Transportation & Logistics News Analysis
Despite disruptions from the pandemic and resulting changes in demand levels from their customers, leading LTL companies are extracting rate increases in the mid-to-high single digits, according to carriers and analysts.
“This is a positive freight environment,” said Chuck Hammel, president of Pitt Ohio, the nation’s 18th-largest LTL carrier. “LTL companies are all raising rates.” Likewise, Darren Hawkins, CEO of Yellow Transportation, called LTL pricing “strong,” and said that carriers were taking full advantage to recapitalize their fleets. In Yellow’s case, it’s been helped by a $700 million influx of cash as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
According to Satish Jindel, principal of SJ Consulting, a firm that closely tracks the LTL market: “It’s a wonderful time to be in the LTL sector.”
There are several reasons for this sentiment. One is pricing power. Unlike the splintered truckload (TL) sector, where the leading carrier, Knight-Swift, barely controls 1% of the TL market, there’s concentration atop the LTL marketplace. In fact, the top 25 LTL carriers account for nearly 90% of the marketplace, with Yellow controlling 10% all by itself through long-haul carrier Yellow Freight and its three regional subsidiaries—New Penn, Holland, and Reddaway.
The bigger question for LTL executives is whether this can last? In past boom cycles, one or two large LTL carriers would exhibit poor pricing discipline. In 2008, during the post-great recession downturn, a few large carriers sensed Yellow was on the brink of bankruptcy and initiated a pricing war with Yellow.
Now, with Yellow on firmer financial footing, no one is holding their breath any longer. According to Jindel, Yellow is using a portion of that $700 million to upgrade its fleet. “They’re only going to be replacing trucks, not adding to their fleet,” he explained, “as they have one of the older fleets in the sector. The question remains: Do they need to expand?”
The answer is “no.” Expansion in truckload can be justified because the carrier only needs a driver and a truck. Carriers need three things to expand in LTL—drivers, trucks, and terminals. “The latter are not easy to come by,” said Jindel, noting that environmental and zoning regulations often make terminal expansion and purchase a costly proposition.
Such conditions effectively mean that there’s a cap on capacity in the LTL sector. “And that simply means that pricing will be good to very good through 2021 for carriers,” said Jindel.
So, even with declines in shipment volumes from COVID-related closures, carriers have adapted their networks to achieve maximum efficiencies. “Those closures are not as strict this year,” Jindel added. “Shipment counts should stay fairly robust, and that should mean good performance for carriers.”
And that would be a continuation from last year. Some publicly held carriers enjoyed a boom year in 2020, according to their stock prices. Saia’s stock was up 90% last year, while Old Dominion Freight Line was up 55% and ArcBest, parent of ABF Freight System, rose 45%. FedEx, UPS, U.S. Postal Service, Amazon Logistics and regional carriers such as LaserShip, LSO and OnTrac collectively set an industry record of delivering over 3 billion parcels during the past peak season.
Holiday season-related volume spikes, especially in December, have had a tangential benefit to the LTL carriers, according to Jindel. But he added that the bigger factor helping LTL carriers was shipments from Amazon’s 155 fulfillment centers, explaining that the more centers they have the less quantity they need on hand in inventory, which converts into more LTL shipments.
“The LTLs are getting significant impact and opportunity to participate in the retail sector evolution,” said Jindel. “The LTLs used to ignore retail, but they got rid of that old way of thinking. Retail is going to be a bigger sector of LTL, and those who don’t pay attention will fight over smaller pieces of the LTL market. You can’t operate in the retail sector with the same attitude as industrial freight.”
Retail shipments can be different. Often, they’re lighter and cube out before weighing out in 80,000-pound trucks. So, LTLs must raise rates to handle that. Most deliveries are not made to docks, but inside to retail stores, and that’s going to be another adjustment for carriers.
“Customers aren’t going to change, you have to change,” Jindel advised carriers. “The only way the current pricing environment could lose momentum would be if some large LTL carrier loses its mind and lowers price to gain more freight to lose more money. I can’t see any of LTL carriers being that unwise.”
