Pressure on Truckload Carrier Profits to Continue
Struggling Economy Limits Rate Increases
By Rip Watson, Senior Reporter
This story appears in the May 19 print edition of Transport Topics.
Truckload carriers should expect to face intense pricing pressure this spring after a first-quarter performance characterized by stagnant rates and deteriorating operating ratios.
A Transport Topics review of results posted by publicly traded truckload fleets showed the average operating ratio worsened by 4.1 percentage points to 98.7, and rates excluding fuel charges inched up only 0.4% to $1.586 per loaded mile.
The operating ratio results were even worse when compared with the first quarter of 2006, when the average for publicly traded carriers was 92.3.
“I don’t see rates picking up this quarter,” said Ray Haight, chairman of the Truckload Carriers Association and executive director of MacKinnon Transport in Guelph, Ontario. “Typically, this quarter sees a bit of an upswing in volumes. I have talked with a number of carriers that are saying volumes have come up in this quarter, but the margins have deteriorated. There is a lot of competition for that little bit of extra volume.”
The latest round of economic indicators released on May 15 gave little indication that a significant pickup in demand is imminent. First-time unemployment claims rose to 371,000 in the latest week, and the total number of Americans receiving benefits hit the highest level in four years, the Labor Department said. In addition, a drop in manufacturing orders was reported by the Federal Reserve Bank of New York.
“We expect rate pressure to continue until the supply-demand balance has shifted towards demand,” said Kevin Knight, chief executive officer of Knight Transportation in a conference call. “Our expectation is that this will occur over the next several months, assuming that fuel prices do remain elevated.”
Diesel prices showed no sign of relenting, hitting still another record of $4.33 a gallon last week and presenting another stumbling block to operating ratio improvement as surcharge collections couldn’t keep up with a 25% fuel price rise this year.
“With the softer freight market, we have been unable to recover the fuel expense shortfall in base rates,” Werner Enterprises said in its quarterly earnings announcement.
“Increases in the cost of fuel are expected to continue to impact our earnings per share until such time as freight market conditions allow us to recover this shortfall from our customers,” Werner said.
P.A.M. Transportation Services said strong competition and weak demand was blocking efforts to raise rates and improve results after its operating ratio climbed to 105.4 from 97.4, the worst performance among public carriers.
Universal Truckload Services Inc. posted the greatest increase in rates, increasing 6.7% to $2.23 a mile. Chief Executive Officer Don Cochran told TT the company was able to raise its rate by changing its mix of business as shipments of auto parts dropped.
“We have picked up shorter length-of-haul work in flatbed and specialized hauling,” said Cochran. “Shorthaul business typically has higher rates.”
Length-of-haul dropped to 365 miles from 396 miles at Universal. Excluding the improvement at the Warren, Mich.-based carrier, rates fell by an average of 0.5%. However, an analyst said some improvement may be in sight.
Thom Albrecht of Stephens Inc. said in an investor note that the freight rate environment has stabilized and the pricing picture should brighten.
“Freight rates will improve during 2009 (actually starting modestly in the second half of 2008),” his May 13 note said, helped by a shrinkage of capacity through mounting bankruptcies and operating improvements by carriers whose equipment utilization is improving.
A study by Avondale Partners LLC analyst Donald Broughton found that bankruptcies among trucking fleets with more than five units reached 935 in the first quarter, the highest level since the 2001 recession and more than double the pace in the first three months of last year (4-21, p. 3).
Celadon Group Chief Executive Officer Stephen Russell appeared to agree with Albrecht’s assessment. In his company’s earnings announcement Russell said that rates had stabilized after falling for the past four quarters and demand should be improving.
“An increased number of trucking failures, combined with a significantly lower level of Class 8 truck builds, should improve the supply and demand balance in the truckload industry over the next few quarters,” he said.
However, Albrecht said, “The U.S. economy has some serious issues (housing, credit, gasoline prices etc.) that could crimp demand growth for some time, possibly leading to tepid [gross domestic product] growth for a year or more.”
ATA’s chief economist, Bob Costello, said on May 14 that capacity should tighten significantly, once the economy improves because of continued reduction in the truckload fleet, which shrank 1.4% in the first quarter.
Haight noted the manufacturing sector and the housing market will have to regain strength before truckload rates can rise.
“We are feeling the effects of the mortgage debacle,” he said, with the automotive and appliance markets suffering especially hard. “Large consumables aren’t moving.”
