When it comes to costs, the motor carrier industry faces its biggest challenge in the area of salaries, wages and benefits, according to a recent report by equity research firm Stifel Nicolaus. “The LTL Industry” focuses on the less-than-truckload segment and provides a perspective on current issues affecting the industry and an outlook for the segment.
David Ross, vice president of the Transportation and Logistics Group, offers data reported by a number of carriers which show salaries, wages and benefits account for just under 59% of carriers’ cost structure. Operating supplies and expenses (which is where fuel shows up) comes in just under 20%, and purchased transportation is nearly 9%.
The less-than-truckload (LTL) segment is particularly concerned with labor costs because the structure of its operations requires more moves and more handling and, therefore, more labor input.
Non-union carriers have typically enjoyed a more flexible workforce that is not bound by strict job classifications and benefits from slightly lower wages. But, even though most carriers in today’s LTL industry operate with 100% non-union labor, underlying wage costs have tended to equalize and, in some cases, the hourly wage rate at some non-union operations is marginally higher than for some union workers.
For unionized carriers, work rules have contributed to inefficiency, requiring more workers to perform functions, thus adding cost and affecting service. One quick example is when a driver arrives at the carrier terminal and there is a shortage of dockworkers. The non-union driver would jump out of the cab and begin assisting dockworkers with loading or unloading. At a union shop, the driver would be constrained by work rules and job descriptions from performing dock work.
The new National Master Freight Agreement (NMFA) between the International Brotherhood of Teamsters and the largest unionized LTL carriers will allow more flexibility through a “utility employee.” This flexible (and higher paid) worker is intended to help the national LTL carriers on lanes where they compete with regional carriers.
Improving labor efficiency offers some help, but the largest component of the wage cost is benefits. Union carriers have large underfunded pension plans and must continually increase contributions to make up the deficit. In the end, a union employee costs carriers $22,000 more per year than a non-union employee, based on information supplied by public companies.
The Teamsters are stepping up efforts to organize carriers, and one prime target is UPS Freight. UPS is already the largest employer of Teamsters in the world, accounting for 14% of total Teamster membership. The former Overnite Transportation fought a long and bitter battle to remain non-union, but the mood has changed since the 2005 acquisition by UPS and its integration as UPS Freight.
Other non-union carriers could face the Teamsters if the Employee Free Choice Act (EFCA) is passed. It nearly passed in 2007 and has the support of presidential candidates Barak Obama and Hillary Clinton.
The EFCA greatly simplifies the organizing process. If a majority of employees sign cards stating they prefer union representation, the union would automatically be appointed bargaining agent for the workers. The process does not provide management an opportunity to state its case in the process. This could become a distraction for non-union management that faces union organizing efforts.
Fuel is another major concern for carriers. The rapid and sustained increases in fuel prices have caused operating costs (and fuel in particular) to capture more of the share of overall costs, biting into some of the percentage labor has represented.
Fuel doesn’t just show up in the carrier’s operating costs, it is also a component of purchased transportation costs. Long-haul carriers use rail intermodal and truckload for many line haul segments where the carrier can’t balance the lanes with backhauls. Fuel is one factor in the purchased transportation costs.
Other purchased transportation costs result from interline moves by regional carriers supplementing a carrier’s reach and by cartage agents used for pick up and delivery operations on either end of a line haul move.
In the area of insurance and claims, the LTL industry has an advantage over the truckload side because it typically runs fewer miles. LTL carriers also tend to use equipment longer than truckload carriers and they have a network infrastructure which includes maintenance. Insurance can be lower for LTL carriers because of the depreciation cycle on equipment and the lower risk associated with fewer miles driven, but this is still an area of rising cost for carriers. To counter some of this effect, LTL carriers have increased the amount of risk they self insure against.
At the end of the day, LTL carrier networks require volume to operate efficiently, and not just volume but lane density. More direct loadings without intermediate sorts produce a more cost effective model. This is a strength of regional LTL networks and a challenge for national LTL carriers that operate regional terminals as well as major breakbulk hubs that perform intermediate sorts.
Volumes are expected to pick up, but they should still post negative year-overyear comparisons in the first half of 2008 and only begin showing positive comparisons in the second half. Stifel Nicolaus expects 2009 to be a more normal year of supply and demand with tonnage growth of 1% to 2% likely.
As demand increases, carriers should find it easier to justify pushing price. But LTL pricing is on the upper end of complexity and singular practices. The system based on the National Master Freight Classification system is so entrenched that common practice trumps even the elimination of antitrust immunity for the rate bureaus.
There has been talk for years of moving LTL pricing to a density-based system more like that used by the parcel carriers, but shippers have developed systems that match carrier practices, and the current system has worked, so they see little incentive for change.
Fuel surcharges have been one of the hottest topics in carrier pricing, and the reason is clear. Fuel surcharges are now over 20% of total LTL average shipping costs after the significant rise in diesel fuel prices since 2002. Carriers don’t hedge fuel costs, but instead have a separate surcharge in place based on a percent of revenue to protect themselves from fuel price increases.
For years, when fuel prices were declining- to-stable, they were a predictable cost that was factored into pricing. Fuel represented 4% to 8% of revenues for LTL carriers. Then in 1996, most large LTL carriers implemented a fuel surcharge to recover some of the fuel cost increases they were seeing that year (up 11% yearon- year). Fuel costs roller-coastered to end 2001 below the 1996 level. But, since then, the cost of diesel fuel has skyrocketed from $1.15 per gallon to $3.82 in March 2008, a 232% increase. With that, fuel surcharges rose from about 1% to near 28% of base price. (Fuel surcharges are applied to the shipper’s bill after the discount has been applied.)
With fuel surcharges, it’s important to note that the surcharge is only part of the rate discussion. Larger shippers often have their own fuel surcharges and some contract negotiations involve fuel surcharge caps. There is often a trade off between fuel surcharges and base rates. The surcharge issue has sparked some litigation by shippers and the US Department of Justice is showing some interest as well (See Legal Briefs, pg. 31).
In general, pricing returns with tonnage, but it is dictated more by supply and demand within the industry. Increased demand, rising operating costs, truck driver recruiting/retention issues, and lack of necessary infrastructure investments should keep the supply/demand relationship relatively tight for the foreseeable future. Capacity is exiting and there could be more carrier bankruptcies over the next quarter or two to bring the sector closer to an even tighter supply/ demand environment when demand picks up again.