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Supply Chain News: Q3 Truckload Profits Down, but Carriers Generally Hang Tough

 

Profits Fall 11.2% Year Over Year, with Large Carriers Reporting Rates Modestly Lower

Nov. 1, 2016
SCDigest Editorial Staff

It was yet another soft quarter for US truckload carriers in Q3, as nearly all of them cited weakness in volumes and rates, with profits profits for the group of six carriers we follow down 11.2%, though still solidly in the black.

That result from what all described as a weak freight environment, with rates flat to down modestly.

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There was a bit of a trend in terms of reducing truck counts or moving trucks from common carriage to dedicated service, but these moves were generally modest.

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From an overall market perspective, the Cass Linehaul Index, which measures US truckload rates before accessorials, fuel surcharges and other fees, was down all three months of Q3, falling 1.6%, 2.8% and an accelerating 3.5% year-over-year in July, August and September, respectively, making it seven straight months of declines - this first time we've seen that since the recession year of 2009.

Those declines were due to a freight market almost all the carriers characterized as "soft" in the quarter.

 

For example, Werner noted that in Q3, "An excess supply of industry trucks relative to sluggish freight demand created a market in which customers pushed harder for contractual rate decreases," though Werner said it often chose to walk away from some customers wanting rate decreases down in the mid-single digits.

 

JB Hunt said it saw "tepid customer demand," in Q3, while Marten Transport said it saw "a soft freight market with excess capacity, which we expect to continue into 2017."

 

But rates for this group were flat or down only slightly in the quarter. Knight Transportation, for example, said it saw a 2.1% decrease in average revenue, excluding fuel surcharge, per loaded mile, a proxy for overall rate changes.

 

Meanwhile, Swift said there was a "lackluster pricing environment that continued to burden the market throughout the quarter." But JB Hunt said core customer rates in its truckload segment were flat compared to the same period in 2015, though spot market rates were down.

 

Some of the carriers said they were seeing some growing market stength at the end of the quarter. Knight was optimist about the direction of rates, noting that "With significantly declining new truck orders, the weak used equipment market, and additional regulatory burdens expected to phase in during the next year, we expect continued improvement in the supply/demand relationship in the coming quarters."

 

All of the carriers we follow were again profitable in Q3 even in the soft environment, with net margins ranging from 8.4% at Heartland Express to 3.7% at both Werner and Swift (net income as a percent of revenues). In aggregate, profits margins fell across all six carriers from 6.7% in Q3 2015 to 5.9% this year in our unweighted average. Net margins were 6.4% in Q2 for the group.

 

Average operating ratios, or operating expense divided by operating revenue, a key transport sector metric, rose sharply from 86.5% on average for the group in Q3 2015 to 90.1% in this latest period.

But for most in out group, growth in areas outside of core truckload carriage, such as dedicated and brokerage services, saw growth, which helped to offset the lower profits in their truckload business.

 

The full table of results from our carrier group is provided below:

 

Q3 2016 US Truckload Carrier Results

 


Source: SCDigest Analysis from Company Earnings Releases

 

Highlights of the comments from each carrier in their earnings releases are provided below, starting with Werner, which as usual provided the most in-depth commentary. As you will see, there was a bit of a trend in terms of reducing truck counts or moving trucks from common carriage to dedicated service, but these moves were generally modest.

 

Concerns about the driver shortage were still there, but clearly more muted than in recent periods.

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Werner

Said the third quarter 2016 freight demand showed gradual improvement from the weak second quarter freight market, a recovery its says was part of this improvement was industry specific and part was Werner specific.

During June 2016, to take advantage of the strengthening dedicated market, Werner rmoved 150 trucks from One-Way Truckload, lessening the need to find freight for their trucks in the more challenged One-Way market. In September 2016, it moved an additional 100 trucks from One-Way Truckload into Dedicated.

 

Said freight volumes and transactional spot market pricing in the One-Way Truckload market improved in third quarter 2016 from the lower levels in second quarter 2016.

During Q3, Werner said "We experienced gradual freight improvement which began to validate our pricing strategy. The contractual rate market became more challenging in second quarter 2016, particularly in One-Way."

