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Lifting the veil of value in truckload

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Lifting the veil of value in truckload Powered By Docstoc
					                      Latest report in a multi-issue series covering
                      value creation in transportation and logistics




Lifting
the veil
of value
in truckload
 The building blocks of successful truckload
 operations are opaque to many people.
 It doesn’t need to be that way.

         BY MERGEGLOBAL VALUE CREATION INITIATIVE
                                                                                                                                    Value Creation in Truckload
Get advanced copies of MergeGlobal reports by visiting www.americanshipper.com/TF2008




                                                                                                                                  of 2008 (we estimate that truckload ca-




T
              he first half of 2008 was a tough time for the U.S.
                                                                                                                                  pacity utilization bottomed during the
              truckload industry.                                                                                                 second and third quarters of 2007). This
                                                                                                                                  inevitably resulted in depressed net rates
                    On the demand side, the period of Jan. 1 through                                                              (which exclude fuel surcharges). Capacity
                                                                                                                                  utilization for the U.S. truckload industry
June 30 saw the lowest year-on-year growth (in real terms) in                                                                     hovered around 76 percent during the first
                                                                                                                                  half of 2008, according to our research,
personal consumption — which accounts for about 70 percent                                                                        down from about 86 percent at the peak of
                                                                                                                                  the cycle in mid-2005. Similarly, dry van
of the nation’s gross domestic product (GDP) — since the same                                                                     net rates averaged $1.44 per mile during
                                                                                                                                  the period, according to Truckloadrate.
period in 1991. Although truck tonnage, a widely monitored                                                                        com, down from $1.47 a year earlier.
                                                                                                                                     As if this wasn’t enough, the first half
industry demand indicator reported by the American Trucking                                                                       of 2008 also saw the highest year-on-year
                                                                                                                                  increase in first-half nationwide diesel
Associations (ATA), was up 3.4 percent                regulations at the start of 2007. Indeed,                                   prices on record (the Energy Information
year-on-year, the underlying demand fun-              2006 sales of Class 8 tractors, the backbone                                Administration provides full-year histori-
damentals were weak and the index itself              of truckload operations, marked an all-time                                 cal data back to 1995), an astonishing 48
benefited from easy comparisons relative              record and were up 12 percent from a very                                   percent. Higher diesel prices intensified
to a very soft first half of 2007.                    strong 2005.                                                                modal shift risk for the industry vis-à-vis
   On the supply side, the industry was                  The combination of soft demand and                                       rail intermodal, particularly for (although
still feeling the effects of aggressive fleet         plentiful supply contributed to keeping                                     by no means limited to) loads traveling
additions carried out in 2006, in advance             industry-wide capacity utilization from                                     800 miles or more. Developments in fuel
of the introduction of new engine emission            recovering faster during the first half                                     prices also put serious pressure on carriers’
                                                                                                                                  costs, due to sudden upward swings in the
  Figure 1                                                                                                                        price per gallon of diesel that prevented
                                                                                                                                  carrier fuel surcharge adjustments from
  U.S. surface transportation                                                                                                     “catching up” with energy trends. The
  revenue by segment: 20071                                                                                                       average week-to-week growth in diesel
  Billions of US$                                                                                                                 prices was 1.3 percent during the first
                                  Total Market: $603 billion                                                                      half, compared to a normal average in
                                                                                                                                  recent history of about 0.5 percent for the
                                      $508                                     $15 $43                          $36               same period.
                                                                                                      9%       6% Local              Not surprisingly, truckload profitability
                                                                                                     Local
                                                                                                                                  deteriorated substantially for the first six
                                                                                49% Domestic




                       40% Non-tractor private fleet                                                                              months of the year almost across the board.
                                                                                                                                  Particularly hit were smaller carriers and
                                                                                                                                  owner-operators, who lack the marketing,
                                                                                                     63%                          IT and bulk-buying resources of most
                                                                                                                 94% Inter-city




                                                                                                    Regional
                         19% Tractor private fleet
                                                                                51% International




