Executive Briefings

Strong Trucking Performance Expected To Continue in 2006

A healthy economy and tight capacity will continue to support trucking industry earnings in 2006, with the less-than-truckload sector showing particular strength.

While not without challenges, the past two years have been very good ones for the trucking industry and that trend appears set to continue for at least another 12 months. "Overall, we believe that volume levels are pretty good for the industry and should remain that way in 2006," says Bob Costello, vice president and chief economist of American Trucking Associations, Alexandria, Va. Though the first quarter of the year is always soft, he says it should not be "extra weak," as can be the case after a particularly slow holiday season.

The trucking association does anticipate a moderation in general economic growth this year. But with manufacturing output predicted to expand at about the same pace as in 2005, trucking performance is expected to remain solid, Costello says. "Many economic indicators slowed in 2005 compared to 2004, but considering the economy endured an onslaught of hurricanes and extremely high fuel prices, it performed remarkably well. We remain optimistic regarding the U.S. economy and the trucking industry in 2006."

The less-than-truckload (LTL) sector has been particularly strong. LTL volume grew 8.6 percent through the third quarter of 2005 while revenue was up 17.9 percent. Much of the revenue growth was due to the pass-through of fuel price increases in the form of surcharges. Even so, results at many companies are better than they have been in years. The industry's largest player, YRC Worldwide (formerly Yellow Roadway), Overland Park, Kan., reported a third-quarter 2005 operating ratio of 91.8 percent, its best quarterly OR since 1988. (Operating ratio is a widely accepted performance measurement in the trucking industry and is determined by dividing operating revenue into operating expenses.) Earnings per share at YRC were up 42 percent for the same period.

"We continue to see a good economy across the board," said YRC chief executive William Zollars when he reiterated the company's earnings forecast for full 2005.

Some smaller, non-union carriers are enjoying even lower operating ratios. Con-Way Transportation, Ann Arbor, Mich., the trucking division of CNF Corp., achieved an OR of 87.3 percent in the 2005 third quarter, compared with an 89 OR a year earlier. Year-over-year revenue was up 11 percent and operating income increased 34 percent. "The crystal ball that I use still looks pretty good," says David McClimon, president of Con-Way. "We have been able to continue to grow at a pace a little bit faster than our competitors so we know we are taking some market share. We have been able to do that without touching our pricing and that has allowed us to maintain our high levels of service and fast transit times, which is what customers seem to want."

Con-Way's growth spans all of its services, including a substantial truckload operation. Overall, however, growth in the truckload sector has lagged LTL growth, with some companies even contracting a bit. This situation is almost entirely due to growth constraints imposed by a severe driver shortage, which mostly impacts the truckload sector. Indeed, that problem seemed to worsen in 2005 with truckload carriers reporting an annualized turnover rate of 135 percent, despite continuing increases in driver pay. Drivers apparently are job hopping to take advantage of signing bonuses, higher mileage rates, or more amenable LTL jobs.

"I think the LTL carriers are in a little bit better position than TL carriers from a capacity standpoint simply because of driver availability," says McClimon. Drivers prefer working for LTL carriers, he explains, because they are more likely to run a scheduled route, getting home most nights and weekends. "Our business model just makes for a more family oriented job," he says.

Phil Pierce, executive vice president for sales and marketing at Averitt Express, Cookeville, Tenn., agrees that driver availability is the top issue, even for LTL carriers. "Our slogan is 'he who has the driver gets the business,'" Pierce says. "It's that simple." Averitt's core operation is as an LTL hauler in the Southeast and Southwest, with direct lanes to major metropolitan areas throughout the U.S.

Because drivers are such a valuable commodity, every company has to proactively work on driver recruitment and retention. "We know over the next 10 years the need for drivers will not lessen so we have created some our own driving schools as well as apprentice and mentorship programs to develop our own drivers," says McClimon. "This allows our dock workers to learn to drive while they are working and getting paid," he says.

Averitt also has a number of programs aimed at getting and keeping drivers. "The number one thing is to be driver friendly," says Pierce. "We need to give our drivers the best possible environment to live in and work in."