This story appears in the May 19 print edition of Transport Topics.
Truckload carriers should expect to face intense pricing pressure this spring after a first-quarter performance characterized by stagnant rates and deteriorating operating ratios.
A Transport Topics review of results posted by publicly traded truckload fleets showed the average operating ratio worsened by 4.1 percentage points to 98.7, and rates excluding fuel charges inched up only 0.4% to $1.586 per loaded mile.
The operating ratio results were even worse when compared with the first quarter of 2006, when the average for publicly traded carriers was 92.3.
“I don’t see rates picking up this quarter,” said Ray Haight, chairman of the Truckload Carriers Association and executive director of MacKinnon Transport in Guelph, Ontario. “Typically, this quarter sees a bit of an upswing in volumes. I have talked with a number of carriers that are saying volumes have come up in this quarter, but the margins have deteriorated. There is a lot of competition for that little bit of extra volume.”
The latest round of economic indicators released on May 15 gave little indication that a significant pickup in demand is imminent. First-time unemployment claims rose to 371,000 in the latest week, and the total number of Americans receiving benefits hit the highest level in four years, the Labor Department said. In addition, a drop in manufacturing orders was reported by the Federal Reserve Bank of New York.
“We expect rate pressure to continue until the supply-demand balance has shifted towards demand,” said Kevin Knight, chief executive officer of Knight Transportation in a conference call. “Our expectation is that this will occur over the next several months, assuming that fuel prices do remain elevated.”
Diesel prices showed no sign of relenting, hitting still another record of $4.33 a gallon last week and presenting another stumbling block to operating ratio improvement as surcharge collections couldn’t keep up with a 25% fuel price rise this year.
“With the softer freight market, we have been unable to recover the fuel expense shortfall in base rates,” Werner Enterprises said in its quarterly earnings announcement.
“Increases in the cost of fuel are expected to continue to impact our earnings per share until such time as freight market conditions allow us to recover this shortfall from our customers,” Werner said.
P.A.M. Transportation Services said strong competition and weak demand was blocking efforts to raise rates and improve results after its operating ratio climbed to 105.4 from 97.4, the worst performance among public carriers.
Universal Truckload Services Inc. posted the greatest increase in rates, increasing 6.7% to $2.23 a mile. Chief Executive Officer Don Cochran told TT the company was able to raise its rate by changing its mix of business as shipments of auto parts dropped.
“We have picked up shorter length-of-haul work in flatbed and specialized hauling,” said Cochran. “Shorthaul business typically has higher rates.”
Length-of-haul dropped to 365 miles from 396 miles at Universal. Excluding the improvement at the Warren, Mich.-based carrier, rates fell by an average of 0.5%. However, an analyst said some improvement may be in sight.
Thom Albrecht of Stephens Inc. said in an investor note that the freight rate environment has stabilized and the pricing picture should brighten.
“Freight rates will improve during 2009 (actually starting modestly in the second half of 2008),” his May 13 note said, helped by a shrinkage of capacity through mounting bankruptcies and operating improvements by carriers whose equipment utilization is improving.
A study by Avondale Partners LLC analyst Donald Broughton found that bankruptcies among trucking fleets with more than five units reached 935 in the first quarter, the highest level since the 2001 recession and more than double the pace in the first three months of last year (4-21, p. 3).
Celadon Group Chief Executive Officer Stephen Russell appeared to agree with Albrecht’s assessment. In his company’s earnings announcement Russell said that rates had stabilized after falling for the past four quarters and demand should be improving.
“An increased number of trucking failures, combined with a significantly lower level of Class 8 truck builds, should improve the supply and demand balance in the truckload industry over the next few quarters,” he said.
However, Albrecht said, “The U.S. economy has some serious issues (housing, credit, gasoline prices etc.) that could crimp demand growth for some time, possibly leading to tepid [gross domestic product] growth for a year or more.”
ATA’s chief economist, Bob Costello, said on May 14 that capacity should tighten significantly, once the economy improves because of continued reduction in the truckload fleet, which shrank 1.4% in the first quarter.
Haight noted the manufacturing sector and the housing market will have to regain strength before truckload rates can rise.
“We are feeling the effects of the mortgage debacle,” he said, with the automotive and appliance markets suffering especially hard. “Large consumables aren’t moving.”
