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Supply Chain News: Strange Q3 for Truckload Carriers, as Market Strong, Profits Down

 

US Freight Market Gained Strength, but Impact of Hurricanes, Rising Driver Costs Send Profits Down

Nov. 8, 2017
SCDigest Editorial Staff

It was an odd quarter for US truckload carriers in Q3, with almost all citing a strengthening freight market and higher rates, but financial results were tepid or down, with carriers citing a loss of business from the hurricanes in the quarter and continued pressure from driver costs.

As usual, we begin our quarterly review of results and trends across various freight transportation modes, startng this week with the truckload carriers, followed next by the rail carriers and then the less-than-truckload sector the week after that.

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"The driver environment is as challenging as we have ever seen," said Knight-Swift.

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The carriers almost across the board saw positives signs relative to freight demand.

Werner, for example, said "In July and August 2017, freight trended better than normal and meaningfully better than the challenging freight market of third quarter 2016," adding that "Freight volumes thus far in October 2017 have been seasonally better than normal."

The American Trucking Associations' Freight Tonnage Index has been mostly rising of late after a flat start to the year, now up 2.4% versus 2016, as a point of comparison.

Data from the Cass Linehaul Index, which measures US per mile truckload rates before fuel surcharges and other accessorials. shows rates were up year-over-year 2.3%, 2.6% and a very strong 4.2% in July, August and September, respectively, making it six months in a row of higher rates after an unprecedented 13 straight months of year-over-year declines.

JB Hunt said it saw a 4% increase in rates per loaded mile in its truckload segment in the quarter. However, comparable contractual customer rates were flat compared to the same period in 2016.

The big news in the sector in Q3 was the completion of the merger of Knight Transportation and Swift, with the new company called Knight-Swift Transportation and having some $5 billion in annual revenues, with claims to be now the largest US truckload carrier.

Schneider also became a public company earlier 2017, and its results are now included in out data table below.

But the mostly good news from the overall market did not hit the bottom line. Overall profits for the six publicly traded carriers we follow were actually down 4.2% in the quarter - though up 19% at Werner after an especially weak Q3 last year.

Margins (net income as a percent of revenues) were generally in the 4-5% range for most carriers, with an unweighted average of 4.5%, down from 5.9% in 2016.

Average operating ratios, or operating expense divided by operating revenue, a key transport sector metric, rose by half a percentage point in the quarter, from 91.5% on average for the group in Q3 2016 to 92.0% in this latest period, driving the fall in profits.

As noted above, hurricanes that reduced some freight volumes and the continued rise in driver costs were the big isues.

"The driver environment is as challenging as we have ever seen," said Knight-Swift.

Also in Q3, JB Hunt sent a letter to its truckload customers warning of a rise in rates of 10% or more soon, citing driver shortages as the prime cause.

Werner, meanwhile, said ""We have increasing confidence that contractual rates will strengthen over the next few quarters."

The full table of results from our carrier group is provided below. The big jump in Knight-Swift revenues comes from the merger.

 

Q3 2017 US Truckload Carrier Results

 

 

Source: SCDigest Analysis from Company Earnings Releases

 

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As always, highlights of the comments from each carrier in their earnings releases are provided below, starting with Werner, which as usual uprovided the most in-depth commentary.

 

As always, highlights of the comments from each carrier in their earnings releases are provided below, starting with Werner, which as usual uprovided the most in-depth commentary.

 

Werner


Company noted that "In July and August 2017, freight trended better than normal and meaningfully better than the challenging freight market of third quarter 2016," adding that "Freight volumes thus far in October 2017 have been seasonally better than normal."
Company saw a 3.4% increase in average revenues per total mile, a proxy for rate changes.

It added that "We have increasing confidence that contractual rates will strengthen over the next few quarters, particularly noting the improving freight market conditions and the expected tightening of supply when the electronic hours of service mandate for the trucking industry becomes effective on December 18, 2017."

Werner ended third quarter 2017 with 7,375 trucks in its truckload segment, a year-over-year increase of 200 trucks and a sequential increase of 60 trucks. Its dedicated unit ended third quarter 2017 with 3,955 trucks (or 54% of the total Truckload segment fleet) compared to 3,825 trucks at the end of third quarter 2016.

Company added that "The driver recruiting market became more challenging," adding that "Several ongoing market factors persist including a declining number of, and increased competition for, driver training school graduates, an historically low national unemployment rate, aging truck driver demographics and increased truck safety regulations."

However, Werner's driver turnover rate once again improved, achieving the lowest third quarter rate in 19 years.

JB Hunt


For the whole company, Hunt said operating income decreased from third quarter 2016 primarily from increases in driver wages and recruiting costs, among other factors, such as higher rail rates for intermodal.

Hunt saw a 4% increase in rates per loaded mile in truckload in the quarter. However, comparable contractual customer rates were flat compared to the same period in 2016. 

At the end of the period, the truckload segment operated 2,040 tractors compared to 2,183 a year ago.

In its intermodal segment, overall volumes increased 6% over the same period in 2016. Revenue per load excluding fuel surcharges was flat compared to third quarter 2016.

Schneider

Company said ""In the third quarter, we saw improved demand/supply balance and increased economic activity, resulting in accelerating pricing." However, "This was offset by cost pressures from driver recruiting and pay, continued refining of our cost structure in the First to Final Mile service offering, as well as lost revenue and productivity from the hurricanes."

Schneider added that the combination of the storms, an improving economy, and the historic surge in demand resulted in positive movement in pricing across the board, including spot, fall premium, and contract rates.

The truckload segment saw a 2.3% decrease versus 2016 in its tractor count, after a right sizing initiative earlier in the year, but was up 1.2% versus Q2.

Heartland Express

Jump in revenues is the result of its Heartland's acquisition of IDC trucking in the quarter.

IDC's operating ratio was 105%, so company said it put much focus on turning those numbers around.

Knight-Swift

With the Knight-Swift merger completed in the quarter, the company said "We are gaining confidence in both areas based on the success of our initial roll-out of best practices from each company and the strengthening freight market. The driver environment, however, is as challenging as we have ever seen.

It added that "Already we have seen progress in purchasing, realizing non-contract revenue opportunities and expanding brokerage opportunities."

The company said that freight environment strengthened throughout the third quarter and into October. The non-contract market improved each month sequentially, leading to a 4.6% year over year increase in revenue per loaded mile, excluding fuel surcharges, for the quarter.

It added that "Strong freight demand is beginning to impact both the contract market and customer expectations for the 2018 bid season."

Marten

Company said "The improvement in our revenue per tractor for the third quarter did not offset the increase in our operating expenses related to insurance and claims and fuel, the decrease in our gain on disposition of revenue equipment and the negative impact of the recent hurricanes on our Texas and Southeast operations."


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