The Truckload Freight Industry in North America in 2017

The truckload sector of the freight industry is different from the LTL and small parcel segments in one important respect. Unlike the other two segments, anyone who can buy or finance the purchase of a tractor-trailer unit and drive the rig, can enter the industry. Freed from the requirement to build cross-dock facilities and/or buy sorting machines, the barriers to entry are low and there are thousands of truckload carriers throughout North America. Nevertheless, the industry has had its challenges over the last couple of years.

Revenues Dropped in 2015 and 2016

Here are links to the top 100 carriers in the United States (http://resources.inboundlogistics.com/digital/trucking_top100_chart_0916.pdf ) and Canada (http://www.todaystrucking.com/top100 ). The top 50 truckload carriers in the United States are listed in the March 20, 2017 issue of the Journal of Commerce. Altogether, the combined revenue of the Top 25 Truckload Carriers dropped 1 percent last year, to $26.9 billion, after falling 2.3 percent, to $27.1 billion, in 2015.

Swift Transportation, Schneider National, J.B. Hunt Transportation Services, Landstar System and Crete are the five largest US based carriers; TFI (formerly TransForce International), Mullen Group, TransX, Trimac Group and Bison Transport are Canada’s largest truckload carriers. It should be noted that TFI now derives roughly 50% of its revenues from the United States.

Revenue declined last year at 15 of the companies on The Journal of Commerce’s Top 25 US Truckload Carriers rankings, according to SJ Consulting Group, which prepared the data. That’s an improvement compared to 2015, when revenue fell at 19 companies. As an indicator of the weakness in pricing last year, the Cass Truckload Linehaul Index, a measure of truckload pricing excluding fuel surcharges, turned negative in March 2016 and declined for 11 straight months.

One of the bright spots for the industry has been the growth in dedicated trucking. This has become a large segment of the business for many fleets. As an example, dedicated trucking accounted for 23 percent of J.B. Hunt revenue in the fourth quarter, but 30 percent of the company’s operating profit.

In October of 2016, TFI. expanded its reach in the United States as Canada’s largest trucking firm acquired the North American truckload (former Con-way) operations of XPO Logistics for $558-million (U.S.) in cash. Swift Transportation Co. and Knight Transportation Inc. announced on April 10 that they will merge via a stock swap to form a new company, Knight-Swift Transportation; The deal will combine two of the largest players in trucking in a business valued at over US $5 billion. The merger was announced shortly after completion of the Schneider IPO. These three developments will make for some very interesting competition in this industry.

Here are a few thoughts on some of the major segments of the truckload industry. Last week Mark Montague, Senior Industry Analyst, DAT Solutions provided his overview of the three major segments of the truckload sector during a Stifel conference call last week. Some of the analysis below comes from his presentation.

Dry Van Truckload

Dry van truckload contracted rates have been flat in the $1.70 US per mile range for over the past 15 months; spot rates dropped from $1.50 mile in January 2016 and now appear to be moving up from the $1.40 mark. There appear to be more active markets (i.e. South, Pacific Northwest, Northeast) in the United States than there were a year ago. The loads to truck ratio has gone from a low of 1.4 in February 2016 to 3.1 in March 2017., a positive sign.

Refrigerated Truckload

Mr. Montague pointed out in his presentation that the refrigerated segment had a particularly difficult year, due in large part to the drought in California. The rate per mile on reefer freight has dropped from over $1.90 US per mile on contract freight in January 2016 and is just beginning to return to that level. Spot rates dropped from about $1.75 per mile into the low $1.60s which is where they remain today. The load to truck ratio has gone from 3.1 in February 2016 to 6.1 in March 2017. The end of the California drought boosts length of haul and results in tighter capacity, good signs for a more positive pricing environment for the remainder of the year.

Flatbed Truckload

Contract flatbed rates were in the low $2.10 US rate per mile range in January 2015 and then tapered off in 2015 and 2016. This coincided with the decline in the fracking boom. Spot flatbed rates were in the $1.85 US range in January 2015. After two years of decline, they were moving up strongly early this year.

