Trucking executives who were increasingly optimistic in late 2011 were much more cautious by the close of 2012, a year when increases in employment, freight demand and pricing gained in the first two years of the recovery slowed to a crawl. From the edge of the so-called fiscal cliff in December, truckers saw little reason to be overly confident about their prospects in 2013, at least in the first half of the year.
“We are not tethering our plans to any significant economic recovery,” said James Welch, CEO of YRC Worldwide, parent of nationwide motor carrier YRC Freight and three regional less-than-truckload carriers. “There are so many variables, from the fiscal cliff to the eurozone, I have asked our team to focus on what we can control.”
Identifying and focusing on “what we can control” will be the theme for trucking and many other businesses in 2013. Factors evolving far beyond local docks and truck freight lanes will shape the U.S. economy. But trucking is in better position to limit damage from another recession or anemic growth than it was in 2008 or 2009.
Since the Great Recession, motor carriers of all stripes have focused on pricing and capacity, carefully balancing equipment and freight demand while restructuring rates and pruning less profitable freight to shore up their bottom lines.
Hopes for a sustained “trucking renaissance” powered by higher yield and profit faded in 2012 as the economic recovery slowed, but truckload and LTL carriers have maintained unusually consistent pricing discipline in the face of flagging shipping demand. That discipline was reflected in third quarter operating ratios. Three publicly owned truckload carriers had ORs in the 80s, along with consistently profitable and expanding LTL carrier Old Dominion Freight Line.
The 16 publicly owned carriers tracked by The Journal of Commerce in its quarterly Trucking Dashboard were profitable in the quarter, including YRC Freight, though some had tighter margins than in the third quarter of 2011, when yield rose more sharply.
Profit at Werner Enterprises, for example, decreased 15 percent year-over-year to $25.1 million, while revenue dropped 1 percent to $506.5 million. Freight demand softened, and rising fuel prices and other costs exceeded rates, said Werner, the third-largest U.S. truckload carrier, according to SJ Consulting Group data.
Werner can’t control freight demand or influence consumer confidence, but it can control its available capacity, and that’s exactly what the $2 billion carrier has done. The Omaha, Neb.-based company operated 215 fewer trucks in the third quarter than it did in the second quarter, after dropping “less profitable customer business.”
Werner isn’t alone. The JOC Truckload Capacity Index, which measures available capacity at a group of large publicly owned truckload carriers, including Werner, on a quarterly basis, dropped 0.7 percentage points to a four-year low of 83.7 in the third quarter as truckload carriers continued to pare their fleets.
That means truckload capacity was more than 16 percent below its 2006 peak in the quarter, and that’s only counting available trucks at a group of active carriers. Factoring in all the trucks parked or scrapped when smaller companies shut down probably would pull the index down several percentage points.
The recession burst a truckload capacity “bubble” — the freight shipping version of the housing bubble — and conservative-minded executives still stinging from 2009’s losses have kept a tight grip on their capital budgets, replacing vehicles only when they have to and driving up the average age of a U.S. Class 8 truck.
The JOC index, based on end-of-quarter tractor counts at the $10 billion carrier group, has ranged from 84.1 to 86.2 since the end of 2009, after plunging 5.4 percentage points from the end of 2008. That shows the resolve of carriers that have refused to add capacity in advance of sustained demand.
“The propensity of carriers to make discretionary additions to their fleets in the 2010-2012 recovery is half of what it was in the 2003-2005 recovery,” said Noel Perry, transportation economist and principal of Transport Fundamentals.
That refusal is a significant break from past behavior and a sign of how deep the recession cut. In a typical economic cycle, “as demand comes back, truckers will just buy a bunch of trucks,” Werner President and COO Derek Leathers said at a trucking industry event last May. “I don’t think that’s going to happen this time.”
Those companies that are adding capacity are doing so because they have an opportunity to increase not just revenue but also profit. Some are expanding organically, such as Knight Transportation, which increased its fleet by 255 tractors or 6.5 percent year-over-year in the third quarter and gained $2.1 million by selling older tractors. On average, the group of truckload carriers tracked by the JOC capacity index cut their fleets by 1.4 percent in the same period. Since 2006 — the base year for the index — Knight has increased its capacity 14.6 percent.
