LTL carriers seen as main casualties of slowing industrial, shipping demand

Segments of the U.S. transportation industry have been swimming upstream for most of 2015, and events over the past five days don't give any indication that the water levels are receding.

After the financial markets closed Monday, Roadrunner Transportation Systems Inc., a Cudahy, Wis.-based asset-light—think control of assets but not ownership— provider of less-than-truckload (LTL), truckload, and intermodal services, shocked everyone by posting third-quarter revenue and income results well below analysts' estimates. Traders and investors responded Tuesday by cutting the company's market capitalization almost in half, sending shares down nearly $9 a share over Monday's closing levels. Prices rose fractionally on Wednesday.

Today, Saia Inc., the Johns Creek, Ga.-based LTL and truckload carrier, a highly regarded player, posted third-quarter results that pleased no one. Revenues year-over-year dropped 4.6 percent, operating income was down 27 percent, shipments and tonnage fell 4.2 and 7.6 percent, respectively, and operating ratio—a ratio of revenues to expenses and a key measure of a business' ability to operate profitably—rose nearly 2 percentage points, to 93.7. That's not the direction Saia wants it to go. But an increase in driver wages—a reality for all trucking companies in an environment where qualified drivers are at a premium—took costs up, which, in turn, raised the operating ratio. On a per-ton basis, labor costs rose 15.8 percent in the quarter, to $157 a ton, according to a report from BB&T Capital Markets, an investment firm. Saia shares closed Wednesday at $23.86, down $6.29 a share.

Last Friday, Swift Transportation Co., the largest truckload carrier by sales, reported a 1-percent third-quarter decline in year-over-year operating revenue, a drop it blamed on the impact of declining fuel surcharges. Phoenix-based Swift, whose truck count in the third quarter rose by 831 trucks over 2014 levels, said it will end up adding 500 to 600 trucks by the end of 2015, down from its initial projections of 700 to 1,100 trucks. This means no more new equipment for the foreseeable future, and possibly reductions in rigs, Swift CEO Jerry Moyes told analysts. Swift's shares have been priced within a narrow range this week.

The biggest carrier of them all, UPS Inc., on Tuesday reported a decline in its core U.S. ground package volume in the third quarter, its first year-over-year drop in the category since the first quarter of 2011. Atlanta-based UPS attributed the decline to "slow industrial production" activity that hit business-to-business shipping activity. Business-to-consumer traffic, propelled by burgeoning e-commerce demand, rose from the same period a year ago. Otherwise, the company posted decent quarterly results. As of midday Wednesday, UPS stock had dropped nearly 5 percent from its close on Monday.

While each company had its unique story to tell, the common thread was that transport companies are being impacted by a U.S. economy that has shifted into lower gear as the year has progressed. For carriers with LTL exposure, September was not a good month, and October, from anecdotal evidence, hasn't been much better. Roadrunner's third-quarter volumes, which historically start slow and finish strong, started slow but never got going. Its truckload traffic, heavily weighted toward refrigerated food items, was hurt by lower poultry, beef, and produce demand. LTL, which accounts for about 25 to 30 percent of the company's mix, was hit by a weak manufacturing climate and what management said was "aggressive pricing," language that seemed surprising—and which no one else is seeing, given the LTL industry's four-year track record of disciplined pricing measures following by a bout of disastrous rate-cutting during and after the Great Recession. Roadrunner also said its intermodal volumes were affected by lower-than-expected activity at the West Coast ports, and noncontractual pricing was pressured by excess truck capacity. The company said it expects no rebound in the current quarter.

At Saia, the story was somewhat better, but not by much. President and CEO Rick O'Dell called the results "disappointing" and blamed "declining tonnage trends" that made it hard to offset the impact of higher driver wages. The company said it also incurred higher costs relating to self-insurance claims. The one bright spot was a 2.2-percent increase in revenue per hundredweight, the revenue a carrier generates for each 100 pounds of freight hauled and a key metric of the success of its pricing strategy. Saia posted the gain despite the headwind of lower fuel surcharges, which depress carrier revenues.

For Saia, "the real test will be in the coming quarters if industry yields can weather further weakness in freight," said David G. Ross, analyst at investment firm Stifel, in a note today. Although 2016 should be a better year for Saia, the company is currently "running up a down escalator" given reduced volume levels, Ross said. For truck users, the saving grace is that the always-imminent capacity crunch has been put off yet again. Truck space is readily available in most markets, and there is little upward movement in spot and contract rates. But that may be for the wrong reason. "The (U.S.) economy is much weaker than most people realize," Michael P. Regan, founder of TranzAct Technologies Inc., a consultancy and audit firm based in Elmhurst, Ill., said today at the "Value Creation 2015" conference in Chicago sponsored by consultancy Armstrong and Associates Inc. Regan said he was told by a major client, whom he described as a Fortune 50 company, that it expects a recession in the U.S. to start sometime in 2016.

Ross, in a separate note today, said an industrial recession in the U.S. may have already begun, a broad trend which will hurt railroads and LTL carriers, the latter having benefited from truckload-carrier overflow that has evaporated. By contrast, Ross noted that the consumer seems to be in good shape. Jobs and wages are growing, and lower gasoline prices should add to consumers' discretionary spending.

There is near-term hope for the LTL industry, according to YRC Freight, the long-haul LTL unit of YRC Worldwide Inc. In a note on its website, the carrier noted—as many others have—that many U.S. businesses are sitting on excess inventory, the result of overly optimistic projections of consumer demand and the lingering impact of the West Coast port slowdown earlier in the year, when delayed shipments arrived at stores after the spring and early summer seasons, leaving retailers with overstocks that no one wanted.

In this environment, businesses will be vigilant in managing their inventories, and will order in smaller quantities but do so more frequently, according to YRC Freight. This type of behavior, if it materializes, will be tailored to the capabilities of LTL carriers, YRC said.