Looking at LTL

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Good tidings seem in order for the LTL segment of the trucking industry, with tonnage volumes increasing – helped along by a growing capacity crunch in the TL sector combined with an uptick in re-shoring activity – which is being followed by rate increases.

Old Dominion Freight Line (ODFL) for example recently announced a 4.3% general rate increase starting May 1 as Todd Polen, the carrier’s VP of pricing, noted that “customers are asking for more capacity” plus more value added products and services.”

“In order to meet that demand and deliver on the promises we have made to our customers, we must continue to build our network and systems,” he explained in a statement.

“Our philosophy is to take a fair and equitable approach that minimizes the impact to our customers’ budgets yet at the same time, supports the value proposition we promised to the marketplace,” Polen pointed out. “Therefore, this increase is necessary to offset the rising cost of new equipment, escalating insurance costs, securing new service center capacity, continuing to develop state-of-the art technology, [plus] providing for competitive wages and benefits.”

Wall Street investment firm Stifel Nicolaus & Co. noted in a recent research missive that it believes LTL pricing overall should increase 3% to 4% this year, even with overall U.S. gross domestic product growth still expected to slump along at a rate of 2% to 2.5%.

Stifel’s outlook for LTL industry tonnage through 2016 is for a continuation of this “slow recovery” pace unless of course a tighter capacity situation emerges in in the TL sector – a tightness the firm said may not truly manifest itself until ELDs (short for electronic logging devices) become mandatory and enforceable, which will likely be sometime in 2016.

For 2014, Stifel expects a roughly 2% to 3% uptick in both volume and yield growth for the LTL segment, adding that LTL tonnage grew 4.4% year-over-year in the fourth quarter of 2013 followed by more tonnage gains in the first quarter this year.

On the pricing side, the firm said LTL yields grew only 0.2% in in the fourth quarter last year although reported yields varied somewhat due to freight profile changes, which was a deceleration from the 1.8% year-over-year yield growth reported third quarter last year.

In Stifel’s analysis, one of the reasons for what it calls this “yield/price mismatch” is the increasing penetration into the LTL freight market by third-part logistics (3PL) providers, which means even if the same freight is still hauled by the same carrier the shift of the primary shipper relationship erodes margins for the carrier.

Stifel added that while large national accounts are not giving much in the way of rate increases and are typically much less profitable customers for the carriers, the firm thinks those larger shippers will need to accept larger-than-average increases once capacity tightens significantly, as the cross-subsidizing done by the small shipper is decreasing and industry consolidation is increasing.

Even with all of that good news on the table, Stifel still cautions that the potential for things to turn sour – especially in terms of broader U.S. economic trends – remains a constant underlying worry.

“We caution that, although industry fundamentals are good now and our outlook through 2016 is for continued growth in pricing and volumes, a few negative surprises could cut valuations significantly,” the firm noted in its research update.

“Now in the fifth year of an economic recovery – sluggish as it may be – we are modeling growth for three more years, yet we are much less confident in our 2016 estimates, as a deceleration in U.S. economic growth would not surprise us, given continued limited real wage growth, job growth, population growth, and potential stimulus withdrawal and rising interest rates,” Stifel pointed out.

“[But] over the longer term, through the cycles, we believe that the U.S. energy sector growth, re-shoring of manufacturing, industry consolidation, regionalization of distribution, and capacity tightening in the TL sector should benefit LTL operators,” the firm said.

Thus while it may not be picture perfect news, it still should be welcome enough for the LTL sector – especially as the chances of raising rates and making them stick now appears to be better.

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Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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