Another trend in LTL is the growth in regional and shorter haul freight. ATA reports that long-haul freight-runs of at least 1,000 miles-was down 3.0 percent through the 2005 third quarter while short-haul-runs of less than 500 miles-was up 2.6 percent. With three regional operational units, Con-Way believes it is well positioned to take advantage of this trend. "Con-Way's focus always has been and continues to be our next-day service markets," says McClimon. "We feel we have a real competitive advantage there. We also believe that when you are regional, you stay closer to the customer. Customer service is not done at a national 800 number, it is done at a regional service center. That makes it easier to get to know what your customer's everyday needs are."

That trend has not been lost on YRC Worldwide, which traditionally has concentrated on long-haul service. In December the company launched a new operating unit called YRC Regional Transportation, which consists of New Penn Motor Express and the four regional units of USF Corp., all recent acquisitions. Together, these companies deliver nationwide service in the next-day, second-day and time-sensitive markets.

Comprehensive Services
Having multiple operational units to provide different types of service is another clear trend among LTL carriers. "If you look at Con-Way, and really the whole CNF organization, you will see that we not only provide LTL service throughout North America, we also have a truckload operation, a brokerage, an airfreight forwarding operation and we provide intermodal service," says McClimon. "In addition, we have really torn down the walls within CNF, so a lot more collaboration occurs with our sister company, Menlo Worldwide, which is one of the finest third-party logistics providers out there. So if you look at what Menlo provides, with its warehousing, transportation management and consulting capabilities and facilities in 22 countries, we can offer our customers service from Taipei to Toledo without having their shipment ever leave the hands of a CNF company."

Similarly, Averitt has built up a wide range of services over the past several years and is now concentrating on "changing the perception that we are still just an LTL company," says Pierce. In addition to LTL, Averitt offers truckload, time-critical and international service as well as providing customized solutions through a supply chain management unit. "The ability to provide all these different services enables you to go to the customer with a comprehensive solution, as opposed to going in and simply pushing a particular mode," he says. "We can operate more as a consultant, listening to their needs and then coming back with customized solutions that help them optimize their network. I know that sounds like a lot of buzz words, but that really is what the customer is looking for-someone who will not just come in and move their freight, but who will tell them how to drive dollars out of their network and get their products on the shelf three days sooner. The challenge that we have is trying to get the customers' perception of our capabilities to catch up with the reality."

Upgrading Fleets
Strong financial performance has given trucking companies a little more cash than usual to spend and much of it is going toward fleet upgrades. "Having a reasonable return allows us to budget capital expenditures, which is nice," says McClimon. "We are able to recapitalize our fleet and reinvest in our facilities."

While Class 8 truck sales are projected to remain strong in 2006, there will be little new capacity added to the industry, says Costello. Rather, companies are reducing the average age of their fleets or buying ahead of new emissions standards that go into effect in 2007.

Technology budgets also seem to be edging up, though with caution still the watchword. "It is easy to become enamored of technology just for technology's sake," says McClimon. "We believe in being very strategic about how we deploy resources." Con-Way's most recent technology deployment was introduction of an online system that notifies customers in advance of any service disruptions or delays. "When you have tight service standards and you promise fast transit times, being able to support that with knowledge in the event there is some kind of delay just further differentiates you from the competition," says McClimon.

One area of technology investment that is getting a big push is fuel and routing optimization, says Ron Lazo, senior director-professional services at Manhattan Associates, an Atlanta-based software company. "Carriers want to make sure that they are optimizing their fuel purchases on any given route," he says. "At the same time, they want to run the most efficient route to minimize miles." Manhattan also is seeing strong interest in driver-to-load optimization, he says, which is a reflection of a carrier's desire to get their drivers home as often as possible.

Some carriers may be looking to spend their extra cash on acquisitions. A lot of consolidation already has occurred in the LTL sector and more is expected. "We think further consolidation is inevitable," says Pierce. "Certainly it makes for larger, more formidable competitors. So we try to figure out ways to be more nimble, more flexible and more responsive. We believe there will continue to be a niche in the marketplace for a company our size."

