LTL 2021 Status: Bull Market
Now is the perfect time to be a LTL carrier. Unlike their full-lot (TL) competitors where pricing discipline is limited due to ease of market entry, the top 10 LTL carriers control approximately 75% of their total $ 43.6 billion market.
And these top players are a who’s who of tech giants like FedEx Freight and newly renamed TForce Freight, the former $ 3.1 billion UPS Freight that was recently sold to Canadian conglomerate TFI International for $ 800 million. They all follow the market profitability leader in Old Dominion Freight Line (ODFL), and a savvy multidimensional player like XPO Logistics as well as a revitalized Yellow Corp.
This latest giant, Yellow, was made profitable thanks to a loan of 700 million dollars from the federal government under the CARES law (Coronavirus Aid, Relief and Economic Security). Finally, add a group of very competitive and well-managed private carriers such as Pitt Ohio, Estes Express, Southeastern, Saia, and Averitt Express, among others, and it’s a well positioned market, at least for carriers.
Unlike previous years, 2021 is likely to be a year where a fortuitous combination of pricing discipline and high barriers to entry encounter an industry determined not to waste what is likely a once-a-decade pricing conundrum for shippers fueled by the growth of electronic commerce.
“When was the last time there was significant new entry into this market? asks Satish Jindel, director of SJ Consulting, a company that closely follows the LTL market. (The answer to this question is Con-way, now XPO Logistics, in 1984). This is because unlike their TL allies, LTL carriers need more than a truck, a driver and a customer. They need real estate on which to build their networks of 200 to 300 terminals, and they need sophisticated package sorting and sizing technology.
It turns out that these barriers to entry are also keys to profitability. For example, Old Dominion Freight Line, the market leader, posted an incredibly low operating ratio of 74.5 in the third quarter of last year.
In the fourth quarter, ODFL reported an increase in revenue per day of 6.3% year-on-year, reflecting a 5.2% increase in LTL tonnes per day and a 3.8% increase in LTL revenue per cwt. Analysts are amazed at these results from a trucking company where price / earnings (P / E) ratios are considered good if they are above 18. ODFL’s forward P / E ratio is 36, 2.
“The company has virtually no debt, outperforms its peers and continues to grow its market share,” said Value Kicker, a Vancouver-based stock analyst firm that has a positive rating on ODFL. .
So what is behind this push in the LTL industry? Let’s look at how the industry has responded to and capitalized on the COVID-19 outbreak, how a major carrier with a 10% market share is no longer on the brink of financial collapse, and finally we’ll take a look at just how far the fare hikes are. 2021 will be high for shippers.
The effects of COVID
In a sense, the pandemic has been a blessing for the entire LTL market, and one carrier in particular. This is because of the pandemic-related surge in LTL shipments that coincided with government stimulus checks that have helped consumers.
“The sector has benefited from limited capacity and a lack of drivers,” says Jindel. “As long as the federal government continues to send stimulus checks, the LTL will have a hard time putting drivers in trucks, effectively keeping capacity on track.”
In summary, the coronavirus outbreak is affecting carriers even though they have practiced social distancing in their operations and have largely remained immune to the virus, according to Pitt Ohio President Chuck Hammel. “It affects operations in a number of ways,” he says. “Keeping our drivers socially distanced from each other and office staff from the time they start until the time they quit has been a huge change. “
However, Hammel argues that the biggest impact he’s having is losing employees with one day’s notice when they call and report they’ve been in contact with someone who is HIV-positive. When this happens, they should be quarantined for seven to 10 days, according to guidelines from the Centers for Disease Control (CDC).
Hammel adds that Pitt Ohio has only had nine positive cases out of a total workforce of 3,100. “But every day we have over 80 people because they came into contact with someone who was HIV positive,” says- he. “So combine a huge driver shortage with COVID reports and a booming freight market and you’ve got a chaotic environment.”
This once-in-a-lifetime freight environment has coincided with a rise in e-commerce that directly plays into the strength of LTL. LTL carriers are used to delivering many loads in a single truck and only need slight adjustments to handle last mile e-commerce freight, experts say.
“Amazon is building a network of more than 150 distribution centers across the country, which also contributes to the strengths of the LTL market,” says Jindel. “The only way Amazon can offer next day and next day delivery is to have fulfillment centers near you. By putting them close to people, this cargo arrives by LTL, not by truck. The demand will be there, and the capacity will be short.