                          11% Non-tractor for hire                                                                                  The MergeGlobal Value Creation
                           3% Dedicated for-hire tractor                                                                            Initiative comprises Brian Clancy,
                                                                                                     28%                            David Hoppin, John Moses and
                         27% OTR for-hire tractor                                                    Long                           Jim Westphal, who are managing
                                                                                                     haul                           directors of MergeGlobal, a specialist
                                                                                                                                    firm that provides clients in the global
                                   Truckload                          Intermodal 2                    LTL      Ground
                                                                                                               package              travel, transport and logistics indus-
   1
                                                                                                                                    tries with services ranging from finan-
     Revenue includes fuel and other surcharges. Width of boxes represents vertical
   share of industry revenue. Height of boxes and percentage values represent segment                                               cial advisory to strategic consulting.
   share of revenue within each vertical. Excludes bulk rail transportation.                                                        This is the latest in a series of reports
   2
     Includes drayage.                                                                                                              in which MergeGlobal will team with
                                                                                                                                    American Shipper for multi-issue
Source: 2002 Vehicle Inventory and Use Survey, Securities and Exchange Commission filings,                                          coverage throughout 2008.
MergeGlobal estimates.
                                                                                                                                  AMERICAN SHIPPER:      NOVEMBER     2008 57
Value Creation in Truckload
large fleets. Truck bankruptcies for the
period reached 1,905 among fleets of at            Figure 2
least five tractors, more than double the          Dry van market segmentation1
corresponding number in 2007. And that
doesn’t even include nominal owner-op-             U.S. Class 8 tractor/trailer trucking loads above 125 miles: 2007
                                                   Millions of loads
erators (essentially one-truck fleets), who
represent the most vulnerable and thus                  Total loads          213
most cyclical portion of the industry.
   That’s not to say, however, that large                                  Flatbed 84
fleets were unscathed by the challenging
environment. The combined operating                                        Reefer 66
ratio inclusive of fuel surcharge (defined                                 Tank 34
as operating expenses as a percentage of                                   Other 29            123
                                                                                                                                Dry van loads
operating revenue) of Celadon, Covenant,                   484            Loads using                                              to/from
J.B. Hunt Truckload, and Werner was 97.9                                equipment other                                          59 primary
percent for the six-month period ended                                   than dry van 2                            31             markets 3
June 30, up from 95.3 percent for the same                                                                                           117
                                                                                           Intra-market
period in 2007.                                                                           dry van loads 3     Dry van loads
   Yet, in this tough environment of truck                                                                    between non-
                                                                                                            primary markets 3
failures and near-100 percent operating
ratios (ORs) there were two companies               1
                                                      Dry van includes Basic Van, Drop Frame Van, Insulated Non-refrigerated Van, Bever-
that stood out and achieved OR levels               age, and Curtainside.
below 90 percent: Heartland Express and             2
                                                      Flatbed includes Flatbed, Low boy, Pole & Logging and Automobile Carrier; Tank
Knight Transportation. This is nothing              includes Dry Tank and Liquid Tank; Other includes Dump, Livestock, Open top, and
new. Heartland’s OR for 2006 and 2007               Other.
                                                    3
