The uncertain economy is wreaking havoc for less-than-truckload (LTL) carriers. Declining volumes are causing unprecedented overcapacity and aggressive pricing reductions, while some shippers are shopping based primarily on price in what many experts are calling the worst market ever for the industry. These market conditions forced a number of companies to cut salaries, staff, and even 401K matches. Yet, despite these draconian market conditions, LTL providers are finding innovative ways to stay the course while awaiting a lifeline from the economy.

Unprecedented balance

Probably the most dramatic change resulting from the weak economy were the significant price reductions some providers instituted as demand shrunk to historic lows. Kenneth Burroughs reports that 2009 was the worst year he has ever experienced in his 38 years in the LTL industry. “It was really the economy first and foremost that caused the overcapacity in LTL, where there was a lot of supply chasing less demand. This put significant pressure on prices,” says Burroughs, vice president of revenue management for Richmond, Virginia-based UPS Freight LTL.

The industry experienced volume declines throughout the course of 2009 that approached 15 percent, year-over-year, reports John Labrie, president of Con-way Freight in Ann Arbor, Michigan. “Given that there was such an unprecedented buyers’ market because of the excess supply, it certainly created an environment in which customers were willing to make changes in their carriers-and they did make those changes at a level we didn’t anticipate.”

Danny Loe agrees that the last two years were the worst the industry has ever encountered. “The combination of 2008 and 2009 relative to the duration of this freight recession is something that no one has ever seen before,” says Loe, director of marketing and public relations for ABF Freight System, Inc. headquartered in Fort Smith, Arkansas. “Right now, the balance between supply and demand is out of kilter. The economic recession brought about significant overcapacity. Even though some of the smaller carriers have disappeared and some of the larger companies have reduced their capacity by operating fewer trucks, this process has not been large enough or fast enough to reconcile the disparity between supply and demand.”

The industry throughout 2009 reported negative growth and substantial losses due to the overall economy and the consequent pricing environment, notes Chip Overbey, vice president of national accounts and marketing for Old Dominion Freight Line, Inc. based in Thomasville, North Carolina. “Additionally, external factors like the ever-pending question about the direction of fuel prices, the increased cost of new equipment and particular engines, the potential cost of insurance, and potential legislative concerns continue to trouble the industry.”

The bad news was intensified by the collapse in the financial markets, notes Rick O’Dell, president and CEO of Saia, Inc. in Johns Creek, Georgia. “Things got even more difficult in the last two or so years when these markets collapsed, so we knew things were going to be very challenging, not only for us, but for the industry as a whole.”

Further compounding market dynamics is the struggle Yellow Roadway Corporation (YRC) is experiencing to stay viable, notes Lee Klaskow, senior research analyst, transportation and logistics, for Longbow Research based in Cleveland. “Even with the number of financial problems they’ve had over the last 18 months, there is a low probability of them going away. The company secured some financing and it appears it has enough liquidity to wade through the current environment.” YRC is the largest contributor to a multi-employer pension fund in which many Teamsters from other companies are invested, Klaskow explains. “So, the Teamsters have a vested interest in seeing YRC survive the current downturn by their willingness to give up some concessions.”

As YRC struggles for survival, some LTL providers are taking advantage of the company’s troubles by attempting to secure market share from the company. For instance, UPS did capitalize on YRC’s situation as customers came to UPS for its service reliability and value proposition, says Burroughs. “When companies sought us out we tried to manage the type of business coming our way from YRC by accepting the middle-market type of business, as opposed to some very large, unprofitable strategic accounts.”

O’Dell at Saia reports that YRC’s current challenge is a major topic in the industry, especially in light of LTL’s overcapacity and the fact that YRC’s troubles have been so prevalent and so public.

Explaining the current dynamics of the industry within the context of the overall economy, Klaskow notes the freight environment has been in a recessionary mode longer than the overall economy. However, he reports some improvements are on the horizon, mainly due to seasonal demand for freight services in the fourth quarter of 2009. “This year is the first time we have begun to see a peak season,” he says. “We are seeing better year-over-year than 2009 (low single-digit increases) and this could be a sign of recovery, although it will likely be a slow and steady recovery. The biggest hurdle for the industry now is the capacity issue and the weak pricing environment.”

Meeting the challenges

So just how did LTL providers adapt to these unfathomable market conditions? Despite the flagging economy and its consequential squeeze on the industry, LTL providers nevertheless are trying to maintain high-quality customer service levels. Granted, it’s a bit of a balancing act in uncharted territory. However, providers are doing their best to provide excellent service while trying to find the appropriate pricing levels that work for their businesses.