Others, such as Celadon Trucking and Roadrunner Transportation Systems, are growing through acquisition, buying existing capacity, along with customer lists and truck drivers. Roadrunner, the fastest-growing U.S. trucking company, according to SJ Consulting Group, acquired eight companies in 2012 even as the overall economy cooled. Those purchases included three western truckload carriers, a West Coast intermodal hauler, a Northeastern refrigerated carrier, a Midwestern regional LTL carrier, a flatbed hauler and a transportation management company.
Those deals certainly added to Roadrunner’s top-line revenue, but they also strengthened its bottom-line earnings. In the third quarter, the Cudahy, Wis.-based carrier’s revenue increased 23.4 percent year-over-year to $279.2 million, while profit rose 37.6 percent to $9.9 million. Truckload revenue leaped 56.6 percent to $124.2 million and profit climbed 30.1 percent, mainly because of the acquisitions.
Expect more mergers and acquisitions in 2013, as companies fill gaps in their geographic footprint or add and strengthen diverse services and smaller companies struggling with rising costs and thinning margins consider selling. “Fleets are under the greatest duress they’ve seen in 30 to 40 years,” Leathers said. “For many, there won’t be an exit ramp. You’re going to see increased consolidation.”
In the LTL sector, consolidation took the form of network realignment. Industry leader FedEx Freight and top competitors Con-way Freight and YRC Freight cut terminals. The three largest LTL carriers restructured operations to move freight faster with fewer fixed assets over the same footprint.
The 10 largest LTL companies reduced their combined terminal count by 18.5 percent from 2007 through 2011, according to SJ Consulting Group research.
“It took the downturn of late 2008-2009 to take the excess capacity that built up before the recession,” Douglas W. Stotlar, Con-way CEO, told reporters at the SMC3 conference last June. Today, LTL carriers are “more sophisticated,” running more efficient networks, and “we’re much better companies as a result.”
LTL consolidation continued in 2012, as FedEx Freight tweaked its redesigned network, shortening transit times on 6,000 lanes, and YRC Freight overhauled its network to eliminate excessive freight handling. That network “will be continuously enhanced to meet the evolving needs of our customers” in 2013, Welch said.
In 2012, LTL capacity and freight demand seemed to finally find a balance. As tonnage slowed during the course of the year, less efficient operators felt more strain. “The gap between the effective operators and those who still have cost and/or network issues becomes more apparent when there is a lack of tonnage strength to mask inefficiencies,” Stifel Nicolaus transportation analyst David G. Ross said in a Dec. 4 note to investors.
Still, LTL pricing didn’t collapse, as it did in the face of falling demand in 2009. But the year-over-year increase in pricing as reflected in LTL revenue per hundredweight slowed. Among the public LTL carriers tracked by The Journal of Commerce, the average annualized increase in yield dropped from 11.3 percent in the third quarter of 2011 to 3.5 percent a year earlier. That’s partially because of declining tonnage but also because of tough comparisons with 2011.
The LTL sector also has its standouts — companies that are bucking industry trends — particularly ODFL and Saia. Both are growing consistently, taking market share and profit, while competitors consolidate.
ODFL spent $120 million to expand its terminal network in 2012, opening or expanding service centers in Southern California, Florida, Michigan, West Virginia, Minnesota, Texas and Pennsylvania. The multiregional carrier increased net profit 84.4 percent in 2011 to $139.5 million, while revenue rose
27.1 percent to $1.88 billion for the full year. In the first nine months of 2012, the Thomasville, N.C., company increased net profit another 30.5 percent to $130 million, while revenue rose 13.3 percent to $1.58 billion.
Saia increased net profit an astounding 253 percent in the third quarter to $11.9 million, while revenue rose 8.1 percent to $288 million, even as the number of shipments the Johns Creek, Ga.-based company hauled declined 2.1 percent.
Saia also re-engineered its LTL network, gaining operational efficiencies and reducing purchased transportation costs 14.6 percent. In an important change, Saia changed sales incentives to reward profitability instead of volume growth.
The financial performance of companies such as Saia, ODFL, Roadrunner, Knight and even YRC Worldwide in 2012 should send a strong message to less fortunate competitors — “It ain’t the economy, stupid.” Sound management of “what we can control” is what’s needed to pull carriers and shippers through tough times in 2013.