It was a soft Q1 for US truckload carriers, as nearly all of them cited weakness in volumes and rates, though profits for the group of seven carriers we follow only fell 7.4%.
From an overall market perspective, the Cass Freight Index, which measures US freight activity, took a sharp drop in January, and in Q1 has been below 2015 levels every month. In March, for example, Cass says shipments were down 1.5% versus 2015 levels, while expenditures were down 7%, indicating a weak pricing environment, as transportation spend is falling at a steeper rate than volumes.
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| "Recent customer bid activity trends have been mixed, as some customers are aggressively working to take advantage of the favorable shorter term trends to the detriment of carriers," Werner said. |
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From an overall revenue perspective, carrier results in Q1 were once again impacted by falling diesel prices, as operating revenue is reported including fuel surchrage fees, though most then strip those surcharge revenues back out overall or by business segment.
Werner, for example, said diesel fuel prices were 68 cents per gallon lower in first quarter 2016 than in first quarter 2015 and were 33 cents per gallon lower than in fourth quarter 2015. Of late, of course, diesel prices have been once again on the rise.
The soft environment for truckload carriers is likely to continue, according to John Larkin, transport sector analyst at Stifel, a Wall Street investment firm.
Larkin recently released a report that said "pricing pressure is rampant in the generic freight market," which includes most types of trucking services, while railroad carload pricing and freight rates among parcel carriers are on the rise.
"Many shippers have effectively elected to toss to the wayside any talk of partnerships, relationships, cooperation, collaboration, etc.," the report read. "Shippers are under enormous pressure to cut transportation costs and seem not to be satisfied with the massive fuel surcharge reductions racked up over the past year and a half."
Similar sentiments from Jason Seidl, an analyst with Cowen & Co., who recently wrote that "It's bid season, and the contract bids that are coming in are not looking that good."
Werner, for example, noted that " The rate market was challenging" in Q1.
Similarly, Knight Transportation commented that "Opportunities in the non-contract market were challenged by falling load counts and additional price competition, particularly from non-asset brokers. The more competitive freight environment and fewer non-contract opportunities have begun to pressure our overall revenue per loaded mile."
Somewhat bucking that trend was JB Hunt, which said it saw core customer rate increases of 2.3% in Q1 in its truckload compared to the same period in 2015.
All of the carriers we follow were profitable in Q1, with net margins ranging from 8.8% at Heartland Express to just 2.0% at Celadon (net income as a percent of revenues).
Average operating ratios, or operating expense divided by operating revenue, a key transport sector metric, rose from 88.2% on average for the group in Q1 2015 to 90.3% in this latest period.
The full table of results from our carrier group is provided below:
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.
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Werner
Noted that first quarter 2016 freight demand was softer than the first quarters of 2015 and 2014.
Said that it saw a 0.9% decrease in average revenues per total mile in the quarter, a proxy of sort for rate changes.
Although "The rate market was challenging" in the quarter, Werner observes that while truckload capacity is currently pretty loose in the market, "we believe significantly lower truck orders in recent months combined with the upcoming changes in trucking regulations should begin to tighten the capacity market in the next few quarters."
As it has consistently been saying in recent quarters, Werner it is "continuing to work with our customers to recoup the cost increases associated with more expensive equipment, a shrinking supply of qualified drivers and an increasingly challenging regulatory environment."
However, while for most of 2016 Werner indicated many shippers seemed OK with the higher rates, currently "Recent customer bid activity trends have been mixed, as some customers are aggressively working to take advantage of the favorable shorter term trends to the detriment of carriers. Based on the current rate and freight market, we believe it may be difficult to achieve rate per total mile increases on a year-over-year basis in the next few quarters."
Werner ended Q1 with 7,330 trucks in its Truckload segment, up 220 trucks, or 3.1%, compared to the end of first quarter 2015. However, that count was basically flat versus Q4 2015.
Werner said it "remains on track to meet our goal of an average truck age of approximately 1.5 years as of December 31, 2016." Part of this investment is to improve the experience for drivers and thus improve retention.
After giving its drivers a sizable wage increase in Q4, Werner said "Our driver turnover rate achieved a 17 year low in first quarter 2016."
JB Hunt
It was a strong quarter from top to bottom at JB Hunt. Current quarter total operating revenue, excluding fuel surcharges, increased 12.9% versus the first quarter of 2015. Intermodal load growth was 12% over first quarter 2015 levels, after having seen slow growth through much of last year.
