'Aggressive' US shippers keep pressure on truckload rates

'Aggressive' US shippers keep pressure on truckload rates

Covenant Transportation Group operated fewer trucks in the first quarter than last year.

Shippers, aided by excess truck capacity, are keeping pressure on truckload freight rates, even as they keep an eye on a potential tightening of capacity in the truckload market later this year. Resistance to rate hikes in the first quarter apparently kept increases to a minimum.

“The customers are being very aggressive in the marketplace, there is no question,” Joey Hogan, president and chief operating officer of Covenant Transportation Group (CTG), a truckload operator in Chattanooga, Tennessee, said during an earnings conference call Friday.

Freight revenue at CTG, excluding fuel surcharges, dropped 3.1 percent year-over-year in the quarter to $140.1 million, and asset-based revenue from its three subsidiaries, including Covenant Transport, also dropped 3.1 percent from a year ago to $127 million.

That’s largely because Covenant operated fewer trucks in the first quarter than it did in early 2016. But diminished opportunities to book freight also blunted rate increases that Covenant and other carriers would like to win as operating costs, such as driver pay, which continued to rise.

CTG did eke out a 0.9 percent increase in truckload yield, measured as average freight revenue per tractor per week, an indication it did get “some increases,” as Hogan said. But the company’s net profit dropped from $4.4 million a year ago to $470,000 last quarter.

In a down market, Hogan said, “you have to be a lot more circumspect on the lanes that you need,” when making a bid for a shipper’s business, “because your network is not as stable. So you are willing to be a little bit more aggressive with freight you are not hauling today.”

CTG chairman and CEO David R. Parker noted that many shippers engaged in bid processes in the first quarter “as a means to lower upward pressure on their freight rates before any meaningful tightening of capacity” thanks to a faster growing economy and trucking regulations.

Parker’s observation confirms what shippers and others have been saying since at least January: shippers concerned about potential tightening of truck capacity later this year are putting more business up for bid and jumping into contract negotiations earlier than usual.

“There’s a belief we’re in a price escalation phase. People want to lock in” rates for the next year or more, Ben Cubitt, senior vice president of engineering and strategic carrier management at logistics company Transplace, said in January. That statement still holds true in April.

“All of our big accounts will be done by July,” Hogan said. “One of our larger, top 10 accounts is done. It's a two-year contract.” That contract gave CTG a 1.5 percent average rate increase last year and a 1.5 percent increase this year, he said. That’s about what CTG expects this year.

“Most of the surveys I answer, I still say 1 to 2 percent for the year, and I think that’s about where we will end up,” Hogan said. However, he noted that the second quarter “is a big, big, big, big quarter.” And signing contracts earlier is helping CTG prepare for the peak season.

“Half of our peak season is already done with,” Parker told Wall Street analysts, referring to contracts with major peak-season shippers, including Amazon. That’s a record time, he said. “I’m very pleased with our peak customers. They helped us nicely in the first quarter.”

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