Less-than-Truckload Market Update: Profitability improving
August 01, 2012
All current reports and analysis of the $33 billion less-than-truckload (LTL) sector indicates that the sector is enjoying a slow, yet uneven recovery from the depths of the Great Recession. With revenue growth on the back burner, top LTL carrier executives and analysts say that the top priorities are now yields and pricing.
David Ross, trucking analyst for Stifel Nicolaus, calls the LTL recovery “slow” and “choppy,” yet he’s predicting 1 percent to 3 percent annual growth in revenue at least through 2014. As a result, profitability is improving.
A recent analysis by Satish Jindel, principal of SJ Consulting, one of the leading trucking analyst firms in the country, shows that year-over-year operating margins of the top publicly held LTL carriers jumped 3 percent in this year’s first quarter, with revenue per hundredweight (excluding fuel surcharges) up 2.6 percent.
In fact, profits are coming, but are uneven. The top publicly held LTL carriers had a 0.7 percent operating margin in the first quarter this year, although that figure was brought down by continuing losses at unionized carriers YRC Worldwide and ABF Freight System. Still, that first quarter figure was the first positive earnings for the publicly held LTLs in four years.
“However, yields are a good bit away from where they need to be,” says Ross, adding that the pricing pendulum has swung back in favor of LTL carriers as they try to execute their strategy of raising profitability. “Manufacturing has been growing, which has helped, and carriers are generally choosing to raise rates, improve operations, and expand margins rather than add capacity, which is allowing for the rate increases to continue,” adds Ross. “Volume is always important, as LTL is a network business and carriers need density.”
Most LTL carrier executives say privately that there is currently at least 10 percent overcapacity in the marketplace. But there are a few network “pinch points” where capacity needs to be added or rates raised. And in some bad news for shippers, carriers say that they are increasingly shedding low-margin business in order to concentrate on their more profitable accounts.
Still, top LTL carrier executives are more bullish now than they’ve been in at least four years. Part of that optimism stems from newfound pricing discipline seen by virtually every carrier in most lanes.
“The industry seems to have found some religion on pricing,” says Doug Stotlar, president and CEO of Con-way Inc, “and growth is now our core strategy. Do we want to grow the business 1 percent to 2 percent a year? Yes. But our focus now is on margin expansion and return on invested capital.”
Analysts and executives say that there are three major market drivers nowadays—macroeconomics, capacity (trucks and drivers), and tougher rate negotiations—which will dictate LTL profitability over the next 12 months to 18 months. Logistics Management recently gathered the insight of a number of LTL market leaders to find out how they’re coping with each of these critical factors.
It’s still the economy…
The LTL business is a derived demand industry, highly cyclical and inexorably tied to overall economic conditions in the U.S. The overall economy appears to be softening, and year-over-year LTL industry volumes and rates have begun trending down.
Shippers and carriers both say that the U.S. is in midst of global macroeconomic uncertainty; and in turn, top LTL executives are seeing choppy freight demand. U.S. No industry segment seems to be doing exceptionally well, though carriers hauling auto-related materials report that business is fairly strong.
“Business is fair but very erratic,” says Myron P. “Mike” Shevell, chairman of the Shevell Group and parent of Northeast regional LTL New England Motor Freight (NEMF). “You go through periods where you think it’s going to rock and roll, and then it dies. We’re hoping to get a shot in the arm later this year, but who knows.”
Because of numerous false starts, LTL executives don’t have much faith in even short-term economic forecasts. “Economic projections for the near-term appear less than stellar,” says Jim Keenan, ABF’s senior vice president of sales and marketing. “I believe LTL companies and shippers alike are feeling the slight breeze of an economic headwind, and likely will until world markets settle down.”
All LTL carriers operating in a highly cyclical business with high-cost terminal infrastructure and expensive trucks “that depreciate whether they are fully utilized or sitting idle,” says Steve O’Kane, president of A. Duie Pyle, another top Northeast LTL carrier. “As the economy slows, volumes drop, incremental costs increase,” O’Kane says. “While these incremental costs increase, economic slowdowns create competitive pressures to reduce prices to put that idle capacity to work. So the slowing economy is top on my list of major impact items.”
For the LTL sector to return to profit margins of the pre-Great Recession era, it would require either a burst of robust economic growth, which is unlikely, or the bankruptcy or cessation of one or more of the weaker unionized carriers, which is also unlikely. Until then, carriers are merely coping with the hand they are dealt.
“We’re all still adapting and adjusting to what the new normal actually is,” says Wayne Spain, chief operating office at Averitt Express multi-regional LTL giant. “We’ve seen signs of a recovery, but it’s slow.”
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