The LTL "Oligopoly" Drives On
Ten years ago at this time, the less-than-truckload (LTL) industry was in shambles. The Great Recession had ravaged volumes. The market leader, YRC Worldwide, Inc., (NASDAQ: YRCW) was hurtling toward insolvency, to be saved at the end of 2009 only by massive eleventh-hour concessions from its unionized workers. Carrier executives seeking to gain or preserve market share, as well as a couple of carriers trying, unsuccessfully, to drive YRC out of business, abandoned their pricing discipline and viciously undercut each other.
As the second decade of the century draws to a close, the landscape couldn't look more different. LTL carriers, for the most part, are in excellent financial health. They have been able to repeatedly hike contract rates, and with few exceptions, the increases have stuck. Only during the first half of 2015, which coincided with the back half of the last downturn in industrial production (LTL's bread and butter), did rates stay flat or decline. LTL shippers have had little leverage, in stark contrast to truckload shippers, who sat in the driver's seat for most of the decade until they were ejected in late 2017 as the impact of the electronic logging device (ELD) mandate led to tightening truckload supply.
The overall LTL top-line picture reflects the sector's strong position. As of the end of 2018, revenues–which included fuel surcharges–exceeded $42.6 billion, a 10.4 percent increase over 2017 levels, according to data from consultancy ShipMatrix. In the early part of the decade, revenues were in the low $30 billion range.
The change in fortunes cannot be chalked up to magic or to a stroke of genius. Rather, it is the result of LTL carriers wielding their natural advantage – what Jason H. Seidl, analyst for investment firm Cowen & Co., labeled an "oligopoly" – to set the agenda. Defined as "a state of limited competition, in which a market is shared by a small number of producers or sellers," it's an appropriate term to describe today's LTL sector.
In 2018, the top 10 carriers generated about $31 billion of revenue, equal to about 73 percent of the total market, according to ShipMatrix data. Full-year 2019 data won't be available for several months, but few would bet that the share pie will look different than it did last year.
The carriers' market power was in evidence over the past month as second-quarter results rolled in for the public companies. All reported low- to mid single-digit rate gains on contract renewals despite what for most was a sluggish macroeconomic environment that's not improving in the short-term.
In addition, all carrier executives described the pricing environment as rational, with the exception of situations where new bidders on a lane may propose below-market pricing to establish a foothold.
Saia, Inc. (NASDAQ: SAIA) posted a 6.7 percent increase in contract renewal rates for the quarter. XPO Logistics, Inc. (NYSE: XPO) toted up a 5.2 percent gain coming off a 3.7 percent increase in the first quarter. Yet XPO's full-year revenue will be flat to slightly down year-over-year, and Chairman and CEO Brad Jacobs told analysts that already-soft tonnage may decline further if industrial production declines. Based on federal government data, industrial activity over the past few months has bounced around but has generally not been robust.
Old Dominion Freight Line, Inc. (NASDAQ: ODFL), seen by many as the best-run LTL carrier, reported renewal rate increases that its executives said were comfortably above its cost inflation levels. (The carrier does not disclose a percentage figure because increases will vary across its customer base.) Yet CEO Greg Gantt was not optimistic about a change in the macro outlook for the rest of the year, though he said August's tonnage data (not released as of this writing) could be decent.
Don Newell, one of the top LTL pricing gurus and a veteran of the industry's battles, said the price discipline being exercised today is unprecedented in his memory. Carriers got religion after the 2008-10 rate debacle and have stayed firm and consistent, especially after seeing the benefits to yield and profitability, Newell said.
Strong demand during 2018 gave carriers the incentive to shed marginal freight, he said. That tailwind doesn't exist this year, but even with less freight to haul, carriers "are sticking to the plan and it's working," Newell said.
Building a sustainable LTL network, with its complex web of terminals and touch points, is a high-risk and expensive endeavor. In the Northeast and mid-Atlantic, the challenges are compounded by high labor costs due to the presence of unions. As a result, the barriers to entry are high. In addition, the enormous pool of LTL supply that existed in the 1960s and 1970s began thinning out after the trucking industry was deregulated in 1980 and carriers lost their tariff protection. Supply has been shrinking since then. The spate of bankruptcies, closures and consolidations, combined with fewer entrants, created the capacity constraints that spawned what Bill Ward Jr., vice president of corporate development & planning at regional carrier Ward Transport and Logistics, called "one of the best rate markets in a generation."
At the same time, the universe of big players has increased significantly in the post-deregulation world, said Don Newell, one of the top LTL pricing analysts and a veteran of the sector's many battles. Before deregulation, there were hundreds of mid-sized carriers, but Newell noted that the top tier at the time consisted of Yellow Freight Corp. (which eventually became YRC), Roadway Express, Inc. and Consolidated Freightways, Inc. Consolidated went out of business in 2002, though its regional LTL operation remained until 2015 when XPO acquired it. Roadway was acquired by Yellow in 2003.
It would be hard to find an LTL C-suiter to admit publicly that the pace of rate hikes will level off. A deep recession could change the trend, but as one executive remarked, "the concentrated carrier base is a big plus for pricing." Seidl of Cowen said that all bets are off if the broader economy goes sharply south. However, rates are so high right now that it would take a few quarters before price deflation would make carrier executives uncomfortable, he added.
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