Klaskow reports that providers were focused on aggressive pricing to build density, cost containment, and network efficiencies. “Everyone is tightening their belts,” he says. “For example, Con-way cut pay for its employees by about five percent, although they recently brought back half of that.”

In some instances, these aggressive pricing reactions to the market came with their own price tag. In an attempt to build density quickly, Con-way sent out more bids than it knew it could handle, expecting to receive only a small percentage, reports Klaskow. “They were getting more bids than they anticipated, so they had to go out and hire the manpower they required. But it takes several months to train someone to work in an LTL facility and that learning curve cost Con-way its profitability.” He adds that the company has been working to improve this situation.

Labrie at Con-way acknowledges that the company experienced unprecedented excess capacity in the market. “Consequently, the sales, marketing, and pricing tactics we employed last year reflected not only what was going on in the marketplace, but the excesses in capacity we were dealing with as well,” he says. “As pricing in the industry decreased over the course of the year, we were not immune from that. We employed those aggressive measures as a way to deal with the market and our company situation as best as we could. However, our focus has always been on making sure we offer service capabilities that are unmatched.”

O’Dell at Saia reports year-over-year reductions in pricing of 5 percent. “This is an industry that used to operate at between five percent and ten percent margins. So, when you begin cutting prices by five percent, this eats into your profitability.” Early in the downturn, Saia instituted price reductions to fill underutilized capacity. “But as pricing continued to deteriorate in the industry, we stopped our pricing reductions and our pricing has been stable over the last six months. In fact, for the last three months, our yield is actually up.”

A few major competitors practiced extremely aggressive pricing in an attempt to gain share and force some companies out of business, continues O’Dell. He admits that in getting caught up in this pricing crossfire, Saia did lose some business due to the industry-wide pricing actions. “There is a point at which you just can’t support doing this. By not lowering my prices anymore, I realize that customers could go somewhere else. But, the point is we can’t keep lowering prices below what our cost structure is.”

What about the staying power of that gained share? O’Dell says some customers continued doing business with the company, while others chose to pursue price. “I can tell you we have not had any turnover with our top ten customers,” he says. “Even during our aggressive cost reductions, Saia has continued to say focused on our quality of service.”

While UPS tried to maintain pricing as best as possible, Burroughs acknowledges that the company found itself in situations that required it to defend its profitable customers because of competitors’ aggressive pricing strategies. “We chose to do that where it made sense for us and in other cases, where we were risking going below our costs, we regretfully gave up business because we just couldn’t handle it at the price market conditions were indicating,” Burroughs says.

The good news is that the wild discounting is ending, reports Klaskow. “Prices began stabilizing in January and carriers who were pricing aggressively have said they will now focus on the profitability of their freight. If they stick to that promise, we don’t expect pricing to go further down. So there are two ways it can go-sideways or up-and we think pricing will move sideways for awhile and then when seasonal patterns start to improve, you could see a real pickup in pricing in the second quarter.”

Staff and salary reductions

One very difficult choice for some providers was instituting salary reductions-or worse, staff reductions. For instance, O’Dell reports that Saia had four different rounds of staffing reductions, totaling about a 10 percent reduction year-over-year. It also reduced by 10 percent pay for company officers, while salaried and hourly employees received a 5 percent salary reduction. “We also stopped our 401K matches. Unfortunately, it takes very extreme measures to deal with the combination of volume softness and pricing declines.” O’Dell says the company will have to restore profitability before salaries can be made whole again.

Con-way leveraged a 5 percent salary reduction across the board. The good news is it did reinstate 50 percent of salaries in the first quarter of 2009. “We have established financial criteria which will trigger the reinstatement of the remainder of the reduction in wages,” reports Labrie.

Disciplined pricing philosophy

Old Dominion has a different story, reports Klaskow. “They didn’t have to do any aggressive pricing or change their network, and yet they remain the most profitable provider because they chose a philosophy of not chasing freight for the sake of building density. Instead, they concentrated on their value proposition and service levels, charging their customers rates that made economic sense for them.”

Overbey at Old Dominion says the company maintained its pricing philosophy and tried to achieve a fair and consistent approach to pricing that supported the value proposition. “Instead of chasing freight, we tried to price our service in such a way so it’s a win for our customers while providing a return to our stakeholders,” he explains. “This approach requires a more disciplined pricing philosophy during the current economic situation we face. Pricing our service for density purposes only could potentially jeopardize our product offering and it didn’t seem like the right choice for us to make for our loyal customers or for our company.”

Loe at ABF reports that the company did not use price as an initiative to attempt to gain freight. “Our goal is to continue to evaluate each account and make sure we are charging a fair price and that we are compensated for the services we provide to our customers,” he says.