With the top 25 LTL carriers controlling 90% of prices, LTL carriers began easing their fares in the third quarter of last year. “They were getting high single-digit increases without breaking a sweat,” Jindel explains. “And because fuel surcharges are going down, that means they’re getting high prices in medium to high single-digit increases in the absence of fuel surcharges.”
Analysts attribute this to the discipline of pricing that has been learned the hard way. “If you lower the prices, you get more freight that you don’t need, and all you do is hurt yourself,” Jindel adds. Maybe that’s because some LTL executives still remember how they were hurt in 2008-2009, when they cut rates when the market was weak and YRC was on the verge of collapse. . Well, 13 years later, the Jaune is revitalized, but the memories of the competitors are still fresh.
So let’s look at the revitalization of Yellow, which controls 10% of the LTL market through its long-haul unit and its three regional subsidiaries.
The yellow rebound
There is no better story of a turnaround in trucking than the ongoing comeback at Yellow. On the verge of bankruptcy several times during this century, Yellow was born again with the help of a $ 700 million injection by the federal government under the CARES Act.
Among other things, this allowed Yellow modernize its fleet. Yellow and its three regional subsidiaries are purchasing around 300 new tractors and 950 trailers in the first half of this year as it undergoes a much needed facelift.
“This will have a huge impact on our business over the next three quarters,” said Yellow CEO Darren Hawkins. “This has enabled us to bring in a significant amount of new equipment, reduce the age of our fleet, reduce maintenance costs and increase mileage and driver comfort. This will present a very nice comeback.
The first $ 300 million was used for short-term contractual obligations, including long-deferred health and retirement benefits for its roughly 24,000 Teamsters. The second tranche of $ 400 million was used for fleet modernization. Yellow is also in the midst of a terminal optimization project that Hawkins says will create a “super regional” network of one to three days of service in addition to the long-haul service provided by Yellow Freight.
“When it comes to strategic planning and network redesign, we can be patient with how we get there,” says Hawkins. “We don’t have to change anything. The right piece about it [federal loan] it’s that we have flexibility and options.
These options have filtered down to other competitors in the LTL industry. Unlike 2008-2009 when the industry was recovering from the Great Recession, Yellow is not on the verge of bankruptcy. According to analysts, this has eliminated the “go-for-the-kill” mentality of FedEx Freight and other LTL carriers which drastically cut fares over a decade ago in an attempt to bury Yellow.
As a seasoned trucking analyst David Ross of Stifel Inc. recently explained in a note to investors that what’s good for Yellow is good for all LTLs and bad news for shippers. “As YRC looks like it will be in business for a while, that potential windfall is not there, but the industry is currently experiencing capacity issues,” Ross wrote.
Interestingly, major LTL carriers haven’t seen typical “TL overflow” freight on their trucks, even with the tight TL market. LTL executives say it doesn’t matter much, as they currently have a lot of freight to fill their trucks.
Analysts and top trucking executives say it’s not about whether rates will go up, it’s just about how far those rates will go up in 2021. “I don’t see any dark clouds. on the horizon for LTLs, ”Jindel said, adding that he expects carriers to increase their fares in“ mid to high single digit ”percentage points. Others have accepted.
“This is a great opportunity to increase margins through higher tariffs,” said Ross of Stifel, calling the LTL pricing environment in 2021 “fairly healthy”.
“It’s a positive freight environment,” adds Hammel. “LTL companies are raising all their prices. Hammel cites a number of reasons, including COVID-19 requirements, driver salary increases, very high insurance costs, a capacity shortage, and increased highway tolls as the main reasons.
According to carriers, the way shippers can mitigate these increases is by working with their carriers on specific issues that can be corrected to save drivers time. “We have great partnerships with our customers,” says Hawkins of Yellow. “LTL pricing involves a lot of complexities and we work closely with our customers. But the yields are firm. I expect to be in a good position, especially with the pilot situation and the overall demand, for a while.
Hawkins reminds shippers that the combination of a $ 150,000 tractor, $ 25,000 trailer and $ 80,000 per year driver on their property results in assets that must be used wisely so that carriers are making a profit. “We like to get paid for what we do,” adds Hawkins. “Our equipment and our drivers must generate income. You must treat our drivers with respect and realize that the equipment must generate income.
How long will this LTL bull market last? According to Hammel of Pitt Ohio: “I don’t see an end in sight.”