LTL MARKET SENTIMENT & EMERGING TRENDS

LTL freight in the US has emerged from the volatility and uncertainty of the first quarter of this year to experience conditions that are the “best in a decade” in some cases. Moving into the fourth quarter of 2020, industry experts and carriers anticipate a return pre-pandemic shipping volumes, tightening capacity and rising rates. This recovery has occurred in parallel with two emerging market trends: pricing discipline and expansion.
Notably, an exhaustive review of freight trades (e.g., Freight Waves, Journal of Commerce), reports by industry researchers (e.g., TransportationInsight, Cass Information Systems), articles and podcasts by freight industry experts (e.g., Supply Chain 247, TranzAct Technologies), guidance from leading competitors in the US LTL freight market (e.g., Old Dominion, XPO Logistics) and the latest available materials from sources cited within the provided presentation (Morgan Stanley Freight Pulse Shipper Survey, FTR Transporation Intelligence) revealed that the preponderance of publicly available information regarding US freight is eitherdated or not specific to the LTL segment of the industry. As such, the desired data points for the LTL market were not always available in exactly the same format. However, this extensive research approach yielded clear, corroborated insights regarding both the current state and forecasted future of the US LTL market, as detailed further below.

LTL Volume

• The most recent, publicly available analysis of national and regional LTL freight volumes indicates that LTL activity strengthened in the second and third quarters of 2020, and is expected to rebound to pre-pandemic levels as early as the fourth quarter of this year.
• Overall, industry experts such as FTR Vice President of Trucking Avery Vise assert that US LTL freight market volumes have been “a lot stronger than originally anticipated” in March and April of 2020.
• For example, Deutsche Bank analyst Amit Mehrotra reported that LTL volumes improved as early as May and June of this year, with activity increasing by as much as 7% to 8% month-over-month.
• In particular, Mr. Mehrotra found that LTL regional freight activity showed “sharp inflections” during the second quarter of 2020, with the Midwest and Northeast experiencing month-over-month volume improvements of 19% and 29%, respectively, for the first week in June.

• Subsequently, TranzAct Technologies reported that LTL market tonnage declines narrowed to the “single digits” for the month of July, while the Journal of Commerce added that LTL volumes increased in both July and August due to “inventory restocking, surging online sales, and increasing consumer demand for physical goods.”
• Most recently, the Journal of Commerce reported in September 2020 that LTL providers who had experienced “double-digit declines” in volume this past April were already “regaining or exceeding pre-pandemic volumes.”
• As evidence of this finding, Saia stated that its LTL shipment volumes “nearly matched year-ago levels” as recently as this past August 2020.
• Meanwhile, the ATA U.S. Freight Transportation Forecast predicts that national and regional LTL volumes will continue to grow moving forward at a CAGR of 2.5% between 2020 and 2025.

LTL Capacity

• Although the second and third quarters of 2020 saw overcapacity within the LTL market, industry experts (e.g., Journal of Commerce, Sunset Transportation) as well as the strategic moves of key competitors within the market (e.g., FedEx, Old Dominion) indicate that capacity is tightening as the US enters the fourth quarter of the year.
• Despite concerns over capacity limits in the first quarter of 2020, the consensus among LTL carriers as early as April 2020 was that there wasn’t “any capacity constraint” within this segment of the freight market.
• Corroborating these statements, US Bank suggested that LTL freight capacity would become “sluggish” in the second quarter of the year, as capacity from new truck sales exceeded demand.
• Shortly thereafter, Logistics Management found in July 2020 that the LTL market had “perhaps 20% overcapacity” across all industry players, with SMC3 CCO Brian Thompson adding that “there is a ton of LTL capacity in the market” that same month.
• Since then, however, industry outlets including Sunset Transportation have reported that equipment and driver shortages were becoming “extremely real” in August, putting pressure on LTL capacity.
• Similarly, the Journal of Commerce asserted in September 2020 that “anecdotal reports from shippers” were suggesting “tightening LTL capacity” across the country.
• In response to this tightening capacity, FedEx, Old Dominion, YRC Worldwide and Roadrunner Transportation Systems were among the freight operators that announced significant LTL expansion plans as recently as August.

