ABF takes industry lead into dimensional pricing, supplementing weight-based pricing

ABF Freight will change its pricing structure to include freight dimensions as a supplement to the existing weight-based pricing structure. The less-than-truckload carrier, a subsidiary of Fort Smith-based ArcBest Corp., is making the change to keep pace with recent shipping trends.

“Our view had been that FedEx Freight was going to lead the shift to dimensional pricing in the industry, as they’re the biggest player and have years of experience on the parcel side with pricing this way,” said David Ross, transportation and logistics analyst for Stifel. “But we have to hand it to the team at ABF for taking the initiative. We have been openly critical of the company’s pricing but believe this could be a sign of positive change at the ABF, assuming discipline is maintained around pricing and margins expand.”

On Aug. 1, the new pricing will go into effect, applying space-based minimum charges for LTL shipments, according to ArcBest. Over the past several years, the number of bulkier shipments has risen in the industry.

“The LTL business has always been cube heavy, as trailers tend to cube-out vs. weigh-out 98% of the time,” according to Ross.

The existing weight-based pricing structure didn’t address these shipments, and the new pricing structure to determine cubic minimum charges will be used to supplement the existing structure.

“This is how we see pricing trending,” Ross said, adding that shippers are expected to benefit from the simpler, more straightforward pricing structure.

Density-based or dimensional pricing is based on “cube, not weight,” according to Ross. Parcel carriers UPS and FedEx use this type of pricing, charging “the greater of cube or weight for small packages.” But in the less-than-truckload industry, carriers use a pricing structure that places freight into different categories. The classification system, National Motor Freight Classification, might place bulky, low-value items into a lower class, while high-value or easily damaged items, such as ping pong balls, would be in a higher class. The higher the class, the higher the multiplier that’s used to calculate the price to ship the freight.

“No LTL carrier prices exclusively in a density-based or dimensional system today, as there is concern over losing business,” according to Ross’ industry note. “Shippers like the old complex way and may switch to a competitor if a carrier goes to density-based pricing.”

“The best carriers, however, do cost already on a dimensional basis, as space, not weight best measures the carriers’ cost to serve in an LTL network,” according to Ross.

For example, FedEx Freight has more than 80 dimensional scanners in its operation, and the primary benefit from the scanners is more accurate dimensional data resulting in more accurate cost and better pricing.

“We believe this initiative is the natural step for us to take now to ensure that the value we provide is appropriately reflected in the compensation we receive for our shipping and logistics services,” said Judy McReynolds, chairman, president and CEO of ArcBest.

EARNINGS EXPECTATIONS
On July 28, ArcBest is expected to report second-quarter earnings. Earnings for the quarter that ended June 30 should rise 10 cents to 48 cents per share, from the same period in 2016, based on a consensus of nine analysts. Revenue is expected to rise 6.5% to $720.54 million, based on a consensus of five analysts.

Tonnage for ArcBest has risen 1% in the second quarter through May, compared to the same period in 2016, according to Brad Delco, trucking/transportation analyst for Little Rock-based Stephens. ArcBest and other LTL carriers provided updates on tonnage throughout the quarter, and they “support our view that the industrial backdrop has improved, reflecting the acceleration in the ISM’s PMI Index over the past several months,” Delco said.

ArcBest also noted that yields including fuel were up 6% so far in the second quarter and was in line with the first quarter even though fuel prices have fallen, according to Delco. The carrier was one of two that announced a general rate increase, and the increases should “support the overall LTL pricing environment” as most of the increases went into effect at the end of May. ArcBest should see the most benefit from the rate increase because between 30% and 35% of its business is non-contractual compared to other carriers’ non-contractual business of between 20% and 25%.

As of mid-day Thursday (July 20), ArcBest shares (NASDAQ: ARCB) were trading at $21.95, down 25 cents or 1.13%. In the past 52 weeks, the stock has traded between $33.95 and $16.95.

INDUSTRY TRENDS
The LTL industry is expected to benefit from the shift in the supply chain from long-haul truckload to regional LTL, said Allison Landry, transportation analyst for Credit Suisse.

“While supply chains were originally structured keeping brick-and-mortar retail stores in mind, they are ill-equipped to serve the rapid growth in e-commerce volumes. As a result, retailers are reorganizing their supply chains in order to deliver goods ordered online more quickly to the end consumer.”

Retailers are building more distribution centers, allowing them to reach consumers with one or two-day shipping, according to Landry. “In return, we suspect that they are demanding that suppliers distribute smaller amounts of inventory more widely amongst multiple distribution centers.

“E-commerce is creating a more fragmented supply chain system that is inherently less suited for long-haul (truckload) and more suited toward regional LTL.”