LTL Is Insulated But Not Immune To Freight Market Volatility

The producer price index for long distance LTL prices follows the same trend-line as truckload spot rates

FreightWaves' SONAR chart of the week (May 12, 2019 – May 18, 2019)

Chart of the Week: Producer Price Index Long-Distance LTL, DAT Van Freight Rate Index (USA) (SONAR: PPI.LDLTL, DATVF.VNU)

The relationship between truckload and less-than-truckload (LTL) is like two cities positioned around the epicenter of an earthquake. The Earth's crust represents the balance between supply and demand in the general freight market and the truckload city is positioned closer to the center of the than the LTL city.

Th relationship between general LTL and truckload spot prices is outlined in this week's chart of the week, which compares the producer price index (PPI) for long distance LTL prices and the average spot market rate for dry van truckloads in the U.S. The truckload rate is represented here as a weekly figure while the PPI is a monthly figure, which explains part of the reason why it is smoother, but the smoothness is also indicative of the volatility of LTL pricing.

Earlier in the week, FreightWaves Chief Economist Ibrahiim Bayaan reported on the recent PPI release from the Bureau of Labor Statistics, arguing that lower demand growth in relation to increased capacity in the past several months is responsible for the slower growth in both the long distance truckload and LTL numbers.

PPI for long-distance LTL increased every month from June 2017 to October of 2018 before declining sequentially from October through December. This last month marked the lowest year-over-year growth percentage for the index since 2016 at 3.94%.

There is a clear connection between the PPI for LTL prices and the average spot rate for truckload. As mentioned, there is a smoothness to the PPI chart that is not present for the DAT van freight rate. Some of that has to do with the reporting cadence, but LTL rates are generally less responsive than truckload prices by nature. This sluggish responsiveness is largely due to the stickiness of LTL contracts versus truckload.

Truckload carriers can refuse to service contracted account load requests, as they cannot guarantee capacity anymore than the shipper will guarantee volume. LTL carriers do not reject loads due to lack of capacity or better paying options as the dispatchers and drivers lack the visibility to the broader market conditions.

The main concern of an LTL operator is service. To maintain service, they rely heavily on freight volumes to fill the trailers so they can move efficiently between hubs. Utilization is more than just truck movement to an LTL carrier. Empty space on the trailer is more of a focus to their daily utilization than truck utilization. A common cliché' used to describe this is "freight moves freight." In other words, LTL carriers are willing to pursue less lucrative freight so they can cut their trucks earlier and service more valuable customers.

LTL bids are much more complicated to manage than truckload bids due to the additional information needed. Truckload bids are predicated on origin/destination pairs and volumes in a defined period. LTL bids require these items plus commodity descriptions which include weight and dimensions that take a lot more effort to compile. This means rebids do not happen as often.

LTL rates are more expensive than truckload when aggregated due to the additional actions required for consolidation. This buffers the LTL carriers from some of the market fluctuation as well, but not entirely. Shippers and brokers will chop truckloads into smaller shipments and push them through LTL networks to gain capacity when it is tight, increasing the LTL carriers' exposure to truckload market price volatility.

Taking these differences into consideration, there is a correlation with trends in the truckload pricing that impact LTL prices. Linehaul movements between hub terminals are in fact truckloads themselves, so the rates must align in some way to market conditions.

LTL will still feel the impacts of the truckload market fluctuations, just not at the same speed or magnitude.

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