LTL Rates

• LTL rates meaningfully weakened during the first and early second quarter of this year, particularly on the spot market, but have shown signs of recovery and are expected to continue increasing through the remainder of 2020 and into 2020.
• “Everybody collapsed in April,” according to FTR Vice President of Trucking Avery Vise, who commented that spots rates for all forms of freight including LTL were down by as much as 26% year-over-year this past April.
• Specifically, TransportationInsight reported in April 2020 that while LTL contract rates were “staying firm,” spot quotes were “dropping” in an attempt by carriers to attract volume and “maintain efficiencies.”
• As recently as this past July, the Bureau of Labor Statistics reported that long-haul LTL pricing continued to drop by 0.2% month-over-month in July, while TransportationInsight similarly highlighted the volatility in this PPI measure throughout the early part of this year, as depicted below.

• However, on a year-over-year basis, the Bureau of Labor Statistics LTL PPI suggested a strengthening of market prices by as much as 1.36% in recent months, as detailed within the enclosed data series.
• In conjunction, Mr. Vise reported that LTL rates in the third quarter of this year have experienced a “dramatic” and “sustained” recovery, adding that the “rate market in spot has recovered quite substantially” and that all freight rates are likely to stabilize or even continue growing into the fourth quarter.
• From a quantitative perspective, TransporationInsight, Logistics Management and TranzAct Technologies are forecasting LTL rate increases through the remainder of this year and into next of 2%-5%, 3%-4% and 4%-6%, respectively.
• These industry trades attributed the anticipated LTL price growth to a variety of factors, including the need to offset the cost of COVID-19 supplies, more constrained capacity and increases in market share concentration.

LTL Cost Reduction Trend: Employee Furloughs / Salary Cuts

• Employee furloughs and salary cuts were identified as a current cost reduction trend among LTL carriers based on the consistent reporting of this trend by industry experts (e.g., FTR Vice President of Trucking Avery Vise, Sunset Transportation) and top-tier media (e.g., The Wall Street Journal).
• Particularly during the second quarter of 2020, freight carriers across the country announced that they were “cutting pay, reducing hours” and furloughing employees to preserve cash and manage costs amid the “deepening economic downturn.”
• For example, ArcBest cut pay for executives, non-union employees and hourly workers by 15% and instituted a hiring freeze.
• Similarly, Saia cut pay for its officers and directors by 5%, deferred wage increases, suspend its 401k match indefinitely and offered early retirement to eligible employees.
• Moreover, LTL carrier A. Duie Pyle reduced pay by 10% to 15% for all staff and furloughed a subset of employees.
• According to Mr. Vise and Sunset Transportation, these employee cost reduction efforts contributed to the current tightening in capacity that the LTL market is now experiencing.

LTL COVID-19 Trend: Billing Disruption & Reorganization

• In conjunction with staff layoffs, one of the “biggest changes” that LTL freight has experienced due to COVID-19 is the disruption and reorganization of billing operations, per industry researchers (e.g., TransportationInsight, Sunset Transportation) and freight media (e.g., Freight Waves).
• Specifically, the combination of furloughs, layoffs and employee quarantines in both the US and overseas has “forced” many LTL carriers to consolidate their back office operations in the country.
• Moreover, the volatility in staffing has resulted in the assignment of inexperienced workers to billing and processing roles, which has led to a “spike in billing errors” across LTL carriers.
• Meanwhile, the long term implications of this billing disruption and reorganization remain unclear, as LTL carriers that shifted offshore billing operations to the US may keep these functions in the country to “ensure quality control” moving forward.

LTL Financial Trend: Consolidation

• The rebounding financial strength of major LTL carriers alongside continued weakness among smaller players is also expected to spur new industry consolidation, based on the analysis of the Journal of Commerce, Transportation Insight, Logistics Management, Refrigerated Transporter and Freight Waves.
• The Journal of Commerce and TransporationInsight forecasted as early as March and April 2020 that weaker LTL carriers in the US would not be “financially prepared” for the pandemic and its associated economic ramifications, and would likely “leave the marketplace entirely” or be acquired by a stronger competitor.
• Since then, such predictions for the competitive disruption and consolidation within the country’s LTL market appear to be coming to fruition, as evidenced by events such as the following:
  • Regional LTL carriers New England Motor Freight (NEMF) and LME permanently closed.
  • TFI acquired APPS Transport Group, a Canadian LTL and intermodal carrier.
  • Roadrunner became a “standalone national LTL carrier” through the divestiture of its ancillary business operations.
  • Bulova Technologies Group acquired Big Red LTL Transport, a New Jersey-based carrier.

