Knight-Swift profits in ‘less robust’ US trucking market

Knight-Swift profits in ‘less robust’ US trucking market

Despite a "less robust" marketplace in the first quarter, Knight-Swift and its subsidiaries improved profitability significantly, with fewer tractors and less revenue. Photo Credit: Shutterstock.com.

A “less robust” market awash with storms and flooding siphoned first-quarter revenue from the largest US truckload operator, Knight-Swift Transportation Holdings. However, Knight-Swift boosted its profits by controlling costs, pulling its adjusted operating ratio down to 86.7 percent from 88.9 percent a year ago, the Phoenix-based company said Wednesday.

That’s a performance other US trucking companies would be happy to emulate as the road ahead through 2019 for motor carriers looks increasingly bumpy. Softer economic growth, high inventory levels, and added truck capacity are combining to pull down truckload rates while motor-carrier operating costs, led by truck driver pay and diesel fuel prices, are rising.

The trucking operator’s first quarter also offers a silver-lining for shippers. The US economy weakened, but Knight-Swift’s bottom line only got stronger. That means the considerable capacity offered by the company — capacity that Knight-Swift has kept stable even as other trucking companies went on a truck-buying spree in 2018 — is not endangered.

The number of new Class 8 trucks and tractors hitting US highways rose 18.8 percent in the first two months of 2019, according to data from IHS Markit, the parent company of JOC.com. And although freight shipments in North America rose in March from February, year-over-year freight volumes have been negative for four straight months, according to the Cass Freight Index.

The US Bank National Shipment Index fell significantly in the first quarter, dropping 12.6 percent year over year and 10.5 percent from the fourth quarter. Although the first quarter is typically a weak one for shipment volumes, some of that drop may be attributed to front-loading of US imports in the fourth quarter to avoid US tariffs that were scheduled to take effect Jan. 1.

Last year was a high-water mark for trucking demand and pricing in the nearly 10-year recovery from the 2008-2009 recession. Year-over-year comparisons are increasingly tough, as Knight-Swift learned when its first-quarter consolidated revenue dropped 5.2 percent to $1.2 billion. The holding company’s consolidated net profit, however, rose 22.5 percent to $96.2 million.

“We are pleased that our ability to deploy assets effectively in a less robust market, together with enterprise-wide efforts to improve our drivers' experience and safety, and a relentless focus on cost control, delivered strong first quarter results,” the company said in a statement Wednesday. Knight-Swift added 106 tractor-trailers to its fleets from the fourth quarter of 2018 to the first quarter but cut its average tractor count drop by 3.6 percent from a year ago.

Trucking revenue fell 4.7 percent year over year in the first quarter to $865.6 million. The company’s trucking segment includes Swift Transportation, the largest stand-alone US truckload carrier, and Knight Transportation, the 11th largest truckload carrier, according to SJ Consulting Group. However, the segment’s adjusted operating profit rose 15 percent to $115.5 million.

The segment also includes Barr-Nunn Transportation, Trans-Mex, Abilene Motor Express, and temperature-controlled trucking company Kold Trans, all of which operate autonomously.

Packing more revenue per mile

The profit gain “was driven by improvements in the Swift over-the-road truckload fleet and the Knight truckload fleet, which operated at adjusted operating ratios of 85.3 and 81.4 percent, respectively,” the company said. “Our revenue per loaded mile, excluding fuel surcharge and intersegment transactions, increased 9.4 percent compared to the first quarter of 2018.”

That’s a sign of rate increases won by the carriers in the frenzied freight market of 2018, when shippers accepted significant rate hikes to secure capacity. The carriers’ miles per tractor dropped 8.7 percent year over year in the first quarter, cutting into overall revenue. That reduction can be attributed to both a slower economy and storms and flooding.

Knight-Swift’s performance on the road was not mirrored on the rails. “Our [intermodal rail] results were negatively affected by inclement weather impacting rail lanes and slower rail transit times,” the company said. Intermodal revenue, excluding intersegment transactions, increased 5 percent to $115.7 million, despite a 5.8 percent decrease in intermodal loads.

Revenue per intermodal load jumped 11.5 percent, but operating profit plunged 40 percent to $2.4 million, driving the intermodal unit’s operating ratio up to 98 percent. “We added container capacity to facilitate our growth plan within this segment, which increased our driver costs and our fixed costs,” said Knight-Swift, adding that it expects improvements in 2019.

Truckload volumes brokered by Knight-Swift’s logistics segment shot up 20.7 percent from the year-ago first quarter, those revenue per load decreased 12 percent, as truckload rates came under pressure. Logistics revenue, excluding transactions between the company’s segments, rose 1.3 percent to $87.2 million, while operating profit shot upward 84 percent to $7.3 million.

The US truck freight market is likely to remain soft, Knight-Swift executives indicated by dropping their earnings guidance for the second quarter. They expect earnings per share in the second quarter to range from 62 to 64 cents per share, rather than 62 to 66 cents, as previously forecast. First-quarter earnings were 55 cents per share better than analysts expected.

Although the second quarter may not be as “robust” as it was in 2018, Knight-Swift’s guidance doesn’t point to a deep downturn either. The company said it expects its contract rates to “remain positive,” but to find fewer non-contract opportunities on the spot market. Overall, Chainalytics and other advisory firms expect contract rates to turn negative in 2019.

That means Knight-Swift and other trucking companies will need to keep an eye fixed on costs as rates come under increased pressure, if they hope to maintain profits in 2019.

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