LTL market remains in a state of flux
"Aggressive and unprofitable pricing tactics remain widespread as carriers focus on fighting for market share" according to reports.
By David Hannon -- Purchasing, 10/15/2009 2:00:00 AM
Despite some signs that overall freight demand has bottomed and is picking up, the less-than-truckload market remains extremely competitive, with some of the biggest carriers continuing to offer steep discounts in an effort to grab market share in the down economy. And the short-term forecast from most market watchers calls for more oversupply for LTL—that is, unless one of the biggest players in the market makes an unplanned exit.
A recent survey of LTL market participants conducted by Longbow Research in Independence, Ohio found that "aggressive and unprofitable pricing tactics remain widespread as carriers focus on fighting for market share. We continue to hear of carriers offering shippers discounts off the general rate increase in excess of 90% compared to more normalized discounts which may on average discount a shipper's annual GRI by roughly 70%."
Perhaps the carrier most effectively executing this strategy is Con-way Freight. In a recent interview, Con-way's CEO Doug Stotlar told Reuters "We have been a little more aggressively priced than we historically have. We've captured some market share because of that." Stotlar also said overall he sees the pricing environment in the industry stabilizing now after an extended period of decline, driven down by excess capacity and weak demand.
And with demand expected to increase in 2010, the massive amount of LTL bidding continues, as freight buyers try to tie up aggressive rates and carriers gobble up as much market share as possible in an era of overcapacity. In addition to the long-running slump in demand, the overcapcity issues are being driven in some part by a lower-than-expected number of bankruptcies for such a slow market. According to the latest data from FTR Associates, only 370 trucking fleets went bankrupt in the second quarter of this year, for example, "a number similar to the rate at the peak of the last upturn" says FTR's report.
"Lenders are reluctant to foreclose because of the extremely low prices for used equipment and to avoid having to book losses on sensitive balance sheets," FTR reports. "The main effect is to swell the number of surplus vehicles competing for freight, now around 200,000 units. Volumes are stabilizing but rates will remain under pressure until there is a strong market-clearing of unprofitable fleets."
A recent report from Stifel, Nicolaus & Co. concurs, pointing out that since the March 2006 peak for LTL, shipments have plunged 26%. However, only about 8% of LTL capacity has exited the market. "There has been some modest downsizing of LTL carrier fleets and networks but limited real capacity has exited. In most downturns, the LTL carriers beat each other up over price until the weakest fail."
Without a doubt, the biggest question in the LTL market remains the future of carrier of YRC Worldwide. While the carrier continues to restructure labor contracts and network assets, YRC's future remains in question. Longbow analysts, however, say the carrier's chances of survival increase the longer it keeps its doors open and the economy picks up.
"Since most of the stakeholders appear to want the company to survive, we believe there is a greater probability that it does barring the economy heading for a double-dip recession," Longbow says. "The bankers, union, and large shippers want YRC to survive, in our view. In short, the bankers do not want the assets on their books, the union doesn't want more job loss, and sophisticated shippers do not want to see roughly 18% market share leave due to the impact on competition."
Certainly, freight buyers are pulling for YRC to survive. According to Stifel's estimates, if YRC were to fail today, it would "immediately cure the overcapacity problem" and increase rates. "Our current view is that YRC runs out of money by the end of 1Q10, absent a restructuring and/or miraculous freight rebound."
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