was 78.4 percent and 81.3 percent, respec-            Markets are defined based on the 114 zones and 17 gateways included in the Freight
                                                    Analysis Framework of the U.S. Department of Transportation. From these zones and
tively, compared to 93.4 percent and 96.4           gateways we have aggregated metropolitan areas (e.g., New York, Chicago) into 59
percent which the four large companies              primary markets; 60 other (i.e., non-primary) markets are remainders in each state
mentioned above averaged for the same               and some gateways.
years. Knight’s corresponding OR num-
bers were 82.0 percent and 85.6 percent.         Source: U.S. Department of Transportation Freight Analysis Framework, 2002 Vehicle
   Why are Heartland and Knight sig-             Inventory and Use Survey, FTR Associates, MergeGlobal analysis and estimates.
nificantly more profitable than their               On the other end are articles and com-         (mostly publicly traded companies).
peers, both in good times (2006) and bad         mentary that address issues in truckload             • Other obvious profitability driv-
(2008)? What are they doing that everyone        from a high level. These are accessible           ers, like net rate improvements and cost
else isn’t? What sets them apart? More           to many readers, but the points made are          controls, while clearly relevant, need to
generally, what drives profitability in          general enough to limit their usefulness for      be better understood. In other words, how
truckload?                                       carriers and shippers alike. Within the latter    can a company in fact improve its access
   The purpose of this article is twofold.       avenue of literature it isn’t uncommon for        to better rates, or how can it better position
First, we will define and analyze the key        readers to be presented with elusive terms        itself in order to keep costs low?
drivers of profitability in asset-based          like “lane density” to describe success in           • There are three key profitability
truckload. To that end, we will present          truckload, but such a concept can mean            drivers in truckload: 1) serving lengths
empirical evidence and logic to support          different things to different people, to say      of haul of 300 to 600 miles, 2) carefully
our answers to the above questions. Sec-         the least.                                        selecting favorable destination markets
ond, it is our objective to present analysis        Our second objective, then, is to position     (we shall explain what we mean by “fa-
that is detailed enough to be meaningful         this article somewhere in between these two       vorable” shortly), and 3) aggressively
and actionable — as well as able to do           extremes. To present evidence that digs a         marketing the business in markets heav-
justice to the complexities of the truckload     bit deeper than, say, comparing operating         ily imbalanced towards loads coming in
industry (sometimes poorly understood            statistics across companies, but that also        versus going out.
or underestimated by industry outsiders)         remains intuitive throughout. In the famous          • While Heartland and Knight have
—yet pragmatic enough that it is accessible      words attributed to Einstein, we intend to        been particularly successful at implement-
to most readers.                                 present work that is “as simple as possible,      ing the above drivers, carriers can carefully
   It’s been our experience that literature on   but no simpler.”                                  adjust portions of their operations to align
truckload tends to be of two types, each at         In summary, our view on the key prof-          more closely with these drivers as part of
one end of the analytical rigor spectrum.        itability drivers in asset-based truckload        their efforts towards margin expansion;
   On one end there are peer-reviewed,           transportation is as follows:                     additionally, these drivers can contribute to
Ph.D. thesis-caliber studies, typically             • The key drivers of truckload profit-         guiding due diligence work in the context of
dealing with some aspect of resource op-         ability are not necessarily the obvious           mergers and acquisitions in the industry.
timization utilizing operations research         ones. Oft-cited metrics, such as miles per           As for the dim scenario outlined above
techniques, whose Greek-letter-driven            tractor per week, empty mile percentage           for the truckload industry during the first
arguments, though relevant and evidently         and fleet size explain surprisingly little        half of 2008, going forward we expect the
necessary, are inaccessible to readers who       of the difference in profitability between        following:
lack the technical training needed to under-     Heartland and Knight and a sample of                 • After a second half slower than the
stand the analytical language used.              seven other large fleets we constructed           first and an even softer first half of 2009, we
58   AMERICAN SHIPPER:      NOVEMBER     2008
Value Creation in Truckload
     Figure 3

