In the first seven months of this year, we have witnessed two of the largest acquisitions in the LTL trucking sector in many years. In January we observed the acquisition of UPS’s LTL division by TFII, the large Canada-based transportation conglomerate. Last week the nation’s largest TL carrier, Knight-Swift Transportation (NYSE: KNX,) acquired AAA Cooper Transportation in a $1.35 billion deal. AAA Cooper runs a regional network of 70 facilities and 3,400 doors spanning from El Paso, Texas, to the Southern East Coast, along with multiple locations in the Midwest. Knight-Swift purchased a company with a fleet of 3,000 tractors and 7,000 trailers for less than 10x EBITDA.

At $43 billion in revenue, the US LTL sector is approximately one tenth the size of the truckload industry. For many years this was a highly competitive low margin business. What is driving these large M & A activities in the LTL sector by predominantly truckload carriers?

Continued Strength in Manufacturing

Manufacturing and industrial activity, which can account for up to 85% of LTL tonnage for some carriers, has been strong during the pandemic. The Manufacturing PMI (Purchasing Manager’s Index) was 60.7% in June. The overall US economy has expanded for eleven consecutive months.

The new year has started with a bang with TFII's planned purchase of the LTL Freight division of UPS.  TFII is a large Canadian freight transportation conglomerate and it's deal is unique in some ways but not in others.

The challenge for many Canadian LTL carriers has been to establish a solid arrangement with a profitable, reliable US LTL partner so they can jointly secure lucrative cross-border freight. Since the United States population is ten times the size of Canada’s, historically it has been financially difficult for a Canadian LTL carrier to purchase a major US LTL partner. Besides the cost, an acquisition of this nature only makes sense if the Canadian carrier is prepared to compete in the U.S. domestic LTL market.

As a result, most Canadian LTL carriers that have been interested in cross-border LTL freight, have formed partnerships with or more U.S. carriers. These partnerships typically last for a few years until one of the following things happen. The U.S. carrier decides to buy a Canadian carrier or cartage company in one or more Canadian cities and enter the market under their own banner. Alternatively, the one partner becomes frustrated with the other partner due to a lack of sales production. The carriers then must seek other partners or another group of partners as replacements. This partnership arrangement has been prevalent for decades.

A Brief History of Canadian Purchases of U.S. LTL Carriers

On July 1, 2020 the U.S. Department of the Treasury announced that it was providing YRC Worldwide with a two-tranche loan that would allow it to make delinquent health and welfare and pension payments as well as fund capital expenditures for its tractors and trailers. As part of the deal, YRC is required to issue the Treasury Department shares of common stock, which YRC expects will equate to a 29.6% equity stake in the company.

The press release stated that “YRC is a leading provider of critical military transportation and other hauling services to the U.S. government and provides 68% of less-than-truckload services to the Department of Defense. This loan will enable YRC to maintain approximately 30,000 trucking jobs and continue to support essential military supply chain operations and the transport of industrial, commercial, and retail goods to more than 200,000 corporate customers across North America.”

It is noteworthy that this is the first time the U.S government has taken a large stake in a company seeking a bailout in the wake of the coronavirus pandemic. It is also the first loan announced from the $17 billion relief fund created by U.S. lawmakers to help "businesses critical to maintaining national security."

To make sense of this bailout, it is worth taking a trip back in history. In the early 2000s there were three large unionized LTL carriers, Consolidated Freightways, Roadway Corporation and Yellow Freight System. Back in 2002, Consolidated Freightways Corp., America's third-largest trucker laid off about 15,500 workers, shut down its operations and filed for bankruptcy.

The following is my annual report on the state of the LTL Freight Industry in the United States and Canada.

The Booming Freight Market of 2018

Strong economic growth and high employment in the United States and Canada, coupled with concerns over US tariffs and trade wars, and high truck utilization rates, propelled freight demand and freight rate pricing skyward. Contract and spot LTL rates rose to record levels. These powerful forces helped make 2018 an outstanding year for many, but not all LTL truckers.

How Big is the LTL Market?

The following is my annual report on the state of the LTL Freight Industry in the United States and Canada. Here are links to the top 100 carriers in Canada (https://www.todaystrucking.com/top-100-ranking-canadas-largest-hire-fleets/ ) and the top 25 LTL carriers in the United States (https://www.logisticsmgmt.com/article/the_top_25_trucking_and_less_than_truckload_ltl_companies_in_2017 ). The combined revenue of the 25 largest U.S. LTL trucking companies remained unchanged at $31.8 billion in 2015 and 2016, according to The Journal of Commerce’s 2016 ranking of the Top 25 LTL Carriers, prepared by SJ Consulting Group. In 2017 annual revenues grew by 7.8% to $34.5 billion.

The Booming Freight Market of 2017 - 2018

Freight volumes are strong as we approach mid-year. Carriers, hampered by a lack of drivers and faced with new time constraints due to mandatory electronic logging devices (ELDs) in the United States, are increasingly being selective in picking the best-yielding freight for their freight lines. LTL carriers are picking up volume from the tightening TL market. Some large TL carriers started rejecting lighter loads of 5,000 pounds to 10,000 pounds earlier this year, and that freight is now moving via LTL carriers. The net result is LTL freight base rates are soaring with some experts projecting increases of 4 to 5 percent or more. In addition, LTL carriers are doing a better job quoting accurate dimensional pricing and accessorial charges which also places upward pressure on rates. This environment will likely continue for the remainder of this year.

The LTL Industry remains a Non-Union “Big Boys” Game