A month after venerable LTL (less-than-truckload) carrier Yellow ceased operations, closing the books on a 99-year-old business—and injecting a fresh burst of freight into the networks of remaining LTL carriers—the overall trucking market is still looking for answers to a host of stubborn, ongoing challenges, including flat pricing, weak demand, excess capacity, and declining tonnages that have persisted through the year.
The supply chain disruptions from Yellow’s closure predicted by some industry watchers failed to materialize. “Typically, what happens in situations like this is there is a bleed into the final event, and then there is the event,” notes Jason Seidl, managing director and senior analyst, trucking and logistics, for investment firm TD Cowen.
“Freight diversions started weeks before [Yellow’s closure],” Seidl says. “Most of Yellow’s freight was in the hands of other LTL carriers [by late July],” he notes, adding that the 8% to 10% LTL market share once held by Yellow and now riding with other carriers is doing so at higher rates.
“They were the low-price carrier,” he says. “Some carriers will take on the freight initially only to find it doesn’t fit their network. [They] will get rid of it eventually, and someone else will pick it up. Freight profiles six months from now will look much different than last month.”
He’s also heard of some carriers who over the past month were delaying rate negotiations with customers “because they wanted to wait out the Yellow situation, to be in a better position to secure higher pricing once Yellow closed its doors,” Seidl’s observed.
Whether that helps lift the margins of surviving carriers remains to be seen, given that the underlying fundamentals of the market “are not that great,” Seidl says. He notes that volumes were soft through the first half of the year and that the market was projected to see little, if any, growth until 2024. Nevertheless, Seidl says, “Net net, it’s a big positive for the industry,” which already had excess capacity available to absorb the volumes.
END OF AN ERA
When the closure became official on Aug. 6, it was a day of profound disappointment, noted Darrin Hawkins, Yellow’s chief executive officer. In a news release, he said, “Today, it is not common for someone to work at one company for 20, 30, or even 40 years, yet many at Yellow did. For generations, Yellow provided hundreds of thousands of Americans with solid, good-paying jobs and fulfilling careers.”
He was unsparing in his criticism of Yellow’s union and what he cited as its fundamental role in the company’s failure.
“All workers and employers should take note of our experience with the International Brotherhood of Teamsters (IBT) and worry,” said Hawkins. “We faced nine months of union intransigence, bullying, and deliberately destructive tactics. A company has the right to manage its own operations, but as we have experienced, IBT leadership was able to halt our business plan, literally driving our company out of business, despite every effort to work with them.”
A CONTROLLED PROCESS
Carriers have been very deliberate in how they’re evaluating the available business from Yellow’s closure, and choosy about what additional freight they’re willing to inject into their networks.
“We are taking on freight from specific customers, but in a controlled process,” notes Jim Fields, chief operating officer for Pitt Ohio. He’s focused on “desirable” freight—freight from existing customers or from customers that fit in lanes where the carrier has capacity, and freight that’s priced appropriately. “We are not inviting shipments from customers who call out of the blue and that are not planned,” he adds.
At Old Dominion Freight Line (ODFL), it’s a similar story. “We have seen an uptick in business [in late July],” said CFO Adam Satterfield in the company’s recent second-quarter earnings call. He also cited a more encouraging macro trend. “I think we are at the end of a long, slow cycle,” he observed.
Late July ODFL volumes had been running at about 47,000 shipments per day, and that has since ticked up closer to 50,000 shipments, reflecting some diversion of freight from Yellow. ODFL’s network has approximately 30% excess capacity, “which is a little higher than our target range of 25%. We are comfortable with the amount of excess capacity, as we remain confident in our ability to win market share over the long term,” Satterfield said.
ODFL continues to invest for growth, with aggregate capital expenditures for 2023 expected to reach $700 million, with $260 million devoted to real estate and service center expansion, $365 million for rolling stock, and $75 million for technology and other assets.
Another beneficiary of the Yellow closure has been LTL carrier XPO. In its second-quarter earnings call, the company said its July shipment count was up “about 9%,” estimating it had picked up some 3,000 additional shipments per day. CEO Mario Harik noted that during this disruptive period in the industry, “we’re very focused on being selective [about] the freight we take on,” with an emphasis on “protecting capacity for our existing customers.”
“A lot of it goes down to being picky about the freight,” he added. “We want four- by four-foot pallets or skids that we can on-board from our customers that fit well into the LTL network.” The goal: “margin-accretive business that will improve our OR [operating ratio] over time.”
XPO also is benefiting from its earlier decision to invest in capacity. Over the past 18 months, the company has added more than 1,900 new tractors and 8,000 new trailers to its fleet, bringing its average fleet age down to 5.1 years from 5.9 years. The company has expanded dock doors in markets where it needed capacity, last year opened six new service centers, and this year expanded capacity at two other service centers in major metro areas.
With near-term industry capacity tightening up, XPO has started pushing the pricing lever. “We are taking pricing actions with customers,” said XPO’s incoming CFO, Kyle Wismans. “We implemented a GRI [general rate increase] with our transactional 3PL [third-party logistics provider] business, and we’ve also moved up our target for contract renewals,” he noted.
“Customers understand that when you take 10% of capacity out of the market, it’s going to cost more to move freight,” he added.
