The shutdown earlier this month of regional LTL carrier Central Freight Lines Inc. (CFL) is a reminder that even in the midst of perhaps the strongest financial and operating cycle in the industry’s history, the complex model can still humble the best of carriers and ruin the worst.
The loss of Waco, Texas-based CFL is unlikely to tighten LTL capacity any more than it currently is. CFL controlled just 0.6% share of the $42 billion-dollar-a-year industry, according to ShipMatrix, a consultancy. However, some customer segments could be hit hard by its absence. CFL did 70% of its business with third-party logistics providers (3PLs), transactional players whose LTL shipper clients are typically price-elastic. Desperate to fill space and behind the 8-ball due to its overreliance on 3PL traffic, CFL significantly underpriced its capacity to keep volume coming and its trucks moving.
With the carrier gone, smaller shippers accustomed to low rates will face sticker shock as their traffic gets repriced in a seller’s market for space, said C. Thomas Barnes, chief revenue officer of transportation technology platform MyCarrier and a longtime LTL executive. The last big LTL closure, New England Motor Freight Inc. in early 2019, came at a time when capacity was looser and freight desired by other carriers could be readily absorbed. That is not the case heading into 2022.
Kent Williams, executive vice president, sales and marketing, at regional LTL and truckload carrier Averitt Express, said the carrier has been very cautious about onboarding CFL accounts because it doesn’t want to put undue stress on its network and compromise its service standards. CFL’s departure could result in short- to medium-term dislocations as spikes exceed the availability of drivers and equipment to haul them, Williams said. He added, however, that he doesn’t expect the impact to be overly significant across the entire market.
CFL painted itself into a corner through its overreliance on 3PLs, according to Barnes. In theory, third-party providers, which today manage between 20% and 25% of freight tendered to LTL carriers, add value by supplying shipment density. In practice, said Barnes, 3PLs operate as one-off players looking to capture the marginal dollar. Because it lacked a robust IT infrastructure to measure the profitability of its loads, CFL was at the mercy of 3PLs and their transactional mindset, Barnes said. In the end, the carrier was just accepting freight to build volume without having any idea what its costs were, he said.
Technology should allow shippers and carriers to deal directly with each other rather than through 3PLs, Barnes said. The added layer doesn’t do shippers and carriers any good, he said. The goal of a platform like MyCarrier is to “eradicate” 3PLs from the equation, said Barnes, calling them “poison.”
Shippers may have the most to learn from Central’s demise, according to Scooter Sayers, an LTL consultant who has worked in the industry since 1989. “I suspect the shippers who were still working with CFL were price-conscious and probably did not have a strong hold on their freight profile,” Sayers said.
That liability wasn’t an issue as long as Central was giving away the proverbial LTL store, Sayers said. However, as shippers now begin to seek replacement providers, “the first question that the carriers will ask is, ‘What kind of freight do you have?”’ he said.
Shippers who transition best in a post-CFL world will have a soup-to-nuts understanding of their freight’s characteristics, Sayers said. This includes shipment weight, dimensions, density, commodity type and the percentage of residential versus commercial deliveries, he said. “If all [shippers] can do is give carriers a list of ZIP codes and shipment weights, they will either pass [on the business] or build in a huge risk factor” — namely higher rates — to compensate them for the lack of visibility into the freight, Sayers said.
Another benefit to shippers of being fully vested in their freight profiles is it will give them some negotiating power over their carriers, Sayers said. “Carriers collect a ton of profile data and tend to not give it back to the shipper because it cedes too much control,” he said. “One way shippers can gain back some pricing leverage, either when changing carriers or negotiating with their current carrier, is knowing their freight and using that knowledge to their advantage.”
Carriers, meanwhile, should use the current market situation to correct the pricing ills that span decades, said ShipMatrix President Satish Jindel. Machines are readily available to accurately capture a shipment’s density and allow carriers to fairly price their space without shipper pushback. Yet for 88 years, pricing has been guided by a system that groups commodities into 18 classifications ranging from 50 to 500, with class 50 being the least expensive and class 500 the most expensive. The system can spawn gray areas of interpretation, leading shippers to erroneously accept a classification that’s too high for its shipment, or resulting in claims to resolve shipper-carrier disputes over what class should apply to a shipment.
Carriers should also end their longtime practice of offering discounts without a volume commitment in return, Jindel said. It would be unthinkable for parcel-delivery carriers to operate that way, he said. The commitments would “help the shippers ensure availability of capacity and enhance relationships with their preferred LTL carriers,” Jindel said.
According to Sayers, the most important carrier lesson of the CFL shutdown is the importance of operational and customer service excellence, and how that translates into pricing leverage by locking in loyal and price-inelastic customers. The model to follow, Sayers said, is that of Old Dominion Freight Line Inc., (NASDAQ: ODFL) long considered the best-managed trucking company in the country.
“I believe Old Dominion’s profit lead on their nearest competitors is half operational excellence and half pricing premium,” Sayers said. “If you as a carrier are not doing this, you will get left in the dust.”