Consolidation is also taking place in this sector. Formed just nine years ago, Daseke, Inc. has grown through the acquisition of nine companies, and accelerated organic growth, to become the second largest operator in the U.S. market for flatbed/open deck/specialized transportation. Daseke expects future growth will be driven by additional acquisitions and the acceleration of organic growth within each of the operating units, through cost savings largely resulting from centralized purchasing, the plentiful availability of growth capital, customer cross selling, and the availability of a common operating platform.

The big wild card for this segment of the freight industry, in the United States, is the prospect of a $1 trillion US infrastructure investment. This would spur truckload movements of lumber, steel, pipe, and other related commodities. Even a smaller investment coupled with a stable or growing energy sector, would stimulate growth in the flatbed market.

In Canada, two major unknowns are the Toronto housing situation and the home construction industry. Toronto and much of southwestern Ontario are experiencing what is being called a “housing bubble.” Home prices in the Toronto area have increased 30% year/year. If there is any type of market correction, this would certainly impact Canada’s flatbed industry but could also have more far-reaching effects on the Canadian economy and total freight volumes.

Canadian Truckload Market

While equivalent data is not publicly available in Canada to the carrier revenue data captured in the SJ Consulting report, 2016 was not a robust year for Canadian truckload carriers. Low oil prices suppressed freight volumes in some western provinces while a weak Canadian dollar did not ignite exports from the major manufacturing provinces, Ontario, and Quebec. In terms of freight rates, the Nulogx Canadian General Freight Index displayed a similar pattern to what took place in the United States.

In terms of M & A activity, “there’s a lot of activity right now, and I’d say there’s more sellers than there are buyers right now,” says Mark Seymour, president and Chief Executive Officer of Ontario-based Kriska Transportation in a recent issue of Today’s Trucking, referring to smaller companies that want to sell before dealing with challenges like a pending U.S. mandate for Electronic Logging Devices, tougher training standards for entry-level drivers, and rising insurance costs.

“I believe the outlook for the economy and the oil and gas industry has changed for the better,” Mullen Group (Canada’s second largest truckload carrier) CEO Murray K. Mullen recently said in a recent call with analysts. We are well positioned to pursue acquisitions and recapture market share from competitors that have mispriced their services and are over-leveraged. The timing of the recovery or acquisitions is somewhat elusive, but I have a high degree of confidence that 2017 will be the beginning of growth for our organization once again.”

The Road Ahead

In the United States, low unemployment coupled with high consumer confidence, bode well for the balance of the year. Consumer purchases are a key ingredient of the economy. Sustained consumer confidence would support a range of purchases and would be very positive for the truckload industry.

Despite the many missteps of the new administration, a significant infrastructure initiative would certainly spur growth in the flatbed sector and the rest of the economy. The question would be how many shovel-ready projects would be ready for implementation in 2017? Rising diesel fuel prices would also be helpful to the energy sector and to the trucking industry. The positive relationships that president Trump appears to have established with the heads of Japan, China and the European Union are also positive for import/export volumes.

The major areas of concern at this point are a lack of a coherent and consistent economic vision for the future from the new administration, the recent bombings (by the US) in the Middle East, the war of words with North Korea and Russia and the upcoming elections in France and Germany. Negative results in one or more of these activities could destabilize the economy of the United States.

In Canada, there is some uncertainty about prospects in the truckload sector. President Trump and speaker Ryan have talked about a border tax and changing existing trade policies. President Trump and Commerce Secretary Mills have made various, sometimes conflicting statements, about NAFTA. These concerns have manifested themselves as an impediment to Canadian business investment, which has already been a weak point in Canada’s economic recovery. Bank of Canada Governor Stephen Poloz recently stated that the US trade outcome, “will certainly be negative” for the Canadian economy, “and could even be a major shock . . . I would say protectionism is absolutely the No. 1 threat.” Changes to trade policies would likely have adverse consequences for trucking fleets involved in cross-border (Canada/US traffic).

To sum up, the truckload sector interfaces with almost all sectors of the economy. While there are some hopeful signs for a solid 2017, there are some worrisome issues that could adversely affect the economies and truckload business in both countries.

To stay up to date on Best Practices in Freight Management, follow me on Twitter @DanGoodwill, join the Freight Management Best Practices group on LinkedIn and subscribe to Dan’s Transportation Newspaper (http://paper.li/DanGoodwill/1342211466).