LTL Pricing: A Delicate Balance
The less-than-truckload (LTL) industry is at a crossroads, according to a recent report from 3PL AFS Logistics and financial services firm TD Cowen. While LTL rates have remained steady, there are signs that carrier pricing discipline may be starting to crack as demand remains sluggish.
A Reprieve from the Freight Recession
The industry received a temporary reprieve from the freight recession in the summer of 2023 when Yellow Corp., the nation’s third-largest LTL carrier, shut down. However, with the industrial economy in its third year of downturn and no major carrier on the brink of closure, the LTL industry will likely need a more significant demand catalyst to continue pushing rates higher.
The TD Cowen/AFS Freight Index
The TD Cowen/AFS Freight Index shows that LTL rates per pound were 62.7% higher in the fourth quarter than their January 2018 baseline. Although this represents a 140-basis-point increase year over year, it is 140 basis points lower than the third quarter. The index is expected to record a fifth consecutive year-over-year increase in the first quarter, but will be down slightly sequentially, typical for the seasonally slowest quarter of the year.
Carrier Sophistication and Pricing
According to Aaron LaGanke, vice president of freight services at AFS, “LTL pricing has been resilient, and a major factor is the increased sophistication of carriers and their ability to price freight in a way that is closely tied to the true cost to move it.” However, he notes that there are opportunities for shippers, especially as low demand persists and carriers seek out “attractive” freight they can move efficiently.
Volume Needed to Sustain Pricing Momentum
With a finite number of carriers in most regions, the LTL industry is more disciplined on pricing than the highly fragmented truckload space. However, volume is needed at some point to keep LTL pricing momentum going. Fourth-quarter updates from publicly traded LTL carriers showed gross yields were slightly negative on a year-over-year comparison but up by low-single-digit percentages excluding fuel surcharges.
Factors Affecting Costs
Several factors contributed to lower costs in the fourth quarter. Diesel fuel prices were down 4% sequentially and 16% year over year. The average fuel surcharge at major carriers was down 3.4% from the third to the fourth quarter. Weight per shipment and length of haul were also down sequentially in the quarter.
FedEx’s Planned Spinoff and Its Impact
FedEx’s planned spinoff of its LTL business could change the competitive landscape. FedEx Freight expects to add 300 LTL sales reps in the coming weeks. LaGanke notes that this could shake things up, as shippers who have historically benefited from bundling parcel and LTL spend to qualify for higher discounts may entertain other options.
Concerns About Pricing Fundamentals
There is some concern that pricing fundamentals could weaken as carriers continue to redeploy the nearly 200 terminals acquired from Yellow’s estate and potentially eye the remaining 100 sites that head to auction next month. While some of the remaining locations are unlikely to see another LTL shipment, carriers are eager to begin generating returns on their real estate investments totaling roughly $2.2 billion.
Truckload Market Update
The report also showed that truckload linehaul cost per shipment was down 3.3% sequentially in the fourth quarter as miles per shipment fell 3.6%. Cost per shipment was down year over year for an eighth consecutive quarter and reached a cycle low, just 11.6% higher than before the pandemic. The truckload-rate-per-mile freight index is expected to be 5.1% higher than the January 2018 baseline in the first quarter and 20 basis points higher year over year.
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