Covenant Transportation Group (CTG) is diving deeper into dedicated trucking, acquiring Landair Holdings, another truckload operator with dedicated, warehousing, and logistics capabilities. The $83 million transaction, announced Thursday, is the latest acquisition within a trucking sector where organic growth increasingly is limited by an inability to recruit new truck drivers.
“We pursued Landair because of their proven record of growth and profitability in the dedicated and [third-party logistics] markets,” CTG chairman and CEO David R. Parker said in a statement. “Landair is a perfect fit with our strategy to grow in areas where we can get closer and more heavily integrated with customers.” Dedicated trucking and warehousing are two such areas.
Once again, demand for dedicated carriage from shippers
Demand for dedicated carriage from shippers struggling to secure truck capacity from traditional suppliers and keep it long term has driven growth at J.B. Hunt Transport Services and most if not all the leading truckload operators in the United States, Covenant among them. The dedicated model is spilling over into drayage and more industrial less-than-truckload markets as well.
About half of Landair’s $121 million in revenue last year was derived from dedicated operations, the carriers said. Another $41 million related to managed freight services and $20 million to traditional, one-way truckload carriage. Chattanooga, Tennessee-based CTG operates truckload carriers Covenant Transport, Southern Refrigerated Transport, and Star Transportation.
Landair Holdings operates truckload carrier Landair Transport and Landair Logistics. Dedicated represents a smaller percentage of Covenant’s revenue, but the company wants to build up that business as shippers look to secure capacity through dedicated contracts. “Dedicated is a great place to be,” Parker said during a first-quarter earnings call in April. “This market [is giving] us a good opportunity to grow our dedicated service offering.”
On the earnings call, transcribed by Seeking Alpha, Parker put the number of trucks CTG has its dedicated service at “900-ish” and nearing 1,000. The question for CTG, he said, is “how do we make sure that we never become just an OTR [over-the-road], you-call-we-haul kind of carrier?” One way, he said, is to secure more long-term dedicated truckload contracts from customers.
Dedicated contracts are typically multiyear contracts, Parker said, between two and four years. That kind of business embeds a carrier in its customer’s supply chain. Dedicated services typically command higher rates and profits as well. While OTR truckload operations often have operating ratios in the low 90s, Parker said CTG’s dedicated operating ratios are sub-90.
Companies get ongoing business, shippers get a guaranteed truck
Those dedicated contracts also give Covenant and other carriers a hedge against the next downturn — whenever that may come. They want stronger relations with shippers as much as shippers want a guarantee that a truck will come to their docks when they call for one.
“We believe the backing of CTG will provide additional resources to expand Landair’s dedicated truckload operations to best meet the needs of its strong customer base, as well as improve profit margins through identified cost synergies,” Parker said in the July 5 statement. He also said he expects Landair will immediately improve CTG’s managed freight services.
Landair, founded in 1981 by Scott Niswonger and Ed Sayler, operates about 430 trucks and 900 trailers, and manages 12 distribution facilities with 1.8 million square feet of warehouse space. That warehouse space, in particular, should bolster CTG’s managed freight business, as well as its dedicated services. John Tweed will continue to lead the Landair business as president.
In the statement, Tweed said the support of larger partners such as Covenant, one of the 25 largest US truckload carriers, is increasingly important to smaller trucking operators that want to expand amid tight capacity and rising costs. “Continued growth at the pace we are experiencing requires access to the resources and support of a strong partner like CTG,” Tweed said.
Similar factors are driving acquisitions elsewhere in trucking, such as the recent Penske Logistics acquisition of Epes Transport. A Penske spokesperson said the purchase will grow the company by enhancing its portfolio of transportation solutions to shippers. Carriers focused on specific areas, such as RoadOne IntermodaLogistics, also are growing by acquisition.
The acquisitions also show just how exuberant trucking executives feel about the current market. During the April earnings call with analysts, Parker compared the 2018 trucking market with a period that now seems almost antediluvian. “It feels like 1994 to me,” he said.