What is LTL Shipping (Less-Than-Truckload) and How Did it Come About?
95% of Cerasis business is done through Less-Than-Truckload (LTL) shipments. In fact, our freight management software, the Cerasis Rater, handled 300,000 LTL freight shipments in 2012, so it is of special interest for us to help educate shippers on all modes of possible ways to ship their freight in order for shippers to make the best decisions for their business. This first post is one in a series where we will explore what is LTL shipping and how Less-Than-Truckload shipping came about and then proliferated after the deregulation of the trucking industry in the 1980s. We will then cover the benefits of LTL Shipping to have more control, decrease costs, and offer flexibility as well as giving you tips on how to save on LTL shipping by explaining what factors create an LTL rate and what you can do to in order to manage those factors better. Then we will conclude the series highlighting the rise of employing a transportation management system to both manage and report on LTL shipping rates as well as touch on how third party logistics companies who focus on LTL shipping can help drive value for a company to allow the shipper to focus more on their core business. Our goal is to empower our readers, customers, and shippers of freight with knowledge in order to better manage and decrease resources needed to run transportation departments.
What is LTL Shipping?
LTL shipping is an acronym for Less Than Truckload shipping. This means a shipment that does not require a full 48- or 53-foot trailer. There are many carriers that specialize or offer this service and, like full truckload carriers, the LTL carriers themselves specialize in different services such as lift gate and residential pickups and deliveries, guaranteed services, freeze protection, transit, and bottom line costs to name a few.
Products are moved from point to point by a number of different modes of transport; air, rail, water and truck. In the US, the movement of goods by truck offers shippers infinite flexibility due at a relatively low cost. Truck transportation can move large items faster than rail as the shipment is not dependent on the railroads timetable. The general freight carriers in the US offer two types of service, Full Truckload (FTL) service or Less-Than-Truckload (LTL). While the FTL carrier moves full containers or trucks of one product from one customer, the LTL carrier moves goods from many different customers on one truck. The LTL carrier offers customers a more cost-effective method of shipping goods than the FTL operator.
The 10 less-than-truckload carriers with more than $1 billion in annual revenue increased combined sales 4.3 percent in 2012 to $23.2 billion, accounting for 72.3 percent of total LTL industry revenue of nearly $32 billion, a study finds. For the first time since the recession, the billion-dollar carriers grew more slowly than the 25 largest LTL carriers. The 25 largest LTL carriers as a group increased revenue 4.5 percent last year, according to SJ Consulting Group. In 2011, trucking’s “billionaires” outpaced their largest competitors by 5 percentage points when it came to sales growth. The group outpaced the 25 largest carriers by 6.6 percentage points in 2010 as the recovery began. That indicates that after two years of steady revenue growth, the biggest LTL carriers found it harder to match prior-year growth rates and price hikes as the general economy weakened, especially in midyear and into the fall.
What are the Characteristics of a LTL Shipping Carrier?
LTL carriers generally utilize van trailers which are covered or enclosed trailers. There are a few refrigerated LTL carriers who utilize temperature controlled trailers. Roll up doors on the rear for access to the inside of the trailer has become a trend for carriers these days as well. What that means is that the entrance to the trailer is a bit smaller than trailers with swing doors. Most carriers will use pup trailers that they can haul two trailers in tandem and LTL carriers will not accept shipments that cannot fit onto one pup trailer. The drivers around town making pick ups and deliveries are generally driving 53 foot trailers and you will notice the majority of LTL carriers on the interstate running their line haul freight are traveling with two tandem trailers. They do this as the freight has already been sorted for destination and can be easily dropped at the coordination terminals as the freight travels across the country. City drivers are using local day cab trucks that are not equipment with sleeper births that allow the local drivers overall lower weight around town along with increased maneuverability as the trucks are shorter in length. The city drivers will generally have a pallet jack in their trailers so they can adjust the freight on their trailers throughout their days. The carriers will have strategically placed terminals where they are able to consolidate all their freight to be picked up and delivered. As a shipment moves from pick up to destination it will be placed with other freight that is bound for the same area to be delivered.
