Less-than-truckload looking up, say analyst and pricing experts
Deutsche Bank’s Amit Mehrotra encouraged by volume progression through May
Below is an interesting article on LTL freight trends and analysis of carrier performance. One statement at the end of the article really caught my attention: Curtis Garrett’s comments on LTL carriers chasing larger accounts. One large regional LTL carrier explained that forty (40) percent of their revenue comes from third parties that offer transportation management solutions (TMS) that resell LTL services through agent networks. Many carriers find it much more efficient to use companies like DLS, a large third-party reseller, to market their services and reduce overhead. The carrier quoted is over $500 million per year with a staff of just thirty-five (35) sales representatives. I would say they figured out the best way to use their talent to improve sales revenue via the proper allocation of assets.
~ Paul Benfer
By Todd Maiden Monday, June 1, 2020
Less-than-truckload (LTL) demand improved through May. The acceleration was notable during the 10-day stretch heading into the Memorial Day weekend. However, the improvement comes off of a very low base that developed in April as COVID-19-related shutdown mandates resulted in most LTL carriers reporting year-over-year tonnage declines in the midteen percentage range with revenue declines in the 20% range.
These were some of the comments shared during Deutsche Bank’s call Monday on the LTL industry, hosted by Amit Mehrotra, managing director of Airfreight & Surface Transportation and Maritime Shipping.
On the call, transportation management system (TMS), pricing and analytics provider Recon Logistics’ Curtis Garrett provided insight on recent trends in the space. Garrett has meaningful perspectives on ground-level operations at many of the nation’s LTL networks.
Garrett said while there has been an uptick in demand for LTL carriers since April and the industry is seeing normal seasonal trends, seasonality has been muted compared to prior years. He said the Southwest region has been slower due to the weakness in the oil and gas patch, a result of depressed energy prices. He said there has been a recent uptick in the industrial and chemical markets and that he expects auto-related LTL freight in the Midwest to see a meaningful rebound in June now that the original equipment manufacturers (OEMs) have resumed operations.
Mehrotra published an LTL report on Sunday providing similar takeaways for May, which he views as bullish for the group as a whole. The investment firm is in the process of increasing its high-frequency geolocation dataset for the LTL industry. The geofencing data now represents more than 1,000 LTL terminals and all of Old Dominion Freight Line’s (NASDAQ: ODFL) more than 200 facilities. The week-by-week analysis evaluates shipment trends of regional and national public and private carriers.
In the report, Mehrotra said “activity levels” in Old Dominion’s network during May were 2% lower sequentially from April, a month in which the carrier posted a 19.3% year-over-year decline in revenue per day as shipments declined 22% and tonnage was down 15.3%. However, he believes the progression throughout the month was the focal point of the data as activity levels during the last week of May were 21% higher than the first week.
The May regional data was largely positive. The company’s Southeast activity improved 33% sequentially from April and was 15% higher in the Northeast. Intra-May was strong in the Pacific and Northeast regions, with activity improving 70% in both from the beginning to the end of the month. The data suggests the carrier saw a 20% sequential decline in activity in the Southwest region during the month.
Mehrotra views the activity trends as bullish, favoring XPO Logistics (NYSE: XPO) due to its valuation discount to Old Dominion. He also sees the strength in the Northeast data as being “particularly positive” for SAIA (NASDAQ: SAIA), which has largely concluded an aggressive, nearly three-year terminal expansion campaign in the region.
Mehrotra’s data was published ahead of the official midquarter, two-month updates most LTL carriers provide at the beginning of the last month of each quarter.
Asked about recent pricing trends, Garrett said rate discipline remains in place throughout the industry. He said technology improvements in freight scanning as well as weight dimensioners have allowed national and even smaller regional companies to become much more strategic in bidding on the freight they want to haul and the lanes they want to service, and in capturing the actual costs involved in moving the freight.
Garrett said there has been an increase in the number of shippers placing their LTL freight out for bid recently and carriers are seeing slightly lower annual rate increases. However, he believes carriers have done a good job keeping surcharges and accessorial charges intact. He believes the carriers are appropriately managing employee furloughs with lower freight levels and said some nonfreight furloughed employees — administrative and sales — are back at work.
On the recent increase in LTL weights per shipment, Garrett said larger shipments have come back to the industry as carriers have become more competitive in the TMS platforms. Large shippers, many deemed essential during the pandemic, have accounted for a larger percentage of total industry shipments compared to smaller mom-and-pop shippers, many of which were deemed nonessential. The bigger companies historically have higher weights, and their improved visibility into inventory and demand allows them to further maximize weight per shipment.
Old Dominion’s secret
Asked why Old Dominion has become the category leader in the LTL space, Garrett, who previously worked in a pricing and yield management role with the carrier, said their “secret sauce is that there isn’t any.” He said they “block and tackle” well on a daily basis and their evolution has been a compounding story with continual reinvestment into their equipment, technology and people.
He said the company has maintained the small company feel, providing customers with direct access to local dispatchers if needed, even though it is now a $4 billion carrier. Garrett said they are very sharp when it comes to pricing freight. They understand the freight they want, the value of lane density and the importance of data. They run a “very efficient” dock and cube out available space better than most. He noted their load factors improved sequentially in April from March even with the drop-off in volume.
Garrett said a couple of other carriers are close to reaching Old Dominion’s level of efficiency and profitability. He said the most notable difference was administrative infrastructure, pointing to the quickness with which some carriers outsource these functions. He said many also hurt themselves with employee churn in customer-facing positions.
He believes claims resolution and pricing infrastructure are key to keeping shippers happy and that many carriers spend too much time courting large national accounts, neglecting the small to medium-size shippers that can be very profitable. Garrett advises carriers to play the “long-term game” and focus on customer response times as a means of gaining market share.
On the uncertainty around YRC Worldwide (NASDAQ: YRCW), he said he isn’t seeing any shippers avoid the carrier due to mounting financial concerns. He said the carrier appears to be operating normally even with the financial headwinds, as their performance metrics are “humming along as normal.”