America’s Major Truckload Carriers Shift Focus to Dedicated and Intermodal

The fourth quarter 2012 financial results for America’s leading truckload carriers tell a story of an industry going through transformation and change.  The most dramatic poster boy of this change can be seen at the largest carrier in the group, JB Hunt.  Basic point to point truckload carriage has fallen so far that it is almost irrelevant in its overall business results.

In Q4, Hunt generated about $1.33 billion in revenue (including fuel surcharges), but only about $112 million of that came from regular truckload carriage (not including fuel surcharge). That's just about 9% of revenue, down from 12% the previous year. Basic truckload's percentage of total profit at Hunt is even smaller, at just 4%.

But Hunt's strategy of focusing on intermodal and dedicated transportation seems to be working. Its intermodal business, which now accounts for 73% of total profits, saw revenue grow another 12.7% in Q4 and over 14% for the year.

Other carriers in the sector have taken notice.  Werner's trucking revenue declined .1% for the full year while its Value Added Services business, which includes dedicated and intermodal, rose 10%, as it has followed in the footsteps of JB Hunt.   Werner's Specialized Services unit, primarily Dedicated, ended the quarter with 3,295 trucks equal to 46% of its total fleet.

While the major truckload carriers reported growth in these two business sectors, growth in their core business was restrained by several key factors.  Werner reported that “there are several truckload capacity constraints including an older industry truck fleet, the higher cost of new trucks and trailers, significant safety regulatory changes and a challenging driver market.”

In fourth quarter 2012, Werner averaged 7,156 trucks in service and ended the quarter with 7,150 trucks.  In a statement, Werner commented that “from 2007 to 2010, the number of new class 8 trucks built was well below historical replacement levels for our industry. This led to the oldest average industry truck age in 40 years. Carriers were compelled to begin upgrading their aging truck fleets, which led to increased replacement purchases of new and later-model used trucks during 2011. Orders for new class 8 trucks slowed during 2012. We believe these orders slowed as current freight rate relief is not keeping pace with the increased costs and capital requirements for new and much more expensive EPA-compliant trucks."

Swift, another large U.S. truckload carrier, reduced its total tractor capacity by 4.2 percent year/year in the fourth quarter.  It increased its capacity in its dedicated and intermodal divisions by adding 2500 intermodal containers to its fleet last year. Swift saw dedicated and intermodal revenues jump 14.9% and 40.2%, respectively.

Are these trends likely to continue for the rest of the year?  The major railroads are counting on it.  The FMCSA ruling this week will result in the new Hours of Service (HOS) regulations moving forward without the 3 month delay requested by the ATA.  This will likely cost the motor carrier industry 3 to 5 percent in productivity.  Truckload capacity is not increasing as evidenced by the fact that only two of seven truckload carriers tracked increased their fleets during the prior quarter.  Truck drivers are not becoming more plentiful.  If the construction industry continues to gain momentum, this may place more demand on the trucking industry to find trucks and drivers.

Higher operating costs are encouraging trucking companies to focus on shorter lengths of haul, less than 700 miles versus lanes that are over 1000 miles.  Truckers are shifting to intermodal service on the longer lanes.  Another factor that is supporting growth in intermodal volumes is transloading.  This process involves the transfer of the contents of 20 and 40 foot containers at ports into 53 foot intermodal containers. 

Dedicated transportation is also attractive since it allows carriers to secure consistent, contractual revenue streams.  Truckers can invest in new equipment knowing they have a secure revenue flow to pay for their equipment.  If the economy continues its slow pace of growth, look for large and mid-size truckers to focus on these faster growth sectors.