We just finished our Q3 2016 review of US truckload, rail and LTL carrier results and trends. (See Q3 Truckload Profits Down, but Carriers Generally Hang Tough, As Volumes Continue to Decline, Rail Carriers See Solid Profits in Q3, and LTL Carriers Again Manage Pricing Strength in Q3 Despite Weak Freight Volumes).
All told, it was a weak quarter yet again for carriers in all three sectors, driven by slowing freight volumes, but for the most part the carriers turned in decent operating results in terms of profitability, helped in the rail and LTL sectors by a still modestly strong rate environment, based on commentary in their Q3 earnings calls. Rates were down in the truckload sector.
We'll take this occasion to once again present some interesting
comparisons on operating metrics across each of these three modes in Q3, as shown in the graphic below. Note that net income is
based usually on each carrier's total business, which may include other sectors, such as the large intermodal business at truckload
carrier JB Hunt, and not just straight truckload or LTL results. Still, the comparisons are useful (though operating ratios are usually just for that TL or LTL business unit, as reported).
|Q3 2016 US Operating Metrics by Mode
|Average Net Income as a Percent of Sales Q3 2016
|Average Net Income as a Percent of Sales Q3 2015
|Best Net Income as a Percent of Sales
Ratio Q33 2016
Ratio Q3 2015
|Best Operating Ratio
|Source: SCDigest Analysis
As can be seen, rail carriers as a group are simply far more profitable than truckload or LTL carriers, with profits as a percent of revenue for the quarter of 19.7%, though that was down a bit from the average of 20.1% in Q3 2015. By comparison, truckload carriers had net profit margins of only 5.9%, and just 3.9%% for the LTL group.
That is of course reflected in the different operating ratios, or operating expenses divided by operating revenue - a key metric in the transportation sector - which for the rail carriers is an astounding 23.6 percentage points better than for truckload carriers and about 27 percentage points better than the LTL sector average.
All three sectors saw average operating ratios rise in the quarter, though just barely in LTL and rail but with truckload carriers on average seeing a sharp 3.6 percentage point increase. Union Pacific again led the way here, with an impresssive OR in the quarter of just 62.1%.
Note: The "average" operating ratio per mode is unweighted, meaning for example that to calculate this number for the truckload sector, we simply add the operating ratios of the six TL carriers we follow and then divide by six. Size of the carrier in revenues is not factored in.
Union Pacific took the top spot that Kansas City Southern held in Q2 in terms of highest net income as a percent of sales, at 21.9%. The sector average of 20.1%, however, stacks up favorably with companies in almost any industry. Compare that to just net profits of 8.0% at GM and 5.0% at consumer products giant Kimberly-Clark in Q3.
In LTL, Old Dominion seems finally to have run into the law of large numbers for the third quarter in a row. After several years of regular gains near or above double digits in revenue and profits, it saw revenue that was basically flat in the quarter and net income that was up just 1.4%.
That said, Old Dominion came in with an OR of 82.4%, 10.7 percentage points better than the LTL sector average and almost eight percentage points better than the truckload group average. In fact, Old Dominion's OR was better than the top score in the truckload side, the 83.1% achieved by Heartland Express in Q3. It is very unusual historically for the best LTL performer to have a lower OR than the best truckload carriers.
If you take Old Dominion out of the calculation, its LTL competitors had an average OR of 96.2% in Q3, meaning Old Dominion was about 14 percentage points better. That in turn means that for every $1 million in revenue, OD drops an extra $140,000 or so to the bottom line than do its LTL competitors as a group.
That is quite an advantage indeed.
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