The Cost of Freight Culling

Every silver lining, it seems, has its cloud. Some less-than-truckload carriers culling unprofitable freight from their books are suffering “network disruptions,” as labor and equipment are mismatched with remaining shippers or new customer locations.

That’s raising purchased transportation costs and keeping operating ratios higher and profit margins lower than expected, says David R. Ross, a Stifel Nicolaus analyst.

Higher costs generated by customer “churn” “were likely not accounted for in rate discussions,” Ross said in a note to investors on Saia’s second quarter earnings.

Saia’s sales rose 15 percent year-over-year to $266 million and its profit surged 41 percent, but its operating ratio only dropped to 96.9 percent from 97.5 percent a year ago. The carrier’s purchased transportation costs rose 12 percent.

“We believe network management and optimization is very important in period of high account turnover,” Ross said.

He said Saia’s difficulties with health care, insurance, maintenance and purchased transportation costs would likely “lessen or be mitigated.”

“As a pure play LTL carrier, the company should benefit from not only further industry pricing momentum but from any overflow freight from the truckload industry, which should have its own capacity problems over the next couple of years,” Ross said.

Certainly, analysts would like to see trucking companies lower their operating ratios more quickly, widening profit margins and boosting shareholder value and stock prices. LTL carriers are happy to report sustained, and hopefully sustainable, profits.

Ross believes LTL pricing momentum “should lead to better industry margins, to the point where they equal or exceed, on average, historical margins,” he said. The average LTL public company operating ratio from 2001 to 2006 was 93.4.

-- Contact William B. Cassidy at wcassidy@joc.com. Follow him on Twitter @wbcassidy_joc.

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