While not without challenges, the past two years have been very good ones for the trucking industry and that trend appears set to continue for at least another 12 months. "Overall, we believe that volume levels are pretty good for the industry and should remain that way in 2006," says Bob Costello, vice president and chief economist of American Trucking Associations, Alexandria, Va. Though the first quarter of the year is always soft, he says it should not be "extra weak," as can be the case after a particularly slow holiday season.

The trucking association does anticipate a moderation in general economic growth this year. But with manufacturing output predicted to expand at about the same pace as in 2005, trucking performance is expected to remain solid, Costello says. "Many economic indicators slowed in 2005 compared to 2004, but considering the economy endured an onslaught of hurricanes and extremely high fuel prices, it performed remarkably well. We remain optimistic regarding the U.S. economy and the trucking industry in 2006."

The less-than-truckload (LTL) sector has been particularly strong. LTL volume grew 8.6 percent through the third quarter of 2005 while revenue was up 17.9 percent. Much of the revenue growth was due to the pass-through of fuel price increases in the form of surcharges. Even so, results at many companies are better than they have been in years. The industry's largest player, YRC Worldwide (formerly Yellow Roadway), Overland Park, Kan., reported a third-quarter 2005 operating ratio of 91.8 percent, its best quarterly OR since 1988. (Operating ratio is a widely accepted performance measurement in the trucking industry and is determined by dividing operating revenue into operating expenses.) Earnings per share at YRC were up 42 percent for the same period.

"We continue to see a good economy across the board," said YRC chief executive William Zollars when he reiterated the company's earnings forecast for full 2005.

Some smaller, non-union carriers are enjoying even lower operating ratios. Con-Way Transportation, Ann Arbor, Mich., the trucking division of CNF Corp., achieved an OR of 87.3 percent in the 2005 third quarter, compared with an 89 OR a year earlier. Year-over-year revenue was up 11 percent and operating income increased 34 percent. "The crystal ball that I use still looks pretty good," says David McClimon, president of Con-Way. "We have been able to continue to grow at a pace a little bit faster than our competitors so we know we are taking some market share. We have been able to do that without touching our pricing and that has allowed us to maintain our high levels of service and fast transit times, which is what customers seem to want."

Con-Way's growth spans all of its services, including a substantial truckload operation. Overall, however, growth in the truckload sector has lagged LTL growth, with some companies even contracting a bit. This situation is almost entirely due to growth constraints imposed by a severe driver shortage, which mostly impacts the truckload sector. Indeed, that problem seemed to worsen in 2005 with truckload carriers reporting an annualized turnover rate of 135 percent, despite continuing increases in driver pay. Drivers apparently are job hopping to take advantage of signing bonuses, higher mileage rates, or more amenable LTL jobs.

"I think the LTL carriers are in a little bit better position than TL carriers from a capacity standpoint simply because of driver availability," says McClimon. Drivers prefer working for LTL carriers, he explains, because they are more likely to run a scheduled route, getting home most nights and weekends. "Our business model just makes for a more family oriented job," he says.

Phil Pierce, executive vice president for sales and marketing at Averitt Express, Cookeville, Tenn., agrees that driver availability is the top issue, even for LTL carriers. "Our slogan is 'he who has the driver gets the business,'" Pierce says. "It's that simple." Averitt's core operation is as an LTL hauler in the Southeast and Southwest, with direct lanes to major metropolitan areas throughout the U.S.

Because drivers are such a valuable commodity, every company has to proactively work on driver recruitment and retention. "We know over the next 10 years the need for drivers will not lessen so we have created some our own driving schools as well as apprentice and mentorship programs to develop our own drivers," says McClimon. "This allows our dock workers to learn to drive while they are working and getting paid," he says.

Averitt also has a number of programs aimed at getting and keeping drivers. "The number one thing is to be driver friendly," says Pierce. "We need to give our drivers the best possible environment to live in and work in."