In its truckload segment, noted that an "excess supply of industry trucks relative to sluggish freight demand created a market in which customers pushed harder for contractual rate decreases. We chose to exit from certain contractual business that would have required significant contractual rate decreases for the next year, since we believed that this pricing was not sustainable and that freight market conditions would begin to show improvement. While we avoided mid-single digit percentage or higher contractual rate decreases in second quarter 2016, market conditions and competition necessitated agreeing to flat to slightly lower contractual rates which became effective in third quarter 2016."

Werner averaged 7,216 trucks in service in the Truckload segment and 75 intermodal drayage trucks in the Werner Logistics segment in Q3. It ended third quarter 2016 with 7,175 trucks in the Truckload segment, a year-over-year decrease of 240 trucks and a sequential decrease of 80 trucks.

After numerour tactics to improve retention, Werner's driver turnover rate once again improved, achieving the lowest third quarter rate in 18 years.

 

JB Hunt

Load growth of 7% in Intermodal (JBI), a 2.9% increase in revenue producing trucks and improved asset productivity in Dedicated Contract Services (DCS), an 88% increase in load volume in Integrated Capacity Solutions (ICS) and a 4% increase in truck count in our Truck (JBT) business segment, partially offset by lower customer rates in JBI, ICS and JBT and tepid customer demand, contributed to the increase in consolidated revenue compared to prior year.

Overall intermodal volumes increased 7% over the same period in 2015, strongest result in the unit in a number of quarters. Its Eastern network realized load growth of 5% and Transcontinental loads grew 8% over the third quarter 2015 as west coast outbound freight growth outpaced the rest of the network and western rail service continued a year-over-year improvement trend.

In its truckload segment, core customer rates were flat compared to the same period in 2015. At the end of the period, JBT operated 2,183 tractors compared to 2,100 a year ago.

Heartland Express

Company said "We have continued to experience downward pressure on freight rates due to the softness in freight volumes resulting from the available capacity in the industry."


Heartland added that "We were able to generate another quarter of solid cash flows from operations, which allowed us to increase our cash reserves and pay for capital expenditures while remaining debt free."

Knight

Company said that "The freight environment remained moderate in the third quarter of 2016 when compared to the same quarter last year. We continued to see improvement in our asset utilization and experienced more favorable supply/demand dynamics as the third quarter progressed."

Knight added that "With significantly declining new truck orders, the weak used equipment market, and additional regulatory burdens expected to phase in during the next year, we expect continued improvement in the supply/demand relationship in the coming quarters.

Company noted that "Driver pay continues to be inflationary".

Knight said it saw a 2.1% decrease in average revenue, excluding fuel surcharge, per loaded mile, a proxy for overall rate changes.

Marten Transport

Company said it saw a "soft freight market with excess capacity, which we expect to continue into 2017."


Marten grew its average number of truckload and dedicated tractors by 283, or 11.6%, in this year's first nine months over the first nine months of 2015.

Swift

On September 8, 2016, Swift announced the retirement of its founder and CEO, Jerry Moyes effective December 31, 2016.

Swift said that excess carrier capacity and pricing pressure continue to challenge the marketplace, adding that there was a "lackluster pricing environment that continued to burden the market throughout the quarter."

As a result, Swift reduced its Consolidated Average Operational Truck Count year over year in the third quarter by 581 trucks, and 110 trucks when compared to the second quarter of 2016. Its Truckload and Swift Refrigerated segments experienced the majority of this reduction.

"Throughout this year, the truckload market has been very challenged thus far in 2016. Many of the same headwinds we have previously disclosed remained throughout the third quarter, as the presence of excess industry capacity, excess customer inventories, and sluggish demand have combined to cause persistent pressure on freight volumes and pricing," the company said.

Swift saw a 3.2% reduction in Average Operational Truck Count in its truckload segment, but Average Operational Truck Count increased 130 trucks sequentially, due to growth with its existing dedicated customer base.

Any reaction to the Q3 review of the truckload sector? Are you seeing falling rates? Let us know your thoughts at the Feedback section below.

 

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