     Dry van truckload revenue in primary U.S. markets: 20071
                 Dry van loads shown: 117 million


                Seattle




            Portland
                                                                                           Minneapolis
                                                                                                                                Grand                  Rochester
                                                                                                                                Rapids                              Albany
                                                                                                              Milwaukee                            Buffalo                   Boston
                                              Salt                                                                                   Detroit
                                            Lake City                                                                 Chicago
                                                                                                                                                Cleveland
                                                                                                                                                                      New
                                                                  Denver                                                          Dayton                              York
                                                                                                                                                  Pittsburgh
                                                                                                                  Indianapolis             Columbus
                                                                                                                                                                    Philadelphia
                                                                                          Kansas City                                 Cincinnati
                  Sacramento                                                                              St. Louis                                               Baltimore
                                                                                                                                                                 Washington, D.C.
                                                                                                                            Louisville                        Richmond
                  San Jose                                                                                                                 Greensboro
                                          Las Vegas                                               Tulsa                                                             Virginia Beach
                                                                                                                      Nashville
                                                                           Oklahoma City                                             Greenville          Raleigh
                                                                                                          Memphis                                  Charlotte
                                                                                                                                Spartanburg
                       Los
                     Angeles                                                                                                          Atlanta
                                                  Phoenix
                                                               El Paso                        Dallas             Birmingham                            Charleston
                          San Diego             Tucson                                                                                              Savannah
                                                                                   Austin
                                                                                                                                                   Jacksonville
                                                                           San Antonio            Houston
                                                                                                                New
                                                                                                               Orleans                              Orlando

                                                                                     Laredo                                          Tampa

           Total revenue (US$)                                                                                                                          Miami
                                               Color legend: Market load imbalance
                             $5 billion
                           $10 billion             Heavily                     Heavily
                                                  inbound                     outbound         1
                                                                                                 Revenue, and the underlying loads that drive it, includes private
                           $15 billion          imbalanced                   imbalanced
                                                                                               fleets, dedicated carriers and over-the-road for-hire carriers.

