‘Pricing Discipline’ to Temper US LTL Rate Relief in 2023
The big picture: The past two years have been called a “golden age” for US less-than-truckload (LTL) operators, but shippers would describe the period — marked by double-digit percentage rate increases, service disruptions, and labor shortages — in less favorable terms, possibly including a few expletives. The wheel is turning, however, and shippers can expect some rate relief and improved LTL service in 2023 as demand softens and shipping patterns normalize. For carriers, that will take some of the shine off the sector’s recent golden glow.
A look back: Total LTL costs to shippers increased an unprecedented 40 percent from September 2020 through June 2022, according to the US Bureau of Labor Statistics’ (BLS) producer price index (PPI) for long-distance LTL, driven by high demand, tight capacity, and the fracturing of labor-heavy LTL networks during the COVID-19 pandemic. Those costs, which include fuel surcharges and other fees in addition to base rates, finally began to decline in July, but the PPI remained 14.4 percent higher on a year-over-year basis in October.
During the first two years of recovery from initial COVID-19 lockdowns and the brief resulting recession, LTL carriers took on a larger share of retail freight, particularly e-commerce, hauling more “middle-mile” retail shipments between warehouses and fulfillment centers in addition to traditional industrial freight. Shippers also turned to LTL carriers as truckload capacity tightened, but with their trailers already full, many operators refused larger shipments or charged high fees to handle them.
As the curtain came down on 2022, LTL rates were still rising, with several carriers claiming contract renewal rates in the mid-single-digit percentage range — a step down from prior years — but LTL freight demand had softened. As one carrier put it, conditions went from “robust” to “moderately soft” compared with a 2021 that had been simply “crazy.”
A look ahead: The flattening of the LTL PPI early in the fourth quarter of 2022 is a sign that carriers will continue to practice the “pricing discipline” that helped LTL operators reap record-setting revenue gains during the pandemic. Many shippers would like to see LTL rates come down further, but how far pricing falls in 2023 will depend on consumer and industrial demand, both of which have been more resilient than expected.
“The fact that LTL is more industrial-based has helped us,” Mario Harik, CEO of XPO, told the Journal of Commerce in November. US industrial production and manufacturing rebounded late in the third quarter, expanding at a “muted” pace, according to Journal of Commerce parent company S&P Global. As such, shippers shouldn’t expect LTL carriers to bend too much on rates, absent a more significant drop in demand. During the 2020 recession, for example, the LTL PPI only fell 4.2 percent.
What’s more, LTL carriers spent the past decade honing a more disciplined approach to balancing costs, which are generally much higher than for their truckload counterparts, and pricing.
A new normal: As pandemic-induced supply chain disruption fades, US LTL flows will likely return to more typical seasonal patterns. However, that seasonality — and the broader LTL supply–demand balance — will still be fragile.
By: William B. Cassidy / JOC