Market balanced, but buyers wary of surcharges and consolidation

David Hannon -- Purchasing, 2/16/2006

Capacity for less-than-truckload (LTL) service is expected to remain balanced going forward but there is increasing concern from buyers and shippers that base rates and fuel surcharges are becoming intertwined, causing an overall cost increase for LTL services.

A recent quarterly survey from market analyst Bear Stearns found 63% of shippers expected LTL capacity to remain steady for the next 12 months, up from 49% the previous quarter. And the percentage of shippers who expect capacity to tighten (23%) is less than half of what it was a year ago (47%) and almost half of what the quarter before (40%) was, a sign that shippers are more comfortable with capacity levels today.

What shippers are not comfortable with are rates and surcharges. Despite the fact that shippers in the survey expected capacity to remain balanced, most shippers said they are preparing for accelerated LTL pricing trends and continuing fuel surcharges, regardless of what fuel prices do. And who can blame them? Carriers in late 2005 reported strong financial results mostly due to higher fuel surcharges. FedEx Freight's third-quarter yield was up 8% on "incremental fuel surcharges and higher rates" according to a company statement. Yellow Transportation said its third quarter 2005 LTL revenue including fuel surcharge was up 7.2%, and excluding fuel surcharges and adjustments for business mix, was up only 1.6%.

And buyers and logistics managers tell Purchasing these are serious reasons for concern. Frank LaBletta, director of purchasing at glass packaging firm Leone Industries in Bridgeton, N.J., says his LTL rates went up on average about 5% in the past year, but the bigger concern was the fuel surcharges from carriers, which spiked as high as 20% in the weeks following Hurricane Katrina and have remained very high. LaBletta is concerned that some carriers are using the fuel surcharges as a profit center instead of a way to recoup increased costs. In LTL, he says, adding a separate fuel surcharge on each shipment on the truck adds up to much more than the cost of the fuel to carry those shipments.

"The question remains—what is reasonable and what is not in terms of fuel surcharges? Some carriers are abusing the fuel surcharges, which in turn increases the overall transportation costs for the whole industry."

LaBletta was able to negotiate a mileage-based surcharge with his truckload carriers, but has not been able to develop a successful one for LTL providers. In an effort to control LTL costs and leverage all of Leone's LTL inbound and outbound traffic, LaBletta has implemented a new process, which resulted in a 15% savings annually and helped set standards going forward.

"Now purchasing recommends our carrier [to suppliers] on every purchase order for inbound shipments and shipping personnel use only our carrier of choice for outbound shipments," he says.

LaBletta also expresses concern about consolidation of LTL carriers, particularly on the East Coast, which has limited competitive pricing. A recent report from Fitch Ratings also showed LTL consolidation having a major impact on pricing and capacity.

"Among the truckers, acquisitions could also be a way to deploy excess cash, particularly in the LTL sector, which has seen several consolidations over the past few years. The larger truckers, like Yellow Roadway and CNF, will likely continue to seek growth opportunities in international markets, particularly in Asia and Europe."

The Bear Stearns report suggests that consolidation and acquisitions are changing the way some shippers select carriers. Some shippers are reluctant to use new regional LTL services from large LTL carriers because of concerns about putting too much volume with too few carriers.

Another concern among shippers regarding consolidation is the decline of service levels across the industry. Columbia Flooring of Danville, Va. ships about 100 LTL shipments a month but is planning to increase its reliance on LTL as it moves into new distribution channels. Martin Sis is the manager of supply chain at Columbia and says there has been a decline in service levels from all LTL carriers in certain areas due to short capacity and manpower issues.

"Over the past year, the biggest decline in service we have seen is when we require special service such as a weekend or off-hour delivery, guaranteed service, lift-gate or short-term storage," says Sis. "The carriers are having an increasingly difficult time providing these services as their terminal staffing grows thinner, their driver pool is less experienced and there are less seasoned personnel available to make sure the service requested is actually provided." Sis says Columbia schedules in-person meetings with carriers to discuss service issues.

In terms of pricing, Columbia uses four core LTL carriers to maintain a certain level of competition for bids and has been using UPS' hundredweight service for shipments up to 700 pounds.

"Most large retailers don't require UPS to make a delivery appointment, so that avoids lift-gate fees, driver-assist charges and storage fees," Sis says.