlueGrace Logistics, said in an interview. “I think you’ll see an extremely tight LTL market for the rest of this year. You’ll get no relief on the LTL side.”

Blankenship, who made those comments before FedEx Freight implemented its volume controls, underscored a major shift in the LTL business occurring during the COVID-19 pandemic. LTL volumes historically have been closely tied to US manufacturing, with operators hauling more industrial freight than consumer goods, but that is changing as e-commerce-related retail freight takes a greater share of the LTL mix.

LTL carriers are getting more middle-mile e-commerce freight heading to smaller distribution centers and warehouses and, to an extent, larger and bulkier final-mile freight headed to homes. Most LTL carriers are working on plans to capture more of that freight, and some, including FedEx Freight, XPO Logistics, and Estes Express Lines, have final-mile operations with their own equipment and drivers.

“The challenge is we largely have an LTL infrastructure built more for long-haul and medium-length delivery supporting the manufacturing sector, and now we’re seeing mass quantities of imports and a huge explosion of short-stroke deliveries,” Blankenship said.

LTL carriers have enough real estate and equipment, “but they don’t have the sheer number of drivers needed,” he said. Drivers are the key element of capacity and are in high demand up and down the supply chain, from the shorthaul delivery to drayage, long-haul truckload, and LTL carriers.

All the large, publicly owned LTL carriers are short hundreds if not thousands of drivers and have laid out ambitious recruiting plans. Yellow, the second-largest US LTL provider by annual revenue, is trying to fill 2,000 job openings, CEO Darren Hawkins said in an interview last week. “I don’t think any transportation company can say they have enough potential employees to match the openings they have,” he said.

That lack of employees — not just drivers but dockworkers and warehouse workers, too — means shippers will have no protection against capacity shortages if freight demand surges even higher, Blankenship said. “There’s not going to be a relief valve,” he said. “There will be a lot of people competing for the same pool of drivers,” not just LTL carriers, but truckload, drayage, and local cartage companies.

Higher volumes, lingering disruption

There is likewise no relief available when LTL carriers tighten the capacity spigot, as FedEx Freight did this week. As Barnes noted, FedEx Freight is not alone. Other LTL carriers have been limiting access to their capacity on a smaller scale in recent weeks and months, according to conversations with shippers, carriers, and logistics providers, as freight pours in from other constrained transportation modes.

Truck and rail freight shipments within North America reached the second-highest monthly level recorded in 31 years in May, according to Cass Information Systems, a provider of freight payment services and author of the Cass Freight Index. The Cass Freight Index for shipments rose 35.3 percent year over year, on easy comparisons with May 2020, hitting its highest level since May 2018.

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Goods are pouring into the US as well at a record-breaking pace as well. Imports from Asia reached 1.67 million TEU in May, a 45.6 percent increase from May 2020 and a 20.2 percent jump from May 2019, according to PIERS, a sister product within IHS Markit. US imports are projected to rise 33 percent in June, according to the National Retail Federation and Hackett Associates.

Among the publicly owned LTL carriers that share mid-quarter data, Yellow reported shipments per day increased 8.3 percent in May year over year, and tonnage 8.9 percent. Multiregional carrier Saia said LTL shipments increased 12.7 percent in May while LTL tonnage increased 22.5 percent. Old Dominion Freight Line, the second-largest standalone LTL carrier, increased LTL shipments by 32.6 percent.

It is not just the amount of freight that is choking LTL networks; lingering supply chain disruption caused by the COVID-19 pandemic and even the winter storms that closed businesses across a large swath of Texas and the mid-South for more than a week in February are also playing a part. When production and shipping are shut down for days or weeks in a period of high demand, businesses cannot catch up quickly.

And without workers on factory floors, warehouse docks, or in truck cabs, they cannot catch up at all. A shipper could send truckloads of vinegar to a ketchup plant, for example, but without enough production line employees the manufacturer cannot churn out enough ketchup packets to meet demand.

Trailers not returned by one consignee cause delays and degraded service at another shipper as transit times stretch out farther and farther. J.B. Hunt Transport Services and Schneider National are raising penalties on shippers who hold onto trailers and containers beyond their allotted free time.

Rising LTL rate floor

When shippers find they cannot move freight when they want to at a price they want to pay, more freight piles up on the dock as they search for any capacity, anywhere.

“You’ll see a reshaping into the LTL market going into 2022,” BlueGrace’s Blankenship said. In the past year, “we’ve seen service degradation as bad as we’ve seen in five to ten years. The only way to maintain service is by using pricing to push freight off their trucks. So much of that LTL footprint ties into on-time/in-full delivery requirements for retailers. They’re in a tough position right now.”

Shippers are seeing LTL rates rise by single- and double-digit percentages, often with little room for negotiation. When shippers refuse rate increases, negotiations are increasingly short. LTL carriers are also seeing large increases in operating costs, especially driver wages and purchased transportation, and fuel costs are beginning to creep upward as well. Those factors all support a rising rate floor.

LTL carriers often raise pricing to discourage shippers from tendering large, heavier partial truckload-type shipments that take up more space, deny capacity to other LTL shippers, and throw off costing and yield management per shipment and per trailer. Increasingly, they may be refusing freight not for pricing or costing reasons but simply to reset their operational cycle. They are pressing the pause button.

“What makes this complicated is that no one lane pair is isolated,” an LTL executive that asked not to be identified told “Ultimately, one backlog in any major lane pair causes another backlog somewhere else in the country. It’s such a fluid situation. You can shut down to get the operation back into cycle, and that’s not a pricing discussion. The type of volume you put through your system has never been more critical.”

Bob Farrell, CEO of third-party logistics (3PL) provider GlobalTranz, said, “LTL carriers continue to have trouble getting the freight they want to optimize networks. The LTL carriers are very much in the driver seat now. We’ve heard them talk about their unwillingness to taking on new customers. It does come down to the specific nature and type of freight that shippers are moving.”

Changes ahead for shippers

GlobalTranz, which last week announced a merger with competitor Worldwide Express, said FedEx Freight’s volume caps will push more LTL shippers toward 3PLs, which already manage about 30 percent of LTL freight. “One of those 1,400 shippers they dropped was a customer of ours,” Farrell told in an interview Monday. “This gives us a good opportunity to go to those other 1,399 LTL shippers with solutions.”

Businesses can cut LTL shipping costs on their own by dropping “bad habits” that contribute to the high cost of handling shipments, said Satish Jindel, president of transportation research firm SJ Consulting Group. “They can palletize shipments better, combine shipments that they’re now sending out on multiple days a week. Then they can pay a rate increase and still have total transportation spend be less. It’s all about how you prepare shipments and tender them.”

Shippers also need to prepare for changes in not just LTL rates but accessorial fees, and in how pricing is applied, TranzAct’s Regan said. “Most shippers assume, ‘Because I’ve always shipped it this way, I can continue shipping it this way; I don’t have to change.’ But carriers are reexamining all their rules. If you want to see what the LTL trucking industry is going to look like, just look at the passenger airlines.”

Those airlines, he noted, have increased the use of accessorial charges for baggage and other services. Passenger airlines also use dynamic pricing, a step considered by LTL carriers as new technology becomes available.

In the past year, “the ocean carriers have taught the trucking companies a lesson the railroads learned a long time ago: If you restrict capacity and you’re disciplined about pricing, you can make a lot more money with a lot less headaches,” said Regan, who works with shipper organizations NASSTRAC and the National Industrial Transportation League. “This is something that is not going to change anytime soon.”