LTL Operating Cost Trend: Improved Operating Ratios

• The return of LTL carriers to more profitable operating ratios was selected as a relatively recent industry trend related to operating costs based on the reporting of TransortationInsight and substantiating data.
• Operating ratios, which measure expenses as a percentage of revenue, have historically served as a benchmark for LTL profitability, financial health and stability.
• Although lower operating ratios are more profitable, LTL carriers relaxed their requirements during the early months of the pandemic and even operated at a loss (with ratios over 100) in order to maintain volume.
• However, as early as this past July 2020, carriers are returning to operating ratios closer to the 90s.
• TransportationInsight adds that as cost and capacity conditions continue to work in favor of LTL providers, this returning trend towards lower operating ratios will only increase.

LTL Sector of Interest Trend: Retail Goods

• Retail has emerged as the new engine of national and regional LTL carriers amid the pandemic, according to a preponderance of industry experts (e.g., Logistics Management, Freight Waves, FTR).
• Historically, “most LTL carriers” have ideally preferred a “50/50 split in revenue” from retail and manufacturing.
• However, SJ Consulting Principal Satish Jindel reported that LTL carriers are handing “more retail shipments than ever before,” amid the drop-off and continued drag on manufacturing production in the country.
• Ultimately, Mr. Jindel asserts that “LTL will perform better than truckload this year,” owing to LTL’s new focus on transporting retail goods as well as the surge in overall retail transportation needs due to e-commerce activity.
• Corroborating this trend, industry leader Old Dominion reported in September 2020 that improving demand from the retail sector ultimately led to a year-over-year increase in LTL revenue per day for the month of August. 

LTL Emerging Trend: Pricing Discipline

• Pricing discipline was chosen as an emerging LTL trend based on the consistent reporting of this shift in behavior among LTL carriers by Logistics Management, Freight Waves and the Journal of Commerce.
• Throughout March, June and August of this year, industry experts have highlighted LTL carriers’ “newfound pricing discipline” as a significant trend within the industry.
• Perhaps the earliest indicator of this shift, Logistics Management reported that the LTL market absorbed the capacity from the closure of New England Motor Freight during the first quarter without “resorting to predatory pricing.”
• Since then, Recon Logistics Vice President Curtis Garrett asserted that rate discipline has “remained in place throughout the industry” despite the pandemic, adding that improvements in freight scanning and weight dimensioners are enabling national and regional companies to become more strategic in their bidding.
• Ultimately, Logistics Management asserted in August 2020 that LTL carriers’ continued trend towards pricing discipline is the core reason that the regional LTL sector has “fared better” than the larger truckload sector.

LTL Emerging Trend: Expansion

• As briefly discussed within the preceding section covering LTL capacity, an emerging trend in the LTL market per industry experts (e.g., TransportationInsight, Freight Waves, TransAct Technologies) and carrier announcements (e.g., FedEx, Old Dominion, YRC Worldwide, Roadrunner Transportation Systems) is a renewed focus on capital expansion projects.
• As recently as July 2020, industry experts forecast that expansion projects in the LTL market would we “delayed” or “significantly reduced” due to the pandemic.
• Since then, however, Freight Waves and TransAct Technologies were among the variety of industry trades that highlighted a new wave and/or larger resurgence in expansion projects among LTL players.
• Some of the most significant, recent expansion project announcements include the following:
  • FedEx is preparing to open a new 166-door LTL facility in Laredo, Texas.
  • Old Dominion has opened nine new LTL terminals to date in 2020.
  • Roadrunner Transportation Systems is adding three new LTL facilities in Chicago, Philadelphia and Riverside, California.
  • YRC Worldwide is expanding its regional next-day service to six new states with the addition of more lanes in the Midsouth and Waco, Texas.