ODFL speeds past weak US LTL market

ODFL speeds past weak US LTL market

ODFL’s shippers are “positive” and “busy,” the carrier says, but the US economy remains “soft.” Photo Credit: ODFL.

The second quarter’s “softer demand environment” didn’t touch Old Dominion Freight Line’s (ODFL's) bottom line. The second-largest United States less-than-truckload (LTL) carrier increased its net income 6.5 percent in the quarter year over year despite a 6.3 percent slide in LTL tonnage and a 2.6 percent drop in LTL shipments, demonstrating that less freight needn’t mean lower profits.

Consistency is key for ODFL. Sticking to its plan regardless of business cycles has helped the carrier demonstrate sustainable profitability is possible in trucking, as in railroading. 

“Our pricing philosophy is on an account-by-account basis and each account should stand on its own,” CFO Adam Satterfield said in an earnings call Thursday.

In the most recent quarter, “our continued focus on cost management allowed us to improve our direct operating costs as a percent of revenue, which more than offset the increase in overhead costs,” said Greg C. Gantt, ODFL’s CEO. The company’s stand on pricing may have added to its shipment shortfall, but it’s a trade the carrier is glad to make.

Although LTL tonnage and shipments dropped, along with intercity miles, the Thomasville, North Carolina-based company’s Q2 revenue rose 2.6 percent year over year to $1.06 billion. LTL revenue per mile rose 7.7 percent to $6.40, LTL revenue per shipment rose 5.4 percent to $335, and LTL revenue per hundredweight, or yield, rose 9.5 percent.

“The strength of our yield allowed us to increase our revenue and also contributed to the improvement in our operating ratio,” Gantt said. ODFL’s operating ratio (OR), a measure of profitability before taxes and other expenses, hit a new low of 77.9 percent for the quarter. That’s 80 basis points better than the second quarter 2018 OR of 78.7 percent.

Compare that with a 90.1 percent OR at FedEx Freight, the largest US LTL carrier, in its quarter that ended May 31. XPO Logistics had an 85.9 percent operating ratio in the 2018 second quarter, and an 89.4 percent OR in the 2019 first quarter. Operating ratios in the low 90s aren’t bad, and those in the 80s are considered good, but ODFLs’ OR is clearly the one to beat.

‘Mixed signals’ for the second half

Gantt and Satterfield are optimistic about ODFL’s prospects, but they’re more cautious about the economic outlook. “The economy continues to give us mixed signals,” Gantt said. “It still feels a little bit soft. Comparisons will get a bit easier in the last part of the year, but we don’t expect our tonnage to flip to positive. We’re prepared for [tonnage] growth if it comes back.”

The LTL pricing market remains “stable,” Satterfield said, with little sign of discounting to grab freight or gain market share. “We’re still getting our renewals [annual contract rate increases] in our long-term target range, 80 to 100 basis points north of cost per inflation,” he said. “They’re not as strong as what we saw last year, but we didn’t expect that coming into this year.”

Volumes and shipments were down year over year in July, the first month of the third quarter, he said, and tonnage has trended lower in the first month of each quarter since last July. Even so, “our major customers are fairly busy,” said Gantt. “That makes you feel good.”

“All the economic indicators we watch still point to growth, but that hasn’t turned into demand across the transportation landscape,” Satterfield said. “The one bright spot is the consumer is still healthy. If consumers keep consuming, somebody’s got to produce and ship that freight.”

Others are following ODFL’s lead

ODFL’s strategy of sticking to its operating plan regardless of business cycles is a lesson it has been happy to teach since the 2008-09 recession, when its disciplined approach to costing and pricing freight kept it out of the rate wars that plunged other large LTL operators into the red. Those carriers contracted post-recession, while ODFL expanded. That’s history the LTL trucking industry and its shipper customers should remember in 2019.

More trucking companies are following ODFL’s example by carefully costing shipments and lanes and pricing accordingly, while getting the most utilization they can out of a 53-foot-long trailer with 26 to 30 pallet positions. To do that, “you need to have a good costing system, not by customer, but by shipment,” said Satish Jindel, president of SJ Consulting Group.

Jindel, whose consulting group specializes in trucking and parcel markets, said the cost of not paying better attention to costing and pricing is clear in the fates of LME and New England Motor Freight, two regional LTL carriers that shut down recently. He also pointed all the way back to 2002 and the demise of Consolidated Freightways (CF), then one of the largest carriers.

“The biggest contributor to CF’s demise was the lack of good accounting and costing to know what was the cost of handling different kinds of shipments,” he said. “They were picking up business the Roadway and Yellow were turning away, and that contributed to their demise.” 

The lessons for shippers and carriers from the CF collapse are still relevant in 2019, Jindel said.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.