How do LTL Shipping Rates Work?
Rates for LTL freight are determined by class, weight, pick up and destination zip codes (in the transportation industry this is commonly referred to as the “lane”), and any additional services required to meet the shipper’s and consignee’s (this is another term for the delivery location) needs. Carriers will offer shippers and brokers discounts for freight that they are wanting to secure for business. The amount of discount is negotiated with the carrier and FAK’s (freight of all kinds) maybe offered to lessen the perceived cost of shipments in addition to the discounted rates. What FAK really means is say a shipper wants to move his products, which are class 85 (microwaves) and is negotiating his rates with a carrier, the LTL carrier may offer to move this freight at a lower class of 50 thus lowering the perceived cost. However, it’s vital shippers or their third party logistics outsourced provider intimately works with a carrier in order to analyze historical freight shipping data and conduct a freight analysis in order to best approach the LTL carrier to get the best contracted rates by specific shipper need. This process will yield a more productive negotiation and create more of a win/win environment, and ultimately allow the shipper to save the most amount of money on their LTL shipping costs.
Another factor in the costs of LTL shipping are fuel surcharges. Fuel surcharges are the fuel costs associated with the lane of a shipment and added on top of line haul costs. Fuel is updated on a weekly basis and is based on the national average of diesel. With rising fuel costs LTL shipping has seen an increase, because when consumers are buying less the need to ship is lower. So where a company used to fill up a whole trailer with their product now they may only need half as much trailer space and can ship their product cheaper by going LTL instead of using a full truck load carrier.
The main factors that play into LTL shipping rates are:
- Classification of Freight
But, we will cover these in more detail in a future LTL shipping blog post over the next week.
How did LTL Shipping Come About in North America?
The US government started regulating the trucking industry in 1935 under the guidance of the Interstate Commerce Commission (ICC). The Motor Carrier Act of 1935 required new truckers to seek a “certificate of public convenience and necessity” from the ICC. The act required motor carriers to file their tariffs with the ICC 30 days before they became effective. The tariffs were then available to be viewed by any interested party. The tariff could then be subject to a challenge by another carrier or railroad which could lead to a suspension of the tariff until an investigation could be carried out.
In 1948, despite a veto from President Truman, the Congress allowed carriers to fix prices and allow them to be exempt from any antitrust legislation. For the next 30 years competition was virtually extinguished as the ICC denied applications from new carriers. The industry began to change in the early 1970’s when first the Nixon, then the Ford and Carter administrations implemented a number of acts to reduce price fixing and collective vendor pricing. The final part of the deregulation was the Motor Carrier Act of 1980. The effect of the new law resulted in intense price competition and lower profit margins, with thousands of new low-cost, non-union carriers entering the market. Between 1977 and 1982, the average LTL rate fell by up to 20%. The trucking industry changed after deregulation. The number of carriers doubled between 1980 and 1990, with over 40,000 carriers in the US. Union membership fell sharply between 1980 and 1985, dropping from 60% to 28%.
The $26.5 billion less-than-truckload (LTL) is a tiny share of the nation’s $700 billion total freight transportation pie, but it increasingly is seen as a vital component in shippers’ supply chains.
That’s because LTL carriers, with their networks of thousands of terminals and hub-and-spoke system of pickups and deliveries, enjoy significant barriers to entry in the otherwise deregulated trucking industry. In fact, there has not been a significant, sizeable new entrant into the LTL sector since UPS and FedEx made forays into the niche through acquisitions in the early 1990s.
Because of that, capacity in the LTL sector is rather finite, especially with the current driver shortage that is only expected to worsen with tighter regulations on drivers, such as the new hours of service rules and Map-21 regulations. Although the LTL sector did ratchet down capacity by as much as 20 percent during the economic downturn of 2007-09, freight demand has returned to LTL and is “fairly steady at the moment”.
Join us next time as we talk about the main benefits of LTL shipping, and then move onto tips on how to combat costs, use technology, and outsourced logistics providers to help manage and reduce costs in LTL freight spend.