With freight volumes choppy, the potential for rate increases shrinking, and operational costs on the rise, TL carriers are increasingly making systemic changes to their businesses so they can remain profitable in what’s being described as a far more “difficult” environment.
Werner Enterprises, for one, said in its third quarter earnings report that freight demand did not show normal seasonal improvement from mid-August through September, with customers generally choosing to keep inventory levels leaner in a market with economic and political uncertainty.
“Freight trends for October to date have continued to trend below levels for the same period in 2011,” the Omaha, NE-based carrier added. “Lower than anticipated freight volumes caused our loads to truck ratio in our truckload segment to be slightly below equilibrium for much of third quarter.”
As a result, Werner said its net income decline 15% to $25.1 million as trucking revenues (net of fuel surcharges) fell 2% in the third quarter to $326.2 million compared to the same period last year.
Meanwhile, the carrier added that rising diesel prices and upward pressure on driver wages is pushing it operational costs higher.
“Driver pay increases by our competitors, a slightly lower number of and increased competition for truck driving school graduates and an improved housing construction market were all factors,” the carrier said, adding that it boosted driver pay 1.4 cents per total mile in third quarter this year compared to the same period in 2011, while making other “pay adjustments” over the last year to attract and retain drivers in specific operations.
Diesel fuel prices were seven cents per gallon higher in third quarter compared to the same quarter in 2011 and were 11 cents per gallon higher versus the second quarter this year, Werner noted. “In third quarter, the national average fuel price increased each week for eleven consecutive weeks,” the carrier pointed out, adding that for the first 17 days of October, the average diesel fuel price per gallon was 40 cents higher than the average diesel fuel price per gallon in the same period in 2011 and 30 cents higher than in fourth quarter of 2011.
John Larkin, a transportation analyst with Stifel Nicolas, emphasized in the research brief that those trends are forcing many large carriers to diversify away from conventional truckload to focus on more dedicated, short haul/regional, and intermodal services.
After freight posted strong growth earlier in the year, Larkin said volumes started falling off in late June, July and August below the normal seasonal trend. “September was generally also a disappointment, with only a slight quarter end surge reported by many [and] October is off to a very sluggish start,” he said. “Uncertainty was the primary reason cited for tepid freight demand.”
Larkin added that carriers generally reported sub-par utilization across their fleets during the third quarter, with some executives believing that they might be leaving as much as 10% to15% of utilization potential on the table due to weak demand. “Carriers who were selectively adding to their fleets have generally ceased capacity additions or are carefully considering pulling the plug on their capacity expansion plans,” he added.
Shippers have also apparently told carriers that they should not expect much in the way of a surge in shipments, at least over the next several quarters, Larkin pointed out. As a result, dry van volumes have been, on balance, the softest, though flatbed demand has also taken a step back.
Some of that information comes via Stifel’s partnership with Transport Intelligence Ltd., a U.K-based research firm specializing in global logistics, and a monthly survey the two conduct of international shippers and forwarders that measures freight activity across several European-based trade lanes.
In October, total shipper confidence fell for a sixth consecutive month, according to the survey, with respondents indicating that current international trade volumes remain poor relative to normal seasonal expectations, as suggested by an indexed reading of 40.4 vs. the benchmark of 50.0, and as compared with September’s 40.6 metric.
“Over the short term, and as we suggested in previous updates, peak season looks increasingly unlikely to materialize in any significant way, absent the mild effect of certain consumer electronics product launches,” Larkin said.
Despite the declining freight outlook, TL contract pricing is holding up better than expected, Larkin noted, adding that most carriers are still securing modest low- to mid-single digit rate increases in the 1% to 4% range as shippers are anticipating a serious capacity crisis in the next year or two and are willing to build core carrier relationships for capacity commitments.
Werner, for example, said in its third quarter earnings statement that it plans to keep diversifying its business model with the goal of achieving what it calls a “balanced portfolio” of revenues comprised of one-way truckload that includes short-haul regional, medium-to-long-haul van and expedited fleet services, along with renewed focus on its “Specialized Services” division, primarily made up of dedicated operations – a division that operates 3,285 of Werner’s trucks, or some 46% of its total fleet.
J.B. Hunt Transport Services is also seeing success via such “diversification” efforts, noted Stifel’s Larkin, as the company’s intermodal segment produced 61% of the J.B. Hunt’s total third quarter revenue as well as 74% of its operating income.
He added that J.B. Hunt’s intermodal revenue increase was purely driven by a 15% increase year-over-year in load growth, attributed to continued conversion of highway traffic to intermodal.
By contrast, J.B. Hunt’s truckload segment – which Larkin stressed has been de-emphasized over the years – representing just 9% of the carrier’s third quarter revenue and 3% of its operating income, amking it the lowest contributor of J.B. Hunt’s four business segments (intermodal, dedicated, integrated capacity solutions, and truckload) during the quarter.
More broadly, Larkin expects carriers to see better opportunity for rate increases in “specialized” services versus straight TL offerings.
In terms of year-over-year comparisons, he expects general contract rates to range from a decline of 1% to an increase of 2% in the second half of 2012 versus the same period in 2011, whereas dedicated offerings should see rates stay flat or rise 2% in the bottom half of 2012 compared to the same stretch last year.