Trucking Companies Throttle Back Expansion Plans

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The Wall Street Journal / January 28, 2016

With uneven demand squeezing profits, truckers are focusing on efficiency and conserving cash rather than bulking up fleets

Large U.S. trucking companies are ratcheting back expansion plans after declining freight volumes cut into fourth-quarter profits.

The lower earnings reported by half a dozen carriers this week confirmed that companies were weighed down late last year by uneven retail sales, high inventory levels and a manufacturing slowdown. Based on their 2016 guidance, they expect more of the same over the next few months.

Trucking companies say they’re preparing for a prolonged downturn by reducing investments in their fleets. Their goal is to avoid creating a glut of trucking capacity, which would give shippers more power to negotiate lower prices for moving their goods, further squeezing carriers’ profits.

That is a dramatic shift from even a few months ago, when many carriers were set on bulking up, and swapping out older vehicles for new, more fuel-efficient models. But with freight volumes and pricing falling, trucking companies need to conserve cash.

“The large carriers…one thing we see in common is that fleet additions in that group have ended, and the outlook is basically to be flat,” said David Jackson, chief executive at Knight Transportation Inc., in a conference call with analysts after releasing earnings Wednesday. “Even the best operators have gone backwards a little bit. And I would add us to that group.”

Knight reported a 11% drop in net income from trucking last quarter, though earnings of $0.36 a share were above most forecasts. The company said it would stop expanding its fleet, and cut its 2016 earnings guidance.

Also Wednesday, Celadon Group Inc. reported a 22% drop in fourth-quarter net profit from a year earlier. Heartland Express Inc. said Tuesday net profit fell 21% over the same period. Swift Transportation Co. , which halted fleet expansion last fall, earlier than many of its competitors, said profits rose slightly in the fourth quarter.

Many Wall Street analysts had anticipated larger profit declines, and trucking shares rallied on hopes that the industry’s biggest players will be able to weather a downturn without being forced to sell off assets or take other drastic steps. That contrasts with freight railroads, which have slashed thousands of jobs after profits were hit by a steep drop in coal and oil shipments.

Industry figures show businesses started dialing back fleet expansion last fall as retailers reported they were overstocked and the freight market weakened. In December, trucking companies ordered 27,800 big rigs, down 37% from a year earlier, though up from November, according to research group FTR. Truck orders had surged in late 2014 and early 2015.

The trucking companies said they have focused on making their operations more efficient.

Knight’s operating ratio for its trucking business—the percentage of trucking revenue needed to cover expenses—rose to 80.7% in the fourth quarter, from 77.5% a year ago, as the company’s trucks drove fewer miles. At Celadon, each truck drove an average 1,704 miles a week in the fourth quarter, down from 1,971 miles a year earlier. However, revenue per mile rose to $1.917, from $1.798.

“Most of these [trucking] companies are in a decent position,” said Jason Seidl, a transportation analyst with Cowen & Co. “Most larger companies have extremely young fleets and decent balance sheets.”

On Thursday, shares in Knight shares were down 4% and Celadon’s stock was off 1%. Swift shares are up 22% in the past week after the company said it could buy back stock. Shares in Covenant Transportation Group Inc., a trucker with many fast-growing e-commerce customers, are up 15% over the same period, despite reporting a slight decline in fourth-quarter profits.