Freight demand is projected to remain on the rise in the U.S. through the second half of this year, providing carriers and third party logistics (3PL) providers alike with both opportunities and challenges.
J. B. Hunt Transport Services provides an example of that dichotomy. While it reported strong earnings and revenues in the second quarter on burgeoning demand for its diversified freight services, slowdowns in train speeds and a lack of drivers are hindering the company’s ability to fully capitalize on rising freight demand.
“The slowdown in train velocity and the difficult driver recruiting environment has challenged our growth in JBI [the carrier’s intermodal division] but we are pleased we were able to maintain profitability levels despite these obstacles,” noted John Roberts III, J.B. Hunt’s president and CEO, in a statement.
“The worsening driver supply conditions will continue to be a headwind for DCS [J.B. Hunt’s dedicated division] and JBT [its truckload division] as well,” he stressed. “The planned improvement in JBT is ahead of schedule and though there is more to do, we are extremely pleased with the progress thus far.”
Still, despite those issues, J.B. Hunt posted net earnings of $93.4 million on total operating revenue of $1.55 billion in the second quarter this year, compared to net earnings of $87.7 million on total operating revenue of $1.38 billion in the same quarter last year.
Load growth of 8% in intermodal (JBI) and 15% for the carrier’s integrated capacity solutions (ICS), helped drive 9% and 31% increases in segment revenue, respectively, with J.B. Hunt’s dedicated contract services (DCS) segment revenue increasing by 15% as productivity improved on large private fleet conversions implemented a year ago.
By contrast, J.B. Hunt said its TL segment revenue overall stayed flat compared to 2013 with an 8% smaller fleet, though its total operating revenue, excluding fuel surcharges, increased 13% vs. the comparable quarter 2013.
Yet Joel Clum, president of consulting firm CarrierDirect, expects continued increases in freight demand through the second half of 2014 to keep pressuring the trucking and logistics sectors in both positive and negative ways.
“Halfway through 2014, we are seeing strong signs of life in the freight industry following a difficult start to the year due to the polar vortex,” he said during a conference call last week arranged by Wall Street investment firm Stifel, Nicolaus & Co.
“Strong freight levels in the second quarter have challenged many trucking companies to develop new plans to cope with increased demand for their services,” he added. “Meanwhile, the pool of qualified drivers has fallen short of demand and the effects from last year’s FMCSA [Federal Motor Carrier Safety Administration] changes have created new hurdles to overcome.”
J.B. Hunt noted in its second quarter earnings report how those issues can impact trucking operations. For example, in its DCS division, revenues from new accounts and higher productivity were mostly offset with higher driver recruiting costs, higher purchased transportation costs and increased safety, insurance and workers’ compensation costs.
“Driver wage and recruiting cost increases continue to rise faster than customer rate adjustments can be implemented and will continue to be a challenge to margin improvement,” the carrier indicated.
Still, CarrierDirect’s Clum feels that despite those challenges, the freight “pendulum” in his words is swinging back into favor of carriers.
“Carriers are now in a place where they are choosing the shippers and 3PLs they want to do business with based on factors that go outside just the amount of freight they offer,” he explained. “They are looking more towards profitability and how little stress the customer puts on their operations, people and drivers.”
As economic growth continues to put favor back towards transportation providers, CarrierDirect expects trucking companies to seize the opportunity to invest in new technology and pricing changes.
“We’re standing on the edge of a sweeping reform in technology that will allow carriers to operate more efficiently – particularly in LTL – and price their services according to those they provide,” Clum pointed out. “The shippers and 3PLs that aren’t equipped to do business in that environment or aren’t ‘carrier-friendly’ will face a challenging road ahead.”
Recent analysis of the growth trends in the U.S. 3PL market by Armstrong & Associates echoes CarrierDirect’s sentiments, with Armstrong projecting gross 3PL industry revenue to grow by 5.2% this year compared to 3.2% from 2012 through 2013.
“Net revenues are expected to increase by 4.3% from $64.6 billion in 2013 to $67.4 billion in 2014,” the firm noted. “Domestic Transportation Management (DTM) should increase 7.5% [with] growth continuing to be fed by the expansion of the base of customers using 3PLs.”
Armstrong added that “it is common now” for customers with as little as $3 million in transportation spend to use at least one 3PL. “Similarly 3PL providers are more systems driven rather than just load-by-load transactions. Systems based ‘Enterprise Accounts’ constitute a significant part of the business for all major domestic transportation managers,” the firm noted in its report.
Refrigerated carrier Marten Transport, Ltd., expects to benefit in the second half of 2014 from some of those trends, though its earnings have slipped a bit of late.
Marten noted that its net income inched up to $7.9 million on total trucking and logistics operating revenue of $168.4 million in the second quarter this year, compared to earnings of $7.7 million on revenues of $16.4 million in the same period of 2013.
Yet its first half earnings of $13.2 million on total operating revenues $327.8 million marks a slight decline from the $14.9 million Marten earned on $325.9 million over the first half of 2013.
Altogether, Marten reported that its operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharge revenue, ticked up to 90.5% in the second quarter of 2014 compared with the 89.9% ratio achieved in the second quarter of 2013. That ratio also ticked up to 91.8% for the first half of 2014 compared to 90.2% over the first half of 2013.
“We remain confident that we are well positioned for the remainder of 2014 and beyond with our rate initiatives that will continue through this year’s third quarter, as the operating environment is becoming more favorable with tightening capacity,” stressed Randolph “Randy” Marten, the company’s chairman in CEO, in a statement.
“We are encouraged by our strong June 2014 performance with net income for the month of $3.1 million, and our opportunity for further profitability growth with our diverse service infrastructure,” he added. “We continue to drive gains in our key operating measures as our revenue per tractor increased 4.1% over the second quarter of 2013, our seventeenth consecutive quarterly increase.”