Another trend in LTL is the growth in regional and shorter haul freight. ATA reports that long-haul freight-runs of at least 1,000 miles-was down 3.0 percent through the 2005 third quarter while short-haul-runs of less than 500 miles-was up 2.6 percent. With three regional operational units, Con-Way believes it is well positioned to take advantage of this trend. "Con-Way's focus always has been and continues to be our next-day service markets," says McClimon. "We feel we have a real competitive advantage there. We also believe that when you are regional, you stay closer to the customer. Customer service is not done at a national 800 number, it is done at a regional service center. That makes it easier to get to know what your customer's everyday needs are."

That trend has not been lost on YRC Worldwide, which traditionally has concentrated on long-haul service. In December the company launched a new operating unit called YRC Regional Transportation, which consists of New Penn Motor Express and the four regional units of USF Corp., all recent acquisitions. Together, these companies deliver nationwide service in the next-day, second-day and time-sensitive markets.

Comprehensive Services
Having multiple operational units to provide different types of service is another clear trend among LTL carriers. "If you look at Con-Way, and really the whole CNF organization, you will see that we not only provide LTL service throughout North America, we also have a truckload operation, a brokerage, an airfreight forwarding operation and we provide intermodal service," says McClimon. "In addition, we have really torn down the walls within CNF, so a lot more collaboration occurs with our sister company, Menlo Worldwide, which is one of the finest third-party logistics providers out there. So if you look at what Menlo provides, with its warehousing, transportation management and consulting capabilities and facilities in 22 countries, we can offer our customers service from Taipei to Toledo without having their shipment ever leave the hands of a CNF company."

Similarly, Averitt has built up a wide range of services over the past several years and is now concentrating on "changing the perception that we are still just an LTL company," says Pierce. In addition to LTL, Averitt offers truckload, time-critical and international service as well as providing customized solutions through a supply chain management unit. "The ability to provide all these different services enables you to go to the customer with a comprehensive solution, as opposed to going in and simply pushing a particular mode," he says. "We can operate more as a consultant, listening to their needs and then coming back with customized solutions that help them optimize their network. I know that sounds like a lot of buzz words, but that really is what the customer is looking for-someone who will not just come in and move their freight, but who will tell them how to drive dollars out of their network and get their products on the shelf three days sooner. The challenge that we have is trying to get the customers' perception of our capabilities to catch up with the reality."

Upgrading Fleets
Strong financial performance has given trucking companies a little more cash than usual to spend and much of it is going toward fleet upgrades. "Having a reasonable return allows us to budget capital expenditures, which is nice," says McClimon. "We are able to recapitalize our fleet and reinvest in our facilities."

While Class 8 truck sales are projected to remain strong in 2006, there will be little new capacity added to the industry, says Costello. Rather, companies are reducing the average age of their fleets or buying ahead of new emissions standards that go into effect in 2007.

Technology budgets also seem to be edging up, though with caution still the watchword. "It is easy to become enamored of technology just for technology's sake," says McClimon. "We believe in being very strategic about how we deploy resources." Con-Way's most recent technology deployment was introduction of an online system that notifies customers in advance of any service disruptions or delays. "When you have tight service standards and you promise fast transit times, being able to support that with knowledge in the event there is some kind of delay just further differentiates you from the competition," says McClimon.

One area of technology investment that is getting a big push is fuel and routing optimization, says Ron Lazo, senior director-professional services at Manhattan Associates, an Atlanta-based software company. "Carriers want to make sure that they are optimizing their fuel purchases on any given route," he says. "At the same time, they want to run the most efficient route to minimize miles." Manhattan also is seeing strong interest in driver-to-load optimization, he says, which is a reflection of a carrier's desire to get their drivers home as often as possible.

Some carriers may be looking to spend their extra cash on acquisitions. A lot of consolidation already has occurred in the LTL sector and more is expected. "We think further consolidation is inevitable," says Pierce. "Certainly it makes for larger, more formidable competitors. So we try to figure out ways to be more nimble, more flexible and more responsive. We believe there will continue to be a niche in the marketplace for a company our size."