Even as the market adjusts, shippers still want the same consistent blocking and tackling when it comes to service, claims-free handling, and on-time delivery of their freight—as well as ever-increasing technology support, says Jeff First, senior vice president of operations for FedEx Freight.
“We are committed to protecting service and capacity for our existing customers and will leverage our highly flexible network accordingly,” he notes. Yet as the market balances out, he believes customers will return their attention to fundamentals that ensure a consistent, dependable, cost-effective service experience. “Customers care about capacity, future capacity, automation, and service reliability. Knowing that, we’re investing in those parts of our business to ensure we are giving customers an outstanding experience, now and in the future.”
MOVING FORWARD
As of this writing, all of the freight once handled by Yellow has been absorbed into the market, which had excess capacity to begin with. It was a welcome injection of business at a time when market conditions for the most part could be described as suffering from weak demand and lower volumes compared to the same time last year. That’s been exacerbated by persistently increasing costs across the board, for everything from tires to maintenance to wages and insurance, recruiting and retention costs, and health-care benefits.
“When you look at general inflation, I think supply chain inflation is significantly higher than the normal inflation we are seeing,” observes Pat Martin, vice president of corporate sales and strategic planning for Estes Express Lines. “Tractors and trailers cost way more—when you can get them. Tires, parts, everything around maintenance, insurance … it’s all gone up significantly.”
Carriers are going to have to be disciplined, he adds. “You can’t be successful in this business without reinvesting, and you can’t reinvest unless you are growing and making a sustained profit.”
He notes that the last two months have been somewhat unsettled as carriers cherry-picked available freight from Yellow’s closing. However, he emphasized that “there was plenty of capacity to absorb the freight. And it has all been absorbed.”
For Estes, “nothing has changed in how we evaluate opportunities,” he explains. “We are taking on freight that is commensurate with what our network can handle and that we can service properly,” he says. Like other carriers, Estes has focused first on meeting the needs of current customers and will only consider taking on business from new customers once it has achieved that.
WHERE ART THOU, PEAK SEASON?
One overriding question that hovers over the industry: Will there be a peak season this year?
“I would say there is a chance we’ll see a peak season,” Martin of Estes Express says. “Inventory levels have become more reasonable. I do think we might see a little bump. Shippers we talk with are by and large cautiously optimistic. There are just so many wild cards out there that will affect the economy and freight.”
Satish Jindel, founder and president of SJ Consulting, believes that the way the economy has been performing and the switch in consumer spending from goods to services over the past two years argues for a very light peak season this year, if there’s one at all.
“I do not see a peak of more than 1% or 2% [in shipment volume] over last year,” he says. “While the retail sales may be higher, around 3% to 4% of that will be due to increases in prices. Parcel volume will have lower growth due to more people shopping at stores and fewer dollars available for goods after high levels of spending on travel and entertainment, which I call the ‘Swiftie effect.’” He expects little growth in trucking volumes, other than that resulting from diversion of Yellow’s shipments to other carriers. “The Yellow situation could not have come at a better time for the LTL industry,” Jindel says.
Avery Vise, vice president, trucking at FTR Transportation Intelligence, echoes Jindel’s viewpoint.
“As far as trucking overall is concerned, we are probably at or very close to the bottom” in terms of freight volumes in the major sectors of truckload, LTL, and flatbed. And while freight seems to have hit bottom, it’s stable, he notes. “We will not have the type of rebound some expect,” Vise adds. He believes the industry “sort of already has had a freight recession.” From a volume perspective, he adds, “we expect no freight growth this year, something on the order of two-tenths of a percentage [point] next year, and really no meaningful recovery until 2025.”
Vise believes the market is still in a “normalization” stage, with Yellow’s shipments moving into and between existing LTL carriers as operators find the sweet spot managing the added volumes, and as other economic factors keep a lid on meaningful growth.
What he does not see is a driver shortage, even as small owner/operator capacity continues to exit the market. Through June of this year, he notes, the market saw 41 carriers with more than 100 trucks close their doors. And looking at those operators with mostly one and two trucks, “[they] have been consistently declining since July 2022. Clearly, carriers have been able to fill their trucks [with drivers] because we have not seen a decline in overall payrolls,” he points out.
“What that means is that we have reversed the surge of new entrants,” which ballooned in 2021 and through early 2022 as spot rates skyrocketed and owner/operators jumped in to ride the wave, he says. “So far, the trucking industry has absorbed all of those displaced drivers. They [small operators] failed with their own trucks, so they went back to big carriers.”
Nevertheless, he expects rates, particularly in LTL, to rise significantly this year due to Yellow’s failure—and higher next year.
LOOK IN THE MIRROR
As the market continues to level out, shippers can expect their transportation budgets to increase as rate hikes come into play and carriers refine their costing models to ensure the freight they do handle is priced correctly and “making money,” says SJ Consulting’s Jindel.
“Mr. Shipper, look in the mirror,” he says. “You have had bad shipping habits, which you didn’t change because carriers let you [get away with] those habits and still took your freight.” In the LTL markets, shippers still are “shipping a lot of air, poorly loading pallets, and not palletizing or optimizing freight to make it more efficient to handle.”
For shippers seeking assurances of consistent capacity and who truly want to become a “shipper of choice” for a carrier, Jindel offers this counsel: “You have to start changing your habits.”
Gartner, Inc.