‘Radical transformation’

The less-than-truckload industry has seen a burst of acquisitions and realignments this year. It is clear that undercurrents are pulling the LTL industry in a new direction.

Here is a rundown of some of what’s been going on:

• Recently, Saia LTL Freight continued its extensive expansion plans by opening a terminal near Chicago’s O’Hare airport.
• Heartland Express, Hirschbach Motors, KLLM Transport and Schneider National all have announced acquisitions.
• Manitoba’s Bison Transport not only formed Bison USA but has bought two Maine carriers.
• USA Truck and Freymiller have been targeted for acquisitions.
• Yellow Corp. has been following through on a brand consolidation announced late last year.
• FedEx Ground is dealing with dissension among its contractors.
• XPO Logistics has spun off its brokered transportation platform and pushed to build out its terminal network. New terminals opened in May in California and Georgia.
• Old Dominion Freight also is expanding its terminal network.

Together, these strategic business machinations suggest a fundamental change for less-than-truckload shipping.

The LTL industry is going through a “radical transformation,” is how one market analyst put it.

Donald Broughton, principal and managing partner in transportation analysis firm Broughton Capital LLC, Clayton, Mo., keeps close tabs on the LTL industry.

He says two fundamental changes cause the radical transformation.

One, the customer base for the LTL business is changing.

“It used to have an industrial customer base that was focused more on price and only needed service between industrial or commercial addresses,” Broughton said.

That is changing because of “onshoring,” which is the opposite of offshoring and refers to moving business operations from overseas back to a company’s home.

Bloomberg News has noted that the related buzzwords “onshoring,” “reshoring” and “nearshoring” have been mentioned a lot during earnings calls early this year. They all point to “a major re-assessment of supply chains in the wake of port bottlenecks, parts shortages and skyrocketing shipping costs that have wreaked havoc on corporate budgets in the U.S. and across the globe,” Bloomberg reported in July.

“The onshoring trend is real, and as it continues the volume of industrial LTL will grow at a pace that is two times to five times what it normally would be,” Broughton said.

The reason is that all the parts and pieces going into the production or assembly process need to be moved, not just the finished product, Broughton said.

The second of the one-two punches

The other fundamental change disrupting the LTL industry, Broughton said, is the rise of e-commerce.

He said that the increase in e-commerce sales of products is exploding the delivery networks of UPS and FedEx.

“This will become a larger customer base than the old industrial base, but it requires delivery to residential addresses,” Broughton said.

Building for decades

“Radical” transformation might suggest abrupt change, but what’s coming to fruition is the result of changes that have been gradually gaining momentum for more than a decade, according to Tim Denoyer, vice president and senior analyst for Columbus, Ind.-based ACT Research.

Nevertheless, it is a big change, he said.

“So far, e-commerce is the bigger factor because the demand for next-day delivery means there are more situations where shippers can’t wait for a full truckload,” Denoyer said.

The other factor cited, reshoring, has begun, he added. Also, there has been a pretty strong industrial recovery in the past two years, but it is still in the early innings.

“There will be a lot of supply chain diversification in the years to come, with reshoring and nearshoring in and around the U.S.,” he said.

ACT Research is optimistic about the business climate for the next several years. Still, higher interest rates and a softer housing market would significantly affect the U.S. industrial cycle, he said.

“Even amid a positive long-term transformation, the LTL cycle will face cyclical challenges in the next few quarters before that long-term uptrend resumes,” Denoyer said.

He noted that a key aspect of the transformation is that LTL rates have not risen as much as truckload rates in the past two cycles, which were the largest on record. Also, LTL rates have not fallen with truckload rates in the looser markets. That price discipline is supporting record LTL company profitability, he said.

As for mergers and acquisitions, the trucking industry is generating record cash flow, which helps a company owner decide to sell. Also, many trucking business owners who started in the post-deregulation era after 1980 are now in their mid-70s, and their heirs aren’t always interested in taking over the businesses.

“I think any regional LTL that comes on the market will see a lot of interest,” he said. LL