Hub: No end in sight for weak US domestic intermodal margins

Hub: No end in sight for weak US domestic intermodal margins

Lower pricing and higher costs took some of the luster off record-breaking intermodal volume for the Hub Group in the third quarter.

The Hub Group, the second-largest US intermodal marketing company, said soft freight demand is driving down rates and keeping profit margins tight for transportation providers — and it doesn’t expect changes any time soon.

The Oak Brook, Illinois-based trucking and transportation provider posted record-breaking domestic intermodal volume but tightening profit margins in their third-quarter earnings. Intermodal volume increased 5 percent year-over-year last quarter. Although volume in the domestic intermodal market declined 2 percent, Hub’s consolidated intermodal volume was up 4 percent in the third quarter. Local East volume increased 1 percent, local West volume was up 3 percent, and transcontinental volume increased 8 percent.

Revenue for the intermodal segment, however, was up just 1 percent to $466 million. The volume growth was driven by a 12 percent increase in loads with retail customers and a 20 percent increase in loads with automotive customers, partially offset by a 1 percent decline in loads with consumer products customers.

In spite of those strong increases in business — from new and old accounts —  “intermodal gross margin decreased because of lower customer prices and rail cost increases,” Terri Pizzuto, Hub’s executive vice president and chief financial officer, told investors on a conference call Wednesday evening.

Falling truck and intermodal pricing also cut into profits at top competitor J.B. Hunt Transport Services in the third quarter, despite increases in freight volume and revenue. The 5 percent drop in net profit to $109.4 million was the first decline in profitability this year for the intermodal trucking firm, which has gained market share in 2016 while competitors cut capacity as their margins narrowed. 

It’s assuredly a shipper’s market. Pricing in the third quarter appears to have been a challenge for every transportation provider. Even executives at Union Pacific Railroad, the largest rail operator in the United States, admitted the Western railway has lost some of its pricing power as domestic and international freight demand remains muted in the last quarter. 

Don Maltby, Hub’s president and chief operating officer, assured company investors the company would remain disciplined in its pricing approach, but added that headwinds remain “with little evidence indicating the challenging pricing marketplace will change.”

Although the intermodal division’s profit margins tightened, Hub’s logistics and truck brokerage gross margins increased in the third quarter.

The company’s truck brokerage division, which won some new accounts in the third quarter, posted a 16 percent increase in revenue to $97 million in the third quarter. Hub’s third-party logistics provider subsidiary Unyson Logistics posted a 12 percent year-over-year uptick in revenue, at $154 million. That double-digit increase was also thanks in large part to new customer accounts coming online, Pizzuto said.

The company’s other 3PL subsidiary did not fare as well. Hub’s Mode Transportation segment posted a 5 percent year-over-year decline in revenue to $252 million. It nevertheless brought in an $8 million profit, an 11 percent increase over third quarter of 2015.

Hub’s individual divisions contributed to a 4 percent year-over-year increase in revenue to $933 million. Profit, however, was still down 10 percent to $17.9 million.

“Generally speaking, demand is muted and intermodal peak season got off to a slower start than we anticipated,” said Hub CEO David Yeager.

Yeager said that the peak fall shipping season will last through the end of the year because of its late start. Nevertheless, that demand remains muted. Competition between the roads and rails is fierce, and profit margins for both segments remain limited. 

In the current market, pricing is becoming more elastic as the company strives “to support and protect strategic customers and markets,” Yeager said.

It doesn’t just impact the company’s business with railways. “We anticipate the truck brokerage marketplace will continue to remain incredibly competitive for the remainder of the year,” added Maltby.

Contact Reynolds Hutchins at reynolds.hutchins@ihsmarkit.com and follow him on Twitter: @Hutchins_JOC.