Source: U.S. Department of Transportation Freight Analysis Framework, Truckloadrate.com, MergeGlobal estimates.
expect economic activity (as measured by                          to a particular “flavor” of truckload: the                        As mentioned earlier, there are several
GDP) and personal consumption to recover                          tractor-trailer portion of the market.                         flavors of truckload, with different under-
in the second half of 2009 and reach a peak                          As shown in Figure 1, the truckload                         lying drivers and different behaviors (e.g.,
in 2010, before modestly decelerating in the                      market, which is a segment of the U.S.                         volatility) throughout the economic cycle.
2011-12 timeframe. In the meantime, we                            surface transportation industry, comprises                     About 60 percent of truckload revenue is
expect trucking activity (loosely measured                        all surface transportation that is not rail                    captured by the private fleet segment, which
by ATA tonnage) to grow faster in 2009                            intermodal (the movement of containers                         comprises all production and commercial
than in 2008. Tonnage will also peak in                           and trailers where a portion of the journey                    companies hauling their own freight using
2010 and then slow down quickly relative                          is on rail), less-than-truckload or LTL (the                   their own equipment (although occasionally
to the macro economy, to the point of being                       movement of consignments from different                        they might transport others’ loads in order
nearly flat by the end of 2012, as trucking                       shippers, usually less than 10,000 pounds in                   to improve asset utilization). A substantial
would lead an expected overall slowdown                           weight, in common equipment) or ground                         portion of private fleet operations are local
in U.S. GDP growth in 2013.                                       package (the movement of small packages,                       in nature (intra-city or intra-metropolitan
   • We expect capacity utilization in the                        usually less than 150 pounds in weight, in                     areas). It is estimated that private fleet
truckload industry to improve at a much                           specialized equipment, from tractor-trail-                     lengths of haul average fewer than 125
faster rate in 2009 and 2010 than in 2008                         ers to walk-in straight trucks, all the way                    miles.
due to the combination of a recovery in                           down to bicycles).                                                The remaining 40 percent of the market
demand, and an expected more disciplined                             Truckload, as defined above, is by far                      comprises carriers hauling freight on their
approach to capacity additions by truckload                       the largest segment of the U.S. surface                        customers’ behalf, known as the for-hire
carriers.                                                         transportation industry, accounting for                        segment. Within the for-hire segment, 73
                                                                  85 percent of industry revenue. It is thus a                   percent of revenue is generated utilizing
Industry definition                                               critical element of the everyday functioning                   tractor-trailers of some kind, most typically
   Truckload transportation is typically                          of the U.S. economy. Intermodal transporta-                    the three-axle tractor and 53-foot trailer
defined as the movement of consignments                           tion tends to be at the top of people’s minds                  combination previously described.
(simply referred to as loads) that are (usu-                      due to its exposure to international trade,                       A small portion of the for-hire tractor-
ally) 10,000 pounds or more in weight, in                         its recent past of fast growth, and its fuel                   trailer truckload segment (about 3 percent)
a single piece of equipment (most likely a                        efficiency characteristics. But the more                       is represented by dedicated operations,
53-foot trailer hauled by a three-axle trac-                      “humble” truckload is actually some 34                         where shippers hire carriers on the basis of
tor), directly from origin to destination.                        times bigger than intermodal, as measured                      equipment rather than discrete loads. Since
This definition, while correct, refers mainly                     by revenue.                                                    the shipper pays for the use of carrier-oper-
60    AMERICAN SHIPPER:               NOVEMBER          2008
Value Creation in Truckload
ated equipment for a pre-specified period
of time (usually in a contractual manner)            Figure 4                                                                            CLDN     Celadon Group
regardless of whether the equipment is full                                                                                              CVTI     Covenant Transportation
or empty, parked or moving, dedicated op-            Knight Transportation,                                                              HTLD     Heartland Express
erations shift the load factor risk from the         Heartland Express                                                                   JBT
                                                                                                                                         KNX
                                                                                                                                                  J.B. Hunt Truckload
                                                                                                                                                  Knight Transportation
carrier to the shipper. Many dedicated op-
erations resemble private fleet operations,
                                                     outperform rest                                                                     PTSI     P.A.M. Transportation Services
                                                                                                                                         USXPS    U.S. Xpress Enterprises
where shippers decide to either partially            of truckload industry                                                               USAK     USA Truck, Inc.
or entirely outsource the transportation             2007 sample of U.S. truckload companies                                             WERN     Werner Enterprises
segment of their value chains.
   The vast majority of for-hire tractor-            Operating ratios 1                                                  EBIT per mile 2
trailer truckload activity is defined as                                                                                 35¢
                                                                                                    102%
over-the-road (OTR), where the shipper                                                   98% 98% 98%                               27¢
hires a carrier to move a load from point                                  94% 94%
                                                                    91%
A to point B (that is, on a one-way basis,
where A and B typically are different cities                  82%                                                                        13¢
or metropolitan areas), thus taking on the            78%                                                                                        9¢ 9¢
load factor risk exclusively for that load.                                                                                                                   3¢        3¢ 2¢
                                                                                                                                                                                      -2¢
This is the segment that most people have