So, how long will this environment last? “I don’t see any end in sight,” added Pitt Ohio’s Hammel.
GLOBAL E-COMMERCE TITAN Amazon recently announced that it has taken significant steps to expand its growing transportation fleet, purchasing 11 Boeing 767-300 aircraft. This marks the first time the company has purchased aircraft, as it has traditionally procured airfreight capacity through leases.
The company said that seven aircraft were purchased from Delta, with the remaining four from WestJet, adding that these aircraft will be part of Amazon’s network by 2022.
“Our goal is to continue delivering for customers across the U.S. in the way that they expect from Amazon, and purchasing our own aircraft is a natural next step toward that goal,” said Sarah Rhoads, vice president of Amazon Global Air. “Having a mix of both leased and owned aircraft in our growing fleet allows us to better manage our operations, which in turn helps us to keep pace in meeting our customer promises.”
Amazon Air’s fleet expansion comes at a time when customers are relying on fast, free shipping more than ever, noted an industry observer, adding that these fleet additions will ensure added capacity in Amazon Air’s network for years to come. What’s more, the observer noted that Amazon is constantly assessing its transportation fleet and network to determine what it needs to support fast, free shipping for customers.
“These fleet additions will ensure added capacity in Amazon Air’s network for years to come,” said Amazon. “The company will continue to rely on third-party carriers to operate these new aircraft.”
Jerry Hempstead, president of Hempstead Consulting, told Logistics Management that this development is another example of Amazon being Amazon. “Because of COVID-19 substantially reducing the number of travelers, airlines have taken down aircraft to rationalize their networks,” he said. “The parked planes just eat up cash. So, the airlines have a chance to move them off their balance sheets so they can replace them with new, more fuel-efficient planes. Therefore, there are real ‘buys’ on hardware.”
Originally Amazon went to third parties like Air Transport Services Group (ATSG) and Atlas Air to acquire the planes and provide the crews to fly them. “Now Amazon is taking a more cost-efficient tact and picking up planes on the cheap, then outsourcing the modification and the piloting of the planes,” added Hempstead. “Amazon has not been shy in publicly stating its intentions to build out its fleet and its hub network—so it certainly isn’t done building its fleet.”
Last June, Amazon said it was leasing 12 Boeing 767-300 converted cargo aircraft from ATSG as part of an initiative to meet changing customer needs through the investment in ways to provide fast and free delivery.
Company officials stated that the addition of these 12 aircraft join its existing fleet of 70 aircraft and brings its total network to more than 80, with one of the new aircraft coming to Amazon Air cargo operations in May and the other 11 scheduled to be delivered in 2021.
Amazon added that the timing of these additional aircraft syncs up well with consumers ordering more goods online, due to the ongoing COVID- 19 pandemic, while also noting that Amazon Air has played a “central role” during this time through the transporting of PPE supplies, not only for Amazon staffers but also frontline health workers and relief organizations throughout the United States. —Jeff Berman, group news editor.
It’s important to take note of the rapid adaptation by ocean carriers to the elastic demand in international freight in 2020. The owners and operators went from famine to feast in a few months.
Predictions of an end to global trade due to the pandemic and trade barriers were literally blown out of the water, with huge surges in demand for goods for consumers and large resellers. As of this month, western ports in North America are congested with cargo sitting on ships at anchor waiting for a berth to unload.
At the beginning of the year, there was a sharp decrease in demand for shipping services since retailers hesitated to restock their shelves as the pandemic spread. The remarkable thing was how quickly cooperating competitors in freight markets reduced ocean shipping capacity to match these dwindling demands to keep rates higher than expected.
When demand skyrocketed in the second half of the year, rates not only stabilized, but they also quickly increased while capacity seemed to recover less quickly. Good fortune or good co-opetition? As we are seeing in other modes of air, rail, pipeline and LTL freight, the consolidation of the market toward a few big players has brought discipline and a trend of ever-higher prices for transportation.
One could argue that the coordination between competitors is the root of the problem. Certainly, we can assume that it will not be favorable to shippers. However, there are several technology trends that do help shippers as well as operators. These developments will keep downward pressure on costs across the supply chain.