Although Burroughs admits UPS did reduce its pricing, he notes the company chose a disciplined approach. “We did defend our share where it made sense for us, but we decided we were not going to fight the market share gains of some competitors out to gain share,” he says.

One strategy the company did excel at is what Klaskow calls finding its ‘sweet spot,’ referring to providing LTL services to middle-market accounts. “That has absolutely been our focus,” Burroughs says. “We want to grow these smaller, less leveraged accounts opposed to large, strategic accounts that are highly leveraged in terms of their pricing and their requirements.” The strategy involves price bundling between LTL customers and small package customers. The small package sales force is helping grow the middle-market with their customers who also need freight requirements, while the freight sales team asks its customers if they require small packages service. “So companies with both freight needs and small package needs have us as a single-source provider, and they get the whole UPS value proposition that includes our technology and reliability,” explains Burroughs.

Providing value

Times may have been tough, but providers kept trying to improve service and provide value to their customers. For instance, ABF’s regional product, called RPM (Regional Performance Model), offers shippers next-day and second-day service. “We can provide a comprehensive regional product as well as a long-haul product in an LTL marketplace with the same pickup and delivery drivers, so customers don’t have to deal with multiple drivers,” says Danny Loe.

Another ABF initiative provides full visibility on full container load service out of most Asian ports to East and West coasts. “We can follow products throughout U.S. distribution,” explains Loe. “If products need to be broken down at ports at either of the coasts and then sent LTL to customers’ warehouses or distribution centers, we can provide that service. We offer visibility down to the PO level so they can have more predictability in their supply chains.”

Old Dominion continued to strengthen its service network, adding equipment to provide more capacity should customers need it, reports Overbey. The company also focused on improving its on-time service, resulting in an on-time service level of 99 percent for 2009 and a claims ratio of 0.6 percent. “We have continued to invest in technology because we believe it is a critical bridge to our future success and a means by which to continue to provide a competitive value proposition to the market,” Overbey says.

In addition to not reducing its pricing during these recent challenging years, Old Dominion has not introduced any wage or benefits reductions. Overbey says the company’s perspective is to take care of its people, who will in turn take good care of the company’s customers and the company brand.

The most significant initiative Con-way embarked on was to improve network efficiencies and reduce costs, explains Labrie. “In the fourth quarter of 2008, we significantly reduced the size of our network by closing 40 locations and six consolidation points, which was an overall reduction of about five percent.” The company also invested significantly in handheld technology to support pickup, delivery, and dock operations. “These devices will enable our driver sales representatives to input data important to our customers so we can provide them with the dynamic information they require to be efficient. This technology will also allow us to better manage our business.”

Early in the downturn-about a year and a half ago-Saia closed five of its terminals and serviced the affected areas from adjacent geographies, reports O’Dell. The company leveraged technology to reduce overhead. The technology investments focused on engineered process improvements, which helped support maintaining a high-quality product offering with fewer resources.

In its strategy to manage costs, UPS made significant network improvements, balanced its capacity, and even removed some capacity, notes Burroughs. “When the economy is bad and revenues are declining, it takes a while to get your costs out. Revenue comes out faster than cost and we were vigilant in making sure we were getting our costs in line with our business volumes.” The company reduced empty miles and improved load averages to gain network efficiencies.

The long view

So what does the future portend? Although several economists predict some GDP growth in 2010, Labrie at Con-way expects that to be modest. “Unfortunately, given the excess supply in the industry, there could be robust GDP growth this year and yet we would still be faced with an industry dynamic that looks pretty similar to what we have been battling for the last year. There is simply too much supply and one year of robust growth will not take care of that unbalance.”

O’Dell at Saia believes the industry is approaching an inflection point. “It looks to me as though we will be operating in a better environment than last year’s, as long as the market holds and the discipline people are promising comes to fruition. I think the transportation industry has been affected more because there hasn’t been much of a shakeout in the industry. Normally, when an industry goes through downturns, there is a shakeout or a rationalization. While it’s frustrating to struggle and not produce profits, we have to remember this is an industry-wide problem.”

Loe at ABF says that at some point the laws of supply and demand will return and the industry will have to rationalize itself. “What that means-no one really knows at this point. Either you will see an increase in business and economic activity, which will result in freight activity; or, you will continue to see some level of capacity removed from the LTL marketplace. But until you see supply and demand more in tune with each other, you will still have the issue of overcapacity to address. I think sustained business activity will be the first sign that we have really turned the corner on this.” wt



Contributing writer April Terreri writes frequently on a variety of transportation and logistics issues.