The return of manufacturing into North America, the evolution of e-commerce delivery needs, and a TL industry projected to suffer the “mother of all capacity shortages” by 2017 are trends poised to give a huge boost to the U.S. LTL sector in the coming years – a boost that should significantly fatten LTL profit margins as well.
“It’s really all about putting more volume through the network to gain density, pickup and delivery density, economies of load factor in the LTL business,” noted John Larkin, head of the transportation and logistics equity research group at Wall Street investment firm Stifel, Nicolaus & Co., during a presentation to the Ozburn Hessey Logistics Carrier Affinity Conference back in May.
“You build that network out and then start pumping more volume through it you get a lot of operating leverage,” he explained.
One reason the LTL sector has more “leverage” than TL carriage is that a little over 50% of the LTL market is controlled by five companies: FedEx Freight (16%); YRC Worldwide (14%); Con-way Freight (10%); UPS Freight (7%) and Old Dominion Freight Lines (7%).
“That’s much more concentrated than the truckload industry, where your biggest carrier may have only 2% and depending on how you count it’s maybe as little as 1%,” Larkin pointed out, though he stressed it is important to “keep in mind” mind that the U.S. LTL industry currently is only 12% as large as the truckload industry.
FedEx Freight’s fiscal fourth quarter results, reported back in June, highlight some of those trends in action.
The carrier reports a 5% jump in operating income to $37 million on a 1% uptick in revenue to $1.57 billion during its fiscal fourth quarter, with its operating margin increasing 0.3 points to 8.7% as a result.
FedEx Freight also noted its LTL revenue per shipment improved 2% due to higher rates from ongoing yield initiatives, significantly offset by lower fuel surcharges – even though average LTL daily shipments remained essentially flat during its fiscal fourth quarter.
Old Dominion noted that its daily tonnage increased 9.6% in May and 9.7% in April, leading it to increase its overall tons-per-day growth expectations for the second quarter to between 9.5% and 10% over the second quarter, though it lowered its revenue per hundredweight expectations down to between 5% and 5.5% from its previous projection of between 5.5% and 6.5% largely due to slower U.S., economic growth.
Yet Stifel’s Larkin noted that the U.S. LTL industry now actually has more volume than it’s ever had and he expects that growth to continue.
“We expect the [volume] growth there to continue growing in sort of the 3% to 4% range [and] maybe drop to between 2.5%-3% over the next couple of years,” he said. “And yields are still rising even though 2015 is not as strong of a year for freight as 2014 was.”
In particular, Larkin noted that the 10-year operating income picture especially for LTL carriers such as Old Dominion shows how the LTL sector is profiting handsomely despite the U.S. economy’s sluggish performance since the Great Recession.
“Old Dominion’s [earnings] growth has been almost twice that of its revenue growth and it’s really all about putting more volume through the network to gain density, pickup and delivery density, [and] economies of load factor in the LTL business,” he explained.
On top of that, LTL prices are still increasing even though freight may be flat to downhill a little – which Larkin thinks is a very good thing for the LTL industry.
“There is not a lot of excess capacity and shippers are willing to pay up if they know in a couple of years we’re going to have a capacity shortage when ELDs [electronic logging devices] and speed limiters are mandated,” he noted.
“In the early days after de-regulation, LTL was being bludgeoned from all directions. But [now] the survivors have hit their stride and the future is really quite rosy,” Larkin emphasized. “With all the LTL industry rationalization that we’ve seen over the last 35 years and the coming mother of all truckload capacity shortages, the real question is will there be enough capacity given how little we invest in our highway system, how congested our ports are, and how little incremental freight the railroads are able to digest.”