First is the development of optimization software that can handle the complexity of intermodal freight moving internationally. Like the airline industry, ocean operators and their forwarder customers are adopting third-party systems that can monitor rates in the market, forecast capacity in lanes and set pricing to maximize net revenue rather than just volume. Getting maximum pay for each cubic meter and keeping vessels moving are assisted by artificial intelligence (AI) that uses big data to help big operators.
On the shipper side, forecasting and AI-assisted inventory control tools are reducing lag-time in responding to changes in demand. Increased sales of an item or style logged in at cash registers in the Midwestern U.S. will trigger demand signals in China and the Southeast Asian production sites.
Shippers are increasingly able to feel comfortable with lead times and with landed costs as they expand their markets. Years like 2020 are an exception in that demand was chaotic, but despite this, leading carriers flexed their capacity to protect their businesses and retain customers.
The third element is the capacity-sharing agreements. Cooperating competitors removed sailings from the market schedule and the companies shared the remaining capacity. These “blank sailings” reduced shipper choices and supported price stabilization.
As an example, Maersk reports that over half of the bookings in key markets were spot rates, thus not subject to shipper-negotiated annual prices. The spot market, when controlled by few operators, historically results in upward trends in pricing.
The emergence and popularity of application programming interfaces (APIs) has enabled the AI applications to gather real-time detailed information on demand and supply. It can connect applications that weren’t originally coded or built to communicate with each other. The result is better decision making with far fewer errors in billing.
Operators argue that prices can’t be allowed to fall below basic operating costs. They contend that cooperation and space sharing protect the industry from steep losses that resulted in bankruptcies in the recent past.
With the new clean fuel costs, we were bound to see prices rise in 2020 anyway. The operators are seeing the fruit of using 21st Century technology to manage their business. Shippers do need to keep an eye on the technology as well as the coordination between competitors.
DESPITE THE UNEMPLOYMENT of more than 10 million Americans and historic unrest in wake of the insurrection at the U.S. Capitol, the chief executive of the U.S. Chamber of Commerce called the state of American business “resilient” in the wake of the coronavirus pandemic and distrust in U.S. institutions.
“Some may look back at the events in early January and ask whether that’s possible,” Chamber CEO Thomas J. Donohue said in his 20th “State of American Business” speech. “Let me say unequivocally— violence has no place in our democracy, no matter where it comes from, who perpetrates it, or what motivates it.”
The 80-year-old Donohue reaffirmed the business community’s commitment by saying: “We’ve got work to do, too— and we’re going to keep at it without distraction or deterrence.”
He noted that the U.S. won’t restore the jobs, growth, and prosperity that were lost in 2020 until “we eradicate the pandemic and get our economy firing on all cylinders.” And for that to happen, he said, our elected officials must pull all the right policy levers in 2021.
Without mentioning outgoing President Donald Trump by name, Donohue welcomed incoming President Joe Biden and Vice President Kamala Harris. He called their electoral-college victory “a clear and lawful election.” He then predicted that the U.S. was on the precipice of what could be a long, sustained economic recovery.
“The pandemic is far from over, but if Congress sufficiently supports the economy with the relief it needs, we could see growth rebound by the third-quarter of this year,” Donohue predicted.
As for the Chamber’s 2021 priorities, the first issue Donohue touched on was the long-delayed and overdue bid to rebuild the nation’s infrastructure.
“We’ve been working on this for more than 20 years,” said Donohue, sounding slightly exasperated. “Let’s find a way to pay for it, and let’s get moving. This year, there can be no excuses for failure.”
Donohue called a major infrastructure push, such as the $1 trillion to $2 trillion Biden talked about on the campaign, the No. 1 way to raise productivity, create jobs, and drive up incomes in a hurry.
“Our lawmakers should enact a fiscally and environmentally responsible infrastructure package that focuses on urgent needs like roads and bridges, modernizes our critical networks and upgrades and expands technology like broadband,” said Donohue. “Even in a 50-50 Senate and a House divided by five votes, this can be done—and it might build some goodwill for bipartisan progress on other priorities.” —John D. Schulz, contributing editor