                                                                                                                          HTLD 3
                                                                                                                                   KNX


                                                                                                                                          WERN

                                                                                                                                                 CLDN
                                                                                                                                                        JBT
                                                                                                                                                              USXPS 3

                                                                                                                                                                        USAK
                                                                                                                                                                               PTSI
                                                       HTLD
                                                              KNX


                                                                    WERN
                                                                            CLDN

                                                                                   JBT
                                                                                          USXPS 3
                                                                                                    USAK
                                                                                                           PTSI

                                                                                                                  CVTI




                                                                                                                                                                                      CVTI
in mind when thinking about “truckload”
or “trucking,” and it will be the main focus
of the rest of this article. It is, we estimate,
                                                      1
a $140 billion market, about 30 percent                 Net of fuel surcharge. Calculated as operating expenses minus fuel surcharge,
bigger than dedicated, intermodal, LTL                divided by net revenue.
                                                      2
and ground package put together.                        EBIT = Earnings before interest and taxes.

                                                   Sources: MergeGlobal, Company earnings releases, and Commercial Carrier Journal.
Shippers right-size
                                                      The ultimate goal of this shipper-specific                            For example, commodities for which
the supply chain                                   decision-making process is to minimize the                            demand levels and unit values justify
    The segmentation of the U.S. surface           sum of transport-related costs and inven-                             steady truckload-sized shipments, and
transportation industry presented in Figure        tory-related costs in the supply chain. The                           whose demand patterns are smooth and
1 is both shipment size- and mode-based.           pooling of these costs at the commodity                               highly predictable, have a high propen-
It divides transportation activity according       level is known as total distribution cost, or                         sity for dedicated truckload use (with the
to both the size of the discrete underlying        TDC. There’s usually a tradeoff between                               majority of it, as Figure 1 shows, being
loads hauled and the type of transportation        transport costs and inventory costs in                                in-sourced).
system, which we call mode, being used             supply chains, because higher speed and                                  In contrast, truckload shipments that
— the latter defined not only in terms of          reliability in transport reduces inventory                            are less frequent, relatively more variable,
equipment (i.e., rail versus truck of some         costs on the one hand but increases transport                         and less predictable tend to be serviced by
kind), but on the basis of shipment man-           costs on the other. Every shipper, explicitly                         core carrier OTR (where shippers choose
agement as well (e.g., OTR versus dedi-            or implicitly, employs some form of TDC                               to tender most shipments to a short list of
cated). Broadly speaking, shipment size            analysis to allocate shipments across modes                           “preferred” carriers) or spot market OTR.
can vary from full 53-foot trailerloads, to        of transport in such a way that the TDC                               Less-than-trailerload sized shipments can
less-than-trailerloads (e.g., a few pallets),      incurred is as low as possible.                                       either be routed in a truckload operation
to one or more small packages. Surface                Commodity type plays a key role in TDC-                            that performs multiple stops or handed
transportation modes, as we define them,           driven decision making. It defines demand                             over to an LTL carrier.
include dedicated trucking (either private         volumes per unit of time, the variability and                            Finally, the breakpoint between LTL
fleet or outsourced), OTR trucking, rail           seasonality associated with those volumes,                            and small package ground transportation
intermodal, LTL trucking, multi-stop               and the unit value of the goods handled.                              is generally determined by the shipment’s
OTR trucking (an economic substitute to            Importantly, it also tends to define where                            physical characteristics and cost-to-serve.
LTL that is under serious pressure from            in the supply chain the decision takes place:                         Shipments that have one or more individual
higher-than-historical diesel prices), and         whether it is a plant sourcing raw materials                          pieces that weigh more than 150 pounds
small package ground transport.                    from a supplier, a distribution center plac-                          are routed via LTL, because small package
    Shipment size is a critical determinant        ing orders at a manufacturing plant, or a                             carriers’ material handling equipment can-
of distribution costs in the United States,        retail store replenishing inventories from                            not support heavy pieces. In other words,
which amount to about 10 percent of GDP            a DC. This is an important distinction be-                            small package carriers are able to handle
according to the 19th annual State of Lo-          cause order size variability for many retail                          multi-piece LTL shipments within their
gistics Report. It is part of the fundamental      products tends to increase as one moves up                            networks provided each individual piece
three questions logistics managers ask             the echelons or links in the supply chain,                            can navigate their sorting systems.
themselves as they make replenishment              from retail stores to raw material suppliers
decisions:                                         (a phenomenon known as the “bullwhip”                                 Focus on dry van loads
    • What product (i.e., commodity                effect). The optimal shipment size and mode                              Having laid out a segment-level industry
type)?                                             selection are thus specific to a shipper and                          definition, we can now properly state that, as
    • How much (i.e., shipment size)?              consignee, commodity type, and supply                                 suggested in the introduction, our objective
    • When (i.e., transport mode)?                 chain link type.                                                      is to understand the key value drivers of
62   AMERICAN SHIPPER:       NOVEMBER      2008
Value Creation in Truckload
for-hire, inter-city (i.e., non-local), one-way
(i.e., OTR) truckload operations.                   Figure 5                                                                                                                   CLDN       Celadon Group
   To that end, and in order to both simplify                                                                                                                                  CVTI       Covenant Transportation
the analysis and standardize markets, we            Truckload profitability                                                                                                    HTLD
                                                                                                                                                                               JBT
                                                                                                                                                                                          Heartland Express
                                                                                                                                                                                          J.B. Hunt Truckload
decided to focus on dry van loads to/from
59 primary U.S. metropolitan areas that
                                                    is not determined                                                                                                          KNX
                                                                                                                                                                               PTSI
                                                                                                                                                                                          Knight Transportation
                                                                                                                                                                                          P.A.M. Transportation Services
are at least 125 miles apart.                       by fleet size                                                                                                              USXPS
                                                                                                                                                                               USAK
                                                                                                                                                                                          U.S. Xpress Enterprises
                                                                                                                                                                                          USA Truck, Inc.
   The length of haul part of our market            2007 sample of U.S. truckload companies                                                                                    WERN       Werner Enterprises
definition allows us to look at the portion
of the market most typically served by
                                                    EBIT margin vs. fleet size                                                         Operating costs vs. fleet size
for-hire OTR operators, rather than private
fleets or dedicated operators (which tend                           22%             HTLD                y = -0.0016x + 0.0792                                    $1.45
                                                                                                        R2 = 0.0023                                                                                       JBT
to concentrate on routes that are shorter                           20%
                                                                    18%                                                                                                      PTSI




                                                                                                                                       Operating cost per mile
than 125 miles). As for our equipment type                          16%                                                                                          $1.40
                                                                                                                                                                                                                USXPS 3
                                                                                           KNX
focus, we are interested in providing insight                       14%                                                                                                                    CVTI

