What’s Next in LTL Pricing?

From: http://www.joc.com/trucking-logistics/ltl-shipping/whats-next-ltl-pricing_20141204.html

By Satesh Jindel

The less-than-truckload industry saw some resurgence in 2014 with carriers’ ability to dig out of suboptimal returns from low-single-digit operating margins. Third-quarter results for publicly traded LTL carriers show a collective operating ratio of 92, a significant improvement from 94 a year ago. This should give LTL carriers optimism about achieving a much-needed 10 percent operating margin by the third quarter of 2015.

Many factors have contributed to the improvement, with the most recognized being a driver shortage and better discipline about basing freight pricing on actual shipment and delivery characteristics.

The driver shortage is an external factor that is contributing to an imbalance of supply and demand and thus an opportunity for carriers to raise rates on shipments not operating at profitable levels. The discipline in pricing comes from carriers’ new focus on using dimensioning machines to adjust rates to account for the full cost of handling such shipments. With a return on investment of three to nine months, expect more carriers to pursue this course.

Although 2014 was a good year for most LTL carriers able to raise rates, shippers are understandably unhappy about such rate increases. They’ll be better off if they accept current market conditions as the new normal, however.

Capacity, which is tight across all segments, is being squeezed further by rising equipment prices and regulatory measures that are resulting in new LTL pricing dynamics. For years, shippers have taken advantage of the fragmented LTL industry with an approach not found in other segments and have contributed to carriers’ inability to reinvest and make required changes in their businesses.

Examples include shippers providing inaccurate shipment weights, claiming a mix of freight classes that is incorrect, including excessive packaging, detaining drivers, and failing to share attributes about the delivery address that results in higher delivery cost and then resisting payment for those charges.

Carriers with high operating ratios, however, also are partly responsible for their poor results. Examples of such shortcomings include using a tariff system that is a carryover from the regulated era, supporting multiple outdated tariffs, implementing annual general rate increases (twice in a 12-month period at times), failing to change their billing practices and lacking the discipline to charge for all of the services provided.

The tariff problem has mushroomed to such an extent that the LTL industry now has more than 3,000 tariffs, with some dating back to the late 1980s. In contrast, national parcel carriers have essentially one rate table, and it’s current.

Worse, LTL industry fragmentation has allowed shippers to develop their own tariff. Although some companies offer technology to manage that difficulty, the new normal creates opportunities for LTL carriers to eliminate the complexity that leads to improper pricing, loss of control over the process to third parties and lower profitability.

In addition to thousands of tariffs, the complexity of LTL rating gets compounded because one tariff with ZIP-to-ZIP rates for the entire U.S. with all 18 freight classes and seven weight groups has 113 billion rate cells. As a benchmark, the UPS Ground parcel rate sheet with zone-based pricing for domestic U.S. service has a total of 1,510 rates. The carriers need to address this complexity in the current environment that gives them leverage on which freight to handle.

Although advances in technology help manage billions of rates in an LTL tariff, a big question remains: Do such rates truly reflect the total cost for the service provided? With shippers getting a discount of more than 60 percent on 20-year-old rates and carriers still taking annual GRIs, it’s no wonder many shippers have embraced 3PLs. That’s why the 3PL share of LTL market revenue has increased from 2 percent in 1998 to about 25 percent.

With the new normal, shippers also can expect changes in billing practices. Too many carriers still bill for delivery-related accessorial charges via separate invoice after delivery. It’s understandable that shippers would resist such charges invoiced several days after the original invoice, so to improve the collection rate for such accessorial charges, LTL carriers will need to bill after the delivery so charges for inside delivery, lift gate or residential delivery are invoiced with the base shipping charges. This billing change alone could increase accessorial revenues by 50 percent for some carriers.

So, shippers looking to manage their budgets will find more success in changing their shipping operations. Despite supply chain improvements, bad shipping habits contribute to more than 10 percent higher transportation costs for carriers.

In 2015, shippers who eliminate excessive packaging and make operational improvements will have more success in holding down their total transportation budget than those who seek to arm wrestle with carriers for lower rates. With demand projected to increase as the U.S. economy expands, shippers can be sure the recent LTL rate increases aren’t temporary.