Softening freight demand and rising diesel fuel prices alongside the still-uncertain impact of hours of service (HOS) changes are clouding the trucking industry’s prospects for the second half of 2013 to a degree. Yet tighter capacity is helping both the TL and LTL segments maintain positive pricing momentum as well, according to several reports.
Wall Street investment firm Robert W. Baird & Co. noted in a recent report that TL pricing remained positive at growth of roughly 1% to 1.5% year-over-year in the second quarter, though that was lower than expectations of 1.5% to 2% year-over-year growth, partially due to softer freight demand in June.
By contrast, LTL demand trends improved throughout the second quarter, according to Baird’s data, leading to more “solid” pricing growth, with carriers such as Saia reporting a 3% improvement in pricing year-over-year overall with contract pricing gains in the 3% to 4% range.
“LTL pricing remained solid; and we continue to expect LTL pricing to trend in-line/better than TL pricing given both the need to restore LTL industry margins from depressed levels and ongoing industry pricing discipline,” Baird noted.
A report from fellow Wall Street firm Stifel Nicolaus stressed, however, that while the LTL industry has “come off the bottom,” it is still is not hauling as much freight as it was four to six years ago.
“Late 2011 to early 2012 may have marked a ‘new-normal’ peak for industry tonnage,” Stifel's analysts noted. “In our opinion, we need an external catalyst to reach prior peak levels once again.”
Such a catalyst could come from a significant housing recovery, or the materialization of a capacity crunch in the TL sector due to a confluence of driver demographic issues, FMSCA regulatory efforts, credit scarcity, and rising equipment costs, to name a few, according to the firm’s analysis.
“While we believe the latter situation is likely, the timing and magnitude may not be enough to drive overflow freight into the LTL world, at least in the near term,” Stifel said.
Douglas Stotlar, president and CEO of transportation conglomerate Con-way, alluded to some of those LTL and TL market conditions in the company’s second quarter earnings report released this week.
"Con-way Freight, our LTL company and largest business unit, is executing well against its key strategic initiatives of lane-based pricing and line-haul optimization, [with] Improved yield and network efficiencies overcoming a slight decline in tonnage to deliver increased operating income in the quarter,” he said. “We are on track with our initiatives and continue to expect year-over-year margin improvement in the second half of the year.”
Meanwhile, Con-way Truckload – the company’s TL division – reported a decline in operating income on flat revenues for the quarter.
“Increased rate per loaded mile was offset by lower productivity per tractor and a decline in total miles,” Stotlar noted. “The quarter's results also were affected by higher vehicular claims and the impact of emissions-systems maintenance, some of which we expect to moderate as the year progresses. [And] despite an inconsistent demand environment, Con-way Truckload has been successful in securing modest rate increases.”
In total, Con-way reported net income of $42.9 million and operating income of $76.3 million on revenues of $1.38 billion in the second quarter this year, compared to net income of $41.8 million and operating income of $80.1 million on revenues of $1.45 billion during the same quarter in 2012.
Baird also noted that while July is typically the weakest freight month of third quarter, a “seasonal build” in September/October could provide a catalyst to reaccelerating rate growth expectations in 2014.
Yet two major wild cards can still potentially affect trucking’s fortunes: the impact from HOS changes and the upward trend in diesel fuel prices.
“It is still too early to gauge HOS impact,” Baird noted. “Domestic truckers unanimously remarked that it was too early to discern the impact the HOS regulations, implemented July 1, had on industry productivity; [rules that could] negatively impact fleet productivity by 1% to 4% depending on fleet mix.”
The firm added that diesel fuel prices continue to rally after reaching lowest point since July 2012, rising for three consecutive weeks to $3.90/gallon after hitting $3.82/gallon in early July. “This rise in diesel prices comes in conjunction with a recent rise in the price of WTI [West Texas Intermediate] crude oil, which began July near $97/barrel, rose above $108/barrel by mid-month, but recently moderated to roughly $104/barrel,” Baird added.
Jonathan Kletzel, U.S. transportation and logistics leader for consulting firm PricewaterhouseCoopers, told Fleet Owner that more muted merger and acquisition (M&A) activity in trucking could be one potential side effect from those industry conditions.
“Many executives are likely to ‘wait and see’ and only re-enter the market if the economy accelerates significantly,” he explained.
“Trucking deals, in aggregate, have the strongest relationship with economic performance of all the transportation modes,” Kletzel added. “One reason is that there are relatively low regulatory barriers to M&A among trucking companies in comparison to airline and rail industries. So, while trucking is much more fragmented than these other modes, there tends to be more flexibility in terms of when acquirers enter the deal market.”