Too good to last?
Dry-van carriers are confronting slower freight growth and driver shortages, while specialized carriers face more consolidation.
By Staff -- Logistics Management, 7/1/1999
After enjoying several highly profitable years fueled by galloping growth in freight volumes and tightly controlled costs, executives in many sectors of the truckload (TL) carrier industry are getting nervous. Truckload carriers are beginning to see a flattening in demand for certain types of cargo, especially exports and imports. At the same time, the intermodal sector is beginning to regain market share now that nearly two years of service problems are behind it. On top of that, carriers are having a tougher time maintaining their margins because of increasing costs.The booming economy has benefited all TL carriers over the past several years--to the point that most dry-van carriers have gotten used to double-digit growth in freight volumes and revenues. U.S. Xpress, for instance, posted a 34-percent increase in freight revenues in 1998. M.S. Carriers wasn't far behind, with a 27-percent revenue increase. Few carriers, however, have been able to translate revenue increases into similar profit gains.
The truckload sector will continue to expand in 1999, but most of that growth will come from conversion of private fleets to dedicated or for-hire service, predicts Anthony Gallo, a trucking analyst with the Baltimore-based investment firm of BT Alex. Brown. The conversion process has been under way for a decade or more, but it is beginning to gain significant momentum, he adds. "Shippers need to reduce their costs and their logistics needs are more complex," he says. "At the same time, outsourcing has matured to the point where companies are comfortable with the idea, even for 'mission-critical' jobs such as delivering time-sensitive goods to retailers or manufacturing customers. We are going to see a resurgence in private-fleet conversion."
Yet the longhaul carriers are again facing competition from the intermodal sector. For the past year, intermodal service has been improving, and more and more price-sensitive traffic is moving by rail. That will hurt some but not all truckload carriers, says Gallo. "The premium truckload carriers should not be affected by this trend, but the more price-sensitive carriers are losing market share."
Cost control also has become problematic for truckload carriers of late. Fuel prices, which constitute about 11 percent of a truckload carrier's costs, shot up in the first half of 1999 and are not expected to go down any time soon. Rate increases are not likely to help, because they're not expected to exceed 1 percent in the near future, Gallo says.
One thing that hasn't changed is the truckload industry's difficulty finding qualified drivers. The longhaul TL carriers have the greatest exposure to this problem because competitors generally offer similar wages, and they all require drivers to spend long periods on the road.
Certain truckload carriers are more insulated from the problem than others, according to Gallo. Carriers such as Landstar, which uses owner-operators and pays them an attractive percentage of a load's revenue, are having relatively few problems attracting and retaining drivers, he notes. Regionally focused TL carriers, such as Swift, are able to keep drivers close to home--a distinct recruiting advantage, he says.
Carriers must spend money to deal with the driver shortage, Gallo says, but their profitability can be hurt by the need to invest in training programs for new drivers. He sees more and more carriers developing compensation plans and schedules that foster driver retention, as well as employing more owner-operators. "None of these measures is going to solve the problem on its own, but jointly they can," he says.
Van Lines Look to Niche Markets
The nationwide real-estate boom during 1998 supported a very strong household-goods (HHG) carrier industry, and the outlook for 1999 seems just as strong, according to Joseph Harrison, executive director of the American Moving and Storage Association. But that doesn't necessarily translate into strong profits. "All of the revenue growth has come from increased traffic," says Harrison. "There has been little opportunity to increase rates."
As is true for other types of truckload carriers, the household-goods carriers are having difficulty finding drivers. This industry segment primarily relies on owner-operators, who are in great demand in all trucking sectors. But household-goods carriers face the added challenge of finding seasonal drivers for the prime moving season that runs from May to September. "Every year this becomes a tougher problem," says Harrison.
The van lines also handle general freight that requires special handling and air-ride trailers, such as medical equipment, furniture, computers, and electronics. These commodities continue to be good markets for the van lines, Harrison says, but these are niche markets that probably will not present major growth opportunities.
In order to reduce costs and improve profitability, the HHG industry is undergoing consolidation. Consolidation has been especially strong among the local household-goods agents, according to Harrison. "The agent operations tend to be small family-owned businesses that are increasingly difficult to operate profitably," he explains. "The larger agents are buying up smaller operations in their area so they can represent several major agent-owned van lines."
The major van-line companies also have been experiencing consolidation in recent years. Mayflower and United now are owned by the same parent company, Unigroup. Atlas has bought out Red Ball, Interstate has bought Global, and Stevens has purchased Burnham. These brands are operated as stand-alone businesses; the savings are in combining their backroom operations.
Tank-Truck Carriers Join Forces
Strong domestic demand for chemicals, food, and refined petroleum products helped most tank-truck carriers maintain profitability during 1998. Unfortunately, an extremely weak export market for chemicals and other bulk products has prevented them from realizing any significant improvements in revenues or profits. According to industry figures, overall tank-truck revenues grew by only 5 percent in 1998, while operating margins saw little if any improvement.
According to Cliff Harvison, executive director of the National Tank Truck Carriers Conference, much of the revenue growth for the $2 billion tank-truck industry has come at the expense of the railroads. Tank-truck carriers profited when shippers of petroleum, food, and chemicals were unable to depend on rail service over the last two years. "Shippers were happy to get the service, and there wasn't the usual bidding to get the lowest possible rate," he says. Now, however, improving rail service is skimming off market share from the tank-truck carriers, and that is putting pressure back on pricing. "Carriers are again having to bid for traffic, which indicates that shippers are going back to rail service," he observes.
The tank-truck industry continues to see robust growth in the petroleum sector as more petroleum companies outsource their trucking operations. With the number and size of petroleum-industry mergers increasing, the extent of this outsourcing growth is difficult to project. "It is a good trend for the tank-truck industry while it lasts," says Harvison.
The biggest news in the tank-truck industry, though, is consolidation. This industry segment already is concentrated among a relatively small number of carriers: The top 10 carriers accounted for 40 percent of the industry's revenues last year.
Consolidation is accelerating on two fronts, according to Harvison. On the one hand, smaller, family-owned carriers are selling out. Increasingly costly environmental and safety regulations make it harder for small companies to earn profits, especially when larger carriers can offer more aggressive rates.
At the other end of the scale, large carriers are forming very large alliances that may be able to dominate certain industry sectors. For example, Apollo Management, a New York-based investment firm, bought MTL of Plant City, Fla., and Chemical Leaman of Exton, Pa. The combined operation, which boasted revenues of more than $620 million in 1998, now is called Quality Distribution. Apollo also attempted to buy the third-largest tank-truck carrier, Matlack Inc. of Wilmington, Del., but negotiations collapsed.
The consolidation of tank-truck carriers is not over yet, according to Harvison. "Five years ago, the NTTC conference had 240 members," says Harvison. "Now it is down to 190. I don't know what the number will be five years from now."
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