LTL Deregulation: Sizzle or Fizzle
Thursday, January 3, 2008Last May, the U.S. Department of Transportation's Surface Transportation Board published a decision (STB-656) that revoked the antitrust immunity granted to motor carriers and household goods carriers to collectively determine transportation rates. The decision is effective January 1, 2008.
While the industry had been moving towards a more deregulated environment for some time, this latest development equates to the final nail in the coffin.
What's not known, however, is what the real impact will be on motor carriers and shippers. Some believe the decision will open up a host of opportunities and pricing options, while others say the effect will hardly be felt at all.
The impact on carriers
According to Michael A. Duncheon, Partner, Hanson Bridgett (www.hansonbridgett.com), the STB's decision will have "significant implications for the trucking industry."
In his article "STB Ex Parte No. 656: Truckers Lose Their Antitrust Immunity," published in the October 2007 edition of The Transportation Lawyer, Duncheaon states that, "The penalties associated with antitrust violations are among the most severe imposed by the federal government and as the deregulation of the airline industry illustrates, it is often difficult for industries to break old habits and adapt to new ways of doing business. Furthermore, there is no sign that the federal government has any intention of backing away from aggressive enforcement of antitrust laws. Just this year, in fact, the Department of Justice reported setting a new record for antitrust sentencing."
Gordon McAuley of The Pasha Group (www.pashagroup.com) agrees with this point. "In large part, the ultimate effect of the loss of antitrust immunity will be determined by the enthusiasm of the Department of Justice and the Federal Trade Commission for policing and enforcing the new regime. The government has a great deal of discretion in what they choose to prosecute. Hopefully, they will focus on business practices that truly provide a potential for anti-consumer price fixing."
And, McAuley emphasizes that the interstate transportation industry is not one of those business endeavors.
"The motor carrier industry, in particular, has traditionally operated at low margins and with a considerable amount of competition. The barriers to entry are relatively easy to overcome: a brother-in-law and a pickup truck are enough to start hauling freight." He adds, "The federal government years ago eliminated the requirement that applicants establish a ‘public convenience and necessity' for proposed new business services. Now, anyone willing to try their hand in the trucking business in welcome to do so, provided they buy liability insurance and operate safe equipment."
But, this is where the uncertainty lies with respect to the federal government. Because while interstate motor carriage is a highly competitive industry with a resulting low profit margin, "the government prosecutors might find that it is precisely the kind of business that is motivated to discuss mutually agreeable pricing options with their competitors," McAuley cautions.
Simply put, the decision "will require everyone in the transportation issue to avoid discussing price and price-related mattes when they congregate with competitors in public, or even in the privacy of their offices or operation yards. It is unavoidable that your competition will learn through your customers what you are quoting or charging for services. That customer will ask your competitor if he can beat your price. The probably is fine under the antitrust laws because it furthers free enterprise, and the consumer gets the best price available. What a transportation company cannot do is discuss prices with competitors before quoting the customer. That could have an impact on pricing that is contrary to the customer: that is, it could result in the customer not getting the lowest possible price because the carrier company knows the bottom line for its competitor. The Department of Justice or the Federal Trade Commission could take an interest in that case. In my view, the result is that customers can discuss price with competitors, but competitors cannot discuss price with each other."
In the meantime, the reactions among motor carriers vary. "We don't expect this to be a huge hardship," sums up Randy Mullett, Vice President of Government Relations, Con-way, Inc. (www.con-way.com). "In fact, we're pretty sure there are going to be new opportunities that come out of this, similar to the opportunities that came out of the original deregulation movement."
He says the decision is going to force people to explore alternatives to the old classification and weight break model. Dimensional or cube-based pricing is one example, he notes, yet the gravitation to these types of products won't qualify as a "wholesale change," he says. "People aren't going to make decisions that aren't in their best economic interest, whether they're carriers or shippers, and there's also something to be said for stability in the marketplace, which we all long for."
Mullett says the biggest concern was over the changes to the classification system, "as that's what gave everyone a consistent starting place from which to begin their negotiations."
Meanwhile, the impact on SMC³ (www.smc3.com), a trucking industry association and rate-making organization, was minimized thanks to exceptional foresight, says Danny Slaton, Senior Vice President, Business Development.
"We've made some fortunate decisions along the way to isolate some of our benchmark products—our premier products—from the collective process," he says. Therefore, when the change came, products were already in place that met the requirements of the newly deregulated environment.
Slaton adds that SMC³'s continued push into automating the pricing process will probably offset the anticipated revenue loss. "I think one of the really good things that have happened to us over the last several years is that we were able to integrate our products to the business enterprise through technology interfaces."
Shippers assess their options
While hardly anyone's expecting a major upheaval in the industry due to the latest deregulation move, shippers have begun speculating about the opportunities that will emerge when it comes to pricing methods.
Transportation consultant Hank Mullen of The Visibility Group (www.thevisibilitygroup.com) has been diligently promoting cube-based pricing as a viable option to existing methods, which he believes is not only easier to use, but more cost-effective for shippers. Although cube-based pricing cannot apply to all freight shipped by LTL (e.g. hazardous materials and ladders), it does target palletized freight, especially that weighing less than 500 pounds.
Unlike the current classification system, which covers 18 different classes of freight, the cube-based system has only five classifications.
Furthermore, according to Mullen, the move from a pricing system based upon "ambiguous classifications to a more exact system of cube and density benefits the shipper by providing an understandable rate structure that, with some innovation in packaging (e.g. nesting) can allow for self-control in cost reductions. Cube-based pricing is a system currently used internationally and should now be used domestically to allow for uniformity in systems, data and metrics."
Sidebar: History of Regulation in the Motor Carrier Industry
1887: The Interstate Commerce Act establishes federal regulation and restraint for the railroads and creates the first federal regulatory agency, the Interstate Commerce Commission (ICC).
1935: The Motor Carrier Act of 1935 places both railroads and motor carriers into equally binding regulatory constraints.
1948: The Reed-Bullwinkle Act emerges to combat a raft of antitrust investigations and scandals, and allows ratemaking bureaus to set rates collectively; a highly regulated environment results.
1980: The Motor Carrier Act of 1980 reverses the regulatory trend and encourages increased competition.
1994: The Trucking Industry Regulatory Reform Act eliminates the requirement to file tariffs with the ICC.
1995: The ICC Termination Act dissolves the ICC and transfers responsibility for overseeing the trucking industry to the Surface Transportation Board (STB).
2007: The STB eliminates antitrust immunity for collective rate-making activities.