While it seems as though most of the logistics sector is in a slump, there is some cause for hope as we see the LTL market enjoying a revival, owing largely to some significant investments in new technology, a revamping of hub and spoke networks, and of course, the boom in e-commerce.
Contributing Factors to a Better Year
As we look at 2017, the market for LTL certainly has a brighter outlook than years prior. It’s true, the investments have helped, but at the end of the day, the power players in the LTL market are the ones that have managed to keep control of their market shares. In fact, the top 25 LTL carriers still control almost 90 percent of the market share. With shipping giants like FedEx and UPS continuing to throw their financial weight into operational improvements and new technology, the LTL sector continues to maintain the upper hand over the fractured FTL sector when it comes to pricing power.
“The expectation remains for better times ahead in LTL due to the prospect of lower taxes, reduced regulation, increased capital spending and the administration’s stated focus on domestic jobs, infrastructure and manufacturing,” says David Ross, an analyst for Stifel Inc.. “In theory, these should all work to drive earnings per share higher for LTL carriers—but in practice it may take a while,” Ross added.
For some of the lead carriers in the LTL sector, that’s already starting. XPO Logistics, for example, is the nation’s 2nd largest LTL carrier group, has actually begun to see profits in the first quarter for the first time in almost a decade. The large portion of this success is due to growth in e-commerce, last-mile delivery capability, investment in technology and cross-selling among other XPO units.
A (Slight) Increase in Demand
Another advantage for the LTL sector is that there is some growth in demand, albeit a small growth. While it might only be a 1 percent growth on average in daily tonnage and shipments it was the first time the LTL sector saw positive growth since 2014. With that being said, low, single digit growth rates are expected to continue for the rest of the year.
According to Mr. Ross, the key to growth in 2018 will be improving the manufacturing sector and reducing overall truckload capacity, which might be enough to spur TL shipments to flow back into LTL networks. Ross also adds that LTL pricing should see an increase for the rest of the year and actually saw a nominally higher rate of growth at 1.8 percent. Ross is forecasting 2 percent higher rates for the rest of the year.
More Stability in the LTL Sector
FTL markets, much like oceanic freight, saw some considerable power mergers, such as the $6 billion merger between Knight and Swift. However, the LTL market seems to show a bit more stability, mostly because LTL carriers already operate out of established networks. Because of this, few analysts expect there to be any mega mergers in the foreseeable future.
“There simply aren’t any benefits,” says Ross. However, smaller acquisitions might make a little more sense later on down the road.
The Road to Success
No matter what the industry, there will always be someone in first place. In the case of the LTL sector, that would be Old Dominion Freight line. ODFL posted an astounding, sector leading, $195 million in net income last year. They also posted an 83.8 operation ration which is also best in class for the industry.
“ODFL vice chairman and president David Congdon says that his company formula for success is simple: 99+% on-time service in regional, interregional and national market lanes at competitive rates with low claims. That’s easy to say, but difficult to do consistently in the highly competitive LTL market place,” said a recent article from Transport Logistics.
The takeaway for the State of LTL logistics is simple. New technology and better operating practices will be the most useful when it comes to taking advantage of the growing demand. As the market continues to improve, so too will the profits for the sector as a whole.