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Expert Insight: Guest Contribution
  By Raymond Nieuwenhuizen  
     
  September 27 , 2007  
 

Transportation News: STB Ruling Makes Way for Deregulation—and Changing LTL Terrain

 
     
  Will Freight Classification System and the Corresponding Base Rates Be Turned on their Heads?  
     
 
Nieuwenhuizen Says:
Existing contracts and tariffs will prevail in determining your future LTL spending.

What do you say? Send us your comments here

A recent Surface Transportation Board (STB) ruling has eliminated the antitrust immunity of 11 collective ratemaking bureaus—including those in the motor freight arena. With the STB’s May 7 decision, the authority of carriers engaged in collective ratemaking was terminated as of September 4.

What impact will this have on Less-than-Truckload (LTL) shippers? To get a complete picture, we need to take a brief detour to 1948.

Since the Great Depression, the majority of industries have been subject to a number of antitrust regulations. But motor carriers have been exempt. The Reed-Bullwinkle Act, passed by Congress in 1948, explicitly permitted motor carriers—both road and rail—to collude in setting general shipping rates. What’s more, the industry’s governing body made it extremely difficult for would-be entrants to join the “club” of motor carriers. Such heavy regulation led to complex pricing strategies, with bloated base rates and exorbitant discounts.

Enter SMC3, the authority in collective LTL ratemaking. SMC3’s General Rate Committee (GRC) meets every year to establish book rates that will be charged to shippers. Composed of SMC3 industry experts and representatives from member carriers, the GRC weighs the motor carriers’ business costs, revenue targets, and profitability goals. With these factors in mind, the committee places agreed-upon rates into effect for the following year.

Proponents of SMC3’s industry-standard CzarLite base rate maintain that it will continue to be the preferred LTL pricing system in the industry. True, the Atlanta-based firm will no longer have the authority to poll member carriers and set rates in accordance with profitability goals. But after 70 years as a dominant influence in the industry, SMC3 understands the pricing dynamics better than anyone. CzarLite, advocates say, will continue to use environmental variables and leverage SMC3’s patented Carrier Cost Index to model cost data and formulate LTL base rates.

SMC3’s detractors assert that time and technology will drive a wedge between CzarLite and reality. Without the input of the carriers, CzarLite’s base rate will be founded more on theory than on fact. The STB decision has also placed the National Motor Freight Classification system in jeopardy. Therefore, both the freight classification system and the corresponding base rates could be turned on their heads, maybe not in the next few years, but certainly in the long run.

So, what does this mean for your LTL shipping operations? Nothing—provided that you’re content with your LTL contracts and expenditures. Existing contracts and tariffs will prevail in determining your future LTL spending. Even if your organization is unhappy with the status quo and seeks to obtain more favorable pricing on your LTL shipping within the next 12 months, existing rates will still be valid baselines to negotiate from.

However, given that future tariffs from the rate bureaus will no longer be based on true cost inputs from the carriers, actual rates will become even further removed from reality as time goes on. Carriers will increasingly rely on their own tariffs, and pricing strategies will become more blurred and diverse. As a result, analyzing and comparing carrier proposals will become an even greater challenge than it is today. This opens the door for new pricing structures, with dimensional (DIM) based pricing being the most likely front runner.

In the parcel/express arena, UPS and FedEx are already heading down the dimensional pricing path, and they will, in all likelihood, introduce dimensional pricing in their freight businesses as well. DIM pricing does have a technology impact, though. Carriers and shippers alike would need to invest in more advanced scales and dimensional scanners, with the possibility that smaller carriers might not be able to afford the necessary investments.

As events unfold, we will be keeping a close eye on further developments in this space. Stay tuned—there is certainly more to come on this topic.

Agree or disgree with our guest expert's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the web site. Upon request, comments will be posted with the respondents name or company withheld.

 
 
 
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