Stifel's LTL 10-year outlook focuses on density pricing, cost discipline
Stifel Transportation & Logistics Research Group says LTL industry more consolidated than a decade ago, and thus better suited to weather a recession.The Stifel Transportation & Logistics Research Group said Thursday the less-than-truckload industry could well shift to a density-based pricing model in the next decade, but that profitability could still be elusive for some carriers even in that new pricing environment.
“We believe the pricing landscape could shift to density-based pricing, as is used in most other modes, and longer-combination vehicles could provide the opportunity for more efficient operations (while also adding linehaul capacity),” Stifel said in a 10-year outlook note on the LTL industry. “Neither change, though, will mean all carriers see greater profitability, for it will be, as usual, up to the individual company managements to implement the changes in a way that leads to better margins. Some will inevitably adapt poorly to the change.”
Stifel said it expects to see LTL gain some share back from truckload over the next decade., followed by more consolidation “during the next recession (and we could easily have more than one recession by 2025).”
The most vulnerable LTL carrier in that situation, Stifel said, would likely be YRC Freight.
“Unless significant changes are made to its current financial position, YRC Freight will likely again be at risk when freight volumes turn negative, especially if aggressive industry price-cutting follows, due to the operating leverage inherent in the business,” the outlook note said.
“Before then, though, we will see if carriers can remain disciplined on pricing longer than in the past, which, if so, should allow for improved margins and operational efficiency. Fortunately, the LTL industry is now more consolidated than it was 10 years ago, as the top five carriers have roughly 55 percent of the market.”
Stifel said those top five carriers – FedEx Freight, YRC Worldwide, Con-way Freight, UPS Freight, and Old Dominion Freight Line – have all either been historically disciplined on price or have been burned by their undisciplined ways and would have little choice but to push price to improve margins.
Finally, the outlook said the key differentiator between LTL carriers is management.
“With the exception of structural inefficiencies (like union labor) outside their control, managements will play the most important role the courses of their respective companies,” the note said. “Since most of the companies run similar trucks with similar drivers through similar real estate networks with similar dockworkers, the difference in margin level, service, and culture comes from the top. We continue to believe the three keys to a successful LTL network are 1.) understanding your costs, 2.) pricing accordingly off those costs and maintaining discipline around that pricing, and 3.) density.”