With freight levels decidedly mixed in the early going for 2013, many LTLs aim to rely on cost controls as the main lever for increasing yields and profits.
“While the unsettled economic conditions contributed to declining tonnage trends throughout the fourth quarter of 2012, our LTL operation [Con-way Freight] increased yield and improved operational efficiency,"noted Douglas Stotlar, president and CEO of Con-way Inc., in the company’s year-end earnings report. "Good cost controls and strong productivity helped to mitigate the impact of a generally weak economic environment."
For 2012, Con-way reported net income of $104.5 million on 5.5% higher revenue of $5.58 billion, up from net income of $88.4 million in 2011, despite a drop in tonnage for its LTL operation, which is the company’s largest subsidiary.
In the fourth quarter last year, Con-way Freight’s tonnage per day declined 3.5% compared to the same quarter in 2011, yet revenue per hundredweight, or yield, increased 4.2%, excluding fuel surcharges. The LTL’s 3.6% higher fourth quarter revenue of $824.7 millionlast year “was primarily attributable to improved yield and higher fuel surcharge revenue,” noted Stotlar.
John Larkin, managing director of Wall Street firm Stifel Nicolaus’ transportation and logistics research group, expects the focus on cost control only to grow in the LTL segment as freight volumes remain choppy to date this year.
“Freight is mixed, with some carriers up and some down y/y [year-over-year] through the first six weeks of 2013,” he observed during the company’s fourth annual Transportation & Logistics Conference last week. “On balance, [LTL] freight is flat to a little up y/y and following a typical seasonal trend now after a weak end of December/beginning of January. First quarter tonnage comparisons should be difficult as last year's weather was exceptionally mild across many regions of the country.”
Based on carrier presentations of Stifel’s annual conference, Larkin expects continued pricing “rationality” and no real deceleration in pricing momentum as LTL carriers still need to recover from severe price cuts that took place in 2009-2010.
“While yields for some carriers have returned to 2007-2008 levels, some carriers are struggling with finding the proper freight mix, while others are dealing with 2013 cost levels – i.e. higher labor costs, higher equipment costs, and higher maintenance costs,” he explained. “That has left them well short of historical average margins and margins necessary to continue investing in the business.”
Case in point is Arkansas Best Corp., which lost $7.7 million on $2.1 billion in revenues last year compared to net income of $6.2 million on $1.9 billion in revenues for 2011. The company said generally flat year-over-year revenue, tonnage and pricing at its ABF Freight System LTL subsidiary were further affected by higher costs.
Judy McReynolds, Arkansas Best’s president and CEO, said the full-year loss at ABF resulting in a 2012 operating ratio above 100, following a slightly profitable 2011, was troubling as total revenues remained about even with annual yield improvement offset by lower business levels.
"We are focused on a return to profitability at ABF by substantially lowering our costs in the next labor contract through negotiations that are now underway,” she added. “ABF's management team is hopeful it will reach an agreement with the Teamsters that allows us to preserve good-paying jobs and protect our employees' retirements through a lower cost structure that truly reflects the competitive nature of today's LTL marketplace.”
By contrast, LTL and logistics conglomerate YRC Worldwide posted consolidated operating income of $24.1 million on over $4.85 billion in revenue for 2012 – the first time the company posted positive annual consolidated operating income in 6 years, noted James Welch, YRC’s CEO, in the carrier’s year-end earnings statement.
"Our year-over-year operating improvement is primarily due to our focus on customer mix management, pricing discipline, productivity improvements, and a decrease in safety related costs," he said. “In 2013, we must continue to build on this momentum.”
And that of course will be the real trick, noted Stifel’s Larkin in his LTL analysis. “With YRC having lost half its size as it restructured, supply and demand seem comfortably in balance,” he explained. “Any acceleration in economic activity – particularly re-shoring of less labor-intensive manufacturing and/or tightness in the truckload sector – could strain the nation's LTL system, thereby providing further pricing leverage for carriers.”