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LTL Rate Increases and Market Saturation

High demand and favorable market conditions mean most LTL carriers find themselves firmly in the driver’s seat when it comes to pricing and choice of freight as we enter the second half of 2018. Peak shipping season occurs during the third and fourth quarters along with contract negotiation between many shippers and carriers. With LTL companies already operating at full capacity and the undeniable impact of freight rates on profitability for most companies, shippers will be better prepared for what’s ahead when you understand the why behind the current state of the LTL market.

  • LTL Capacity
    While the economy is certainly a catalyst of LTL demand, there are other contributing factors. Tight LTL capacity also stems from the changing retail landscape (brick-and-mortar to ecommerce), spillover from full truckload demand, available equipment, and competition for available drivers.
  • Retail
    The “middle mile” of ecommerce shipments are often handled by LTL carriers. With a 16 percent growth in online retail purchases in 2017, and little sign of slow-down in 2018, ecommerce will continue to impact LTL capacity. Some carriers have adjusted operations by adding hubs and service centers to accommodate the industry, including their more rigid on-time delivery expectations.
  • Truckload Demand Spillover
    The overly saturated truckload market has some shippers looking to LTL carriers. That being said, heavy partial truckload shipments are not always ideal in LTL carrier operations. This has many carriers weeding out the freight that does not complement their network.
  • Available Equipment
    According to an article from Supply Chain 24/7, LTL carriers have not added much equipment to their fleets in the past few years. They speculate, however, that even a surge in available trucks would not have much impact due to the driver shortage.
  • Available Drivers
    Several growth sectors, including construction and manufacturing, share a workforce with LTL carriers. Competition within other industries that may offer more lucrative opportunity is a challenge for LTL carriers. The driver shortage of the truckload sector has not yet had a large impact on LTL.

Unexpected Consequences of High Demand

The benefit of high demand for LTL carriers is revenue growth — which is up 10% or more through volume or yield gains. It is not all roses though. There are challenges for carriers operating over capacity, and shippers are likely to feel it.

Carriers are maximizing profits, in part by weeding out freight that is less profitable — not a good fit for their network or operations. They are using pricing initiatives that make the shipments costly and ultimately leave shippers disinclined to tender freight that carriers find unattractive.

The freight that is moving through the overly saturated LTL operations may experience inconsistent service levels. Some terminals are already running weeks behind. The holiday surge will likely bring more missed pickups and transit delays for shippers. Without enough employees or equipment to handle such high shipment volume, some carriers have embargoed their guaranteed transit services. YRC Worldwide has suspended reimbursement of their Time-Critical service due to their struggle to keep up with demand. A note on their website indicates they may reinstate the practice, but are still facing difficulties, “We are currently working on a re-launch of our time critical services. While our service is improving, we continue to face industry challenges including peak shipping volumes, driver shortages and capacity constraints.”

Summary

With carriers’ eyes on profits and high demand in the market, freight shipping rates are likely to continue increasing during shipper-carrier contract negotiation the remainder of the year. Prices will go up, but do not expect service levels to do the same. Most LTL carriers are not operationally equipped to handle this surge in demand. Shippers will need to prepare for inconsistent transit days and allow time in their supply chain for things like missed pickups and late shipments.

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