Big US truckload operators drive profits despite slowing volume

Big US truckload operators drive profits despite slowing volume

Despite gloomy freight economy indicators, publicly owned truckload carriers are rolling into the second quarter with stronger bottom-line profits. Photo credit: Shutterstock.com.

The largest US truckload carriers are boosting profitability and gaining freight despite an overall downward trend in shipping volumes, according to data from corporate earnings reports and research firm SJ Consulting Group. Some of those carriers are also lowering earnings expectations, however, as 2019 shapes up to be a slower, softer year than the “annus mirabilis” seen 2018.

An SJ Consulting Group survey of five publicly owned truckload carriers found overall gains in revenue, profitability, and load volume in the first quarter, even though a first-quarter boom in 2018 made comparisons more difficult. “This is still a good year” for trucking, SJ Consulting Group president Satish Jindel said, even if it’s not 2018.

That was certainly true in the first quarter for J.B. Hunt Transport Services, at least on the over-the-road side of its business. J.B. Hunt’s dedicated trucking revenue leaped 21.7 percent year over year during the period, while truckload revenue rose 9.9 percent. Dedicated loads and truckload volume were up 19.9 percent and 4.2 percent, respectively, and revenue per loaded mile increased, too.

The story was different on the other side of the tracks, however. In J.B. Hunt’s primary intermodal business, load volumes were down 7 percent from a year ago, with about half of that decline attributed to disruptive weather in Chicago and rail lane closures. Intermodal revenue rose 2 percent overall, but operating profit was down 10 percent due to higher costs.

The story also is different for smaller trucking operators, a majority of which told Bibby Financial Services in a first-quarter survey they were losing business to competitors charging “unsustainably low prices” and being squeezed by contracts that impose sharp penalties for missed deliveries. Their one advantage: an easier time finding and hiring truck drivers.

A slowing, but growing economy

For months, consumers, economists, and Wall Street analysts have been asking how much the economy will slow in 2019. Perhaps they should be asking how much the economy will grow. Real US GDP may not hit the high points seen in 2018, when GDP expanded 4.2 percent in the second quarter, but neither is a recession expected before 2020.

The US Bureau of Economic Analysis surprised practically everyone Friday, when it announced US GDP expanded 3.2 percent in the first quarter. GDP received a jolt from high inventories, higher exports, and a decrease in imports, which are a drag on GDP. The pace of consumer and business spending slowed from the fourth quarter. The 3.2 percent estimate will be revised twice, with the second estimate coming May 30.

A number of freight market indicators took depressing turns in the first quarter. The Cass Freight Shipment Index, for example, has declined on a year-over-year basis in each of the last four months, starting in December. Truck tonnage slipped sequentially and was rising at a slower annualized pace. US Bank’s National Shipment Index dropped 10.5 percent from the fourth quarter, its biggest decline since 2011.

However, “there is good reason to expect the [US Bank] shipment index to recover from the large drop in the first quarter, as the winter weather effects will not be present in the second quarter, plus economic activity is expected to pick up from a seasonally slower first quarter,” Bob Costello, American Trucking Associations chief economist, said in his analysis of the data.

It is difficult to say how much of the softness seen in these indicators was due to high inventories and the shift of seasonal imports to the fourth quarter in advance of US tariffs or disruption caused by widespread storms and flooding in the Midwest and South, and how much those factors compounded a seasonal slowdown that typically depresses freight demand.

Regardless, truckload pricing has taken a hit, with spot market rates that rose by double digits in 2018 dropping by similar numbers in 2019. That decline puts pressure on contract rates, and while large carriers maintain they are still winning moderate increases, analysis of industry data by Chainalytics and JOC.com shows contract rate growth is likely to turn negative this year.

Depressed spot rates are partly attributable to the expansion of trucking capacity in the second half of 2018 and first months of 2019. New Class 8 registrations rose nearly 20 percent in January and February, according to data from IHS Markit, the parent company of JOC.com.

That capacity is likely to tamp down price increases for US truckload shippers in 2019.

Managing expectations

Some trucking operators are responding to economic uncertainty by lowering earnings expectations for the second quarter. Knight-Swift lowered its forecast for earnings per share by two cents at most — more a cautious step back rather than a full retreat. Covenant Transportation Group in March likewise warned a soft freight market could blunt quarterly financial results.

“The truckload freight environment has been weaker this year from late January through mid March,” David R. Parker, Covenant chairman, president, and CEO, said at the time. He blamed “late 2018 inventory growth,” the effect of the partial government shutdown on spending, and extended periods of inclement weather that impacted the timing of shipping seasonal goods.

But the quarterly financial results of some US companies indicate 2019 might not be a bad year at all. Household goods manufacturer Procter & Gamble this week increased its organic sales growth outlook for its fiscal year ending with the second calendar quarter from 2 percent to 4 percent, citing three consecutive quarters of 4 percent sales growth across its multiple brands.

And an improving demand trend in the housing market in the first three months of 2019 raised more than roofs at home construction company PulteGroup. “There’s every reason to believe that 2019 can be another good year for the housing industry,” President and CEO Ryan Marshall said during a conference call transcribed by Seeking Alpha. A good year for housing wouldn’t be bad for trucking.

Trucking companies aren’t taking growth for granted. The SJ Consulting Group survey shows carriers that invested in high-demand services such as dedicated trucking last year are reaping dividends, as are carriers that attacked cost imbalances while raising driver pay. Those companies laid the groundwork for a healthier ride through an economic slowdown.

That’s important to shippers, as well as investors, Mark D’Amico, senior analyst at Pittsburgh-based SJ Consulting Group, pointed out. “Profits are more important than revenue growth, or at least they should be, especially after New England Motor Freight went out of business” in February, he said. “Most shippers didn’t expect that would happen.”

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