Integrated Capacity Solutions load growth was 45% over the same period in 2015, while the Truck segment revenue increased 5% on a 12% increase in fleet size, and was up 12% when excluding fuel surcharge.
Said it saw "increased contract pricing established throughout 2015 across all business units," which is then helping 2016 results. But it also saw higher driver wages and recruiting costs in the quarter.
Hunt said core customer rate increases were up 2.3% compared to the same period in 2015 in its Truckload unit. At the end of the current quarter it operated 2,270 tractors in the segment compared to 2,020 in 2015, as it continues to add capacity after several years of paring it back.
Heartland Express
Company said it saw weaker freight volumes and more downward pressure on freight rates in
2016 compared to the first quarters of 2015 and 2014.
Noted that "Our fleet of both tractors and trailers remains in pristine condition, ready for the road ahead."
Following a fleet upgrade capital campaign in 2015, operating income for quarter period decreased $8.9 million as a result of lower gains on disposal of property and equipment from lower trade volume, impacting overall profitability.
No specific information on its fleet size was provided.
Knight Transportation
Company noted that "The freight environment was less attractive in the first quarter of 2016 compared with the same quarter a year ago. We attribute the change to excess trucking capacity, higher inventory ratios, and weak U.S. industrial production for the full quarter of this year."
Added that "Opportunities in the non-contract market were challenged by falling load counts and additional price competition, particularly from non-asset brokers. The more competitive freight environment and fewer non-contract opportunities have begun to pressure our overall revenue per loaded mile."
Said it saw "essentially flat average revenue per loaded mile," in Q1, a proxy measure for rate changes.
In its logistics segment, Knight said "gross margins in our brokerage business expanded 350 basis points [3.5%], while load volume grew by 31.0%."
Saw a small decline in the number of tractors in the quarter, dropping to 4,689 from 4,765 in 2015.
Swift
Drop in profits stemmed from "a weaker than expected freight market [which] could not offset the driver wage and owner-operator pay increases implemented in May of2015," the company said.
Saw a weak 0.6% increase in revenue per loaded mile net of fuel surcharge, a proxy measure for the change in rates in the quarter.
Dedicated revenue net of fuel surcharge, however, grew a strong 12.1%.
Tractor counts in Swift's truckload segment was basically flat, ending with 10,650 trucks in Q1 compared to 10,535 in 2015, up about 1%.
Company is losing money on its intermodal unit, with an operating ratio of 103.8%, up from 101.6% in 2015.
Swift noted that the drop in intermodal came in part from "the elimination of our Trailer-on-Flat Car service being completed during the first quarter of 2016, as our strategic focus remains on expanding our Container-on-Flat-Car (COFC) service offering."
Marten Transport
Company said it has seen "pricing pressures and a soft freight market since last year's second quarter."
Marten is growing its fleet, increasing its average number of truckload and dedicated tractors by 384 tractors, or 16.5%, year over year in Q1 - though we believe that is mostly the affect of an acquisition.
Company saw a sharp rise in its Dedicated segment, with revenue net of fuel surcharge rose to $35,510 million in the quarter from $19,863 in 2015.
Celadon
As with others, Celadon noted it saw "weaker freight volumes and pricing pressure in the March 2016 quarter."
Noted its strategy is to move "the business model to more dedicated and committed customer freight, increasing our asset light model which broadens our value-added customer service offering at good margins, creating more lane density in our core operating lanes, and increasing our brokerage portion of our business in lanes that do not create lane density.
Company says after growing its fleet size through acquisition in recent years, in Q1 it reduced the average seated line haul tractors sequentially by 232 tractors to 5,082 from 5,314 in Q4 2015, at it "continues to focus on utilization improvements and revenue enhancements to our operating assets."
However, Celadon did increased its number of dedicated trucks and trucks committed to specific customers during the quarter to 1,792 from 1,330 at the end of March 2015.
Noted that "A shrinking supply of qualified drivers along with economic and safety regulatory issues, should result in a more constrained truckload capacity for shippers in the future."
Any reaction to the Q1 review of the truckload sector? Are you seeing falling rates - and less interest in partnerships with carriers in favor of prices? Let us know your thoughts at the Feedback section below.
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