                                                      EBIT margin
into the most commoditized portion of the                           12%                                                                                          $1.35
                                                                    10%               CLDN
truckload market, the dry van segment,                                                                                WERN                                                                                         WERN
                                                                     8%
                                                                     6%                                                                                          $1.30
where barriers to entry are lowest and value                                                              JBT                                                                  CLDN              KNX
                                                                     4%
drivers are thus more nuanced.                                       2%                      USAK                                                                $1.25         USAK
   In 2007, there were 117 million dry van                           0%          PTSI                                 USXPS 3                                                                        y = 0.0094x + 1.2906
                                                                    -2%                            CVTI                                                                                 HTLD 3       R2= 0.0948
Class 8 tractor-trailer loads with lengths                          -4%                                                                                          $1.20
of haul above 125 miles to/from our 59                                    0     1     2      3     4      5     6     7     8     9                                      0    1     2     3      4    5     6     7   8   9
primary markets (Figure 2). This repre-                                        Fleet size (Thousands of tractors)                                                            Fleet size (Thousands of tractors)
sents 43 percent of all such loads over all
markets, and about a quarter of total Class         Figure 6
8 tractor-trailer loads traveling more than
125 miles that the U.S. economy generated           Higher equipment utilization does not
in that year (some 484 million, according           guarantee higher truckload profitability
to FTR Associates).                                 2007 sample of U.S. truckload companies
   Our 117 million dry van load sample
                                                    EBIT margin vs. miles per tractor                                                  EBIT margin vs. deadhead percentage
includes 10,088 unique origin-destina-
tion (OD) pairs and 120,532 unique                                  22%                            HTLD 3                                                        22% y = 1.5421x - 0.1032       HTLD 3
origin-destination-commodity (ODC)                                  20%                                                                                          20% R2 = 0.1706
                                                                    18%              KNX                                                                         18%
combinations. The top five commodities                                                                 y = -0.0045x + 0.5743                                                                       KNX
                                                                    16%                                                                                          16%
in the sample (machinery, plastics/rubber,                                                             R2 = 0.263
                                                                    14%                                                                                          14%
                                                     EBIT margin




                                                                                                                                                 EBIT margin




electronics, miscellaneous manufactured                             12%                                                                                          12%                             WERN
                                                                    10%                                       WERN                                               10%
products, and newsprint/paper) account                               8%                                                                                           8%                  CLDN
                                                                                JBT
for 47 percent of all loads. The weighted                            6%                                                                                           6%                        JBT
                                                                     4%                                                    CLDN                                   4%
average length of haul over all loads in                                                         USXPS 3                                                               PTSI
                                                                     2%                                                                                           2%                   USAK
the sample is 630 miles, with a slightly                             0%
                                                                                                                          PTSI                                    0%                          USXPS 3
                                                                                                              USAK
U-shaped distribution among the 125 to                              -2%                                                   CVTI                                   -2%                 CVTI
                                                                    -4%                                                                                          -4%
300-mile, 300 to 600-mile, and 600-plus-                               90       95     100       105     110    115       120    125                                 6% 7% 8% 9% 10% 11% 12% 13% 14%
mile length of haul brackets (39 percent,                                     Annual miles per tractor (thousands)                                                             Deadhead miles as % of total
26 percent, and 35 percent of all sample
                                                     1
loads, respectively). On average, each OD              Net of fuel surcharge. Calculated as operating expenses minus fuel surcharge,
pair in the sample generated 46 loads per            divided by net revenue.
                                                     2
shipping day.                                          EBIT = Earnings before interest and taxes.
                                                     3
   Dry van markets in the United States dif-           Estimated.
fer markedly in terms of size (as measured
                                                  Sources: MergeGlobal, Company earnings releases, and Commercial Carrier Journal.
by revenue) and load imbalance (defined as
outbound loads divided by inbound loads,          very different balance characteristics: Los                                             portant gateway markets, like New York,
where the closest the ratio is to 1 the more      Angeles is balanced, Chicago is outbound                                                Miami, Philadelphia, Seattle, Houston
balanced the market is (Figure 3).                imbalanced, and New York is inbound                                                     and the California Bay Area (San Fran-
   The largest markets are the Los Angeles        imbalanced.                                                                             cisco/Oakland/San Jose) are all inbound
Basin, across Texas (Laredo-Houston-                A number of balanced and outbound                                                     imbalanced. Similarly, the Atlanta, Dallas,
Dallas), the upper Midwest (Chicago-              imbalanced markets benefit from inter-                                                  and Kansas City markets are inbound im-
Detroit-Cleveland), the New York area,            national gateways (border crossings or                                                  balanced despite being prominent inland
and Atlanta. Miami and the Bay Area in            maritime ports) and/or inland railheads,                                                rail intermodal destinations. Clearly, the
Northern California are also large (and           which function as load-generating engines                                               reason for the imbalance is that all of
heavily inbound imbalanced) markets.              within their geographical demarcations.                                                 these markets are major population centers
There are more inbound imbalanced than            These include Los Angeles; Portland, Ore.;                                              with strong production and consumption
outbound imbalanced markets in the con-           Chicago; Memphis, Tenn.; St. Louis; Bos-                                                footprints. The fact that Los Angeles and
tinental U.S. The three largest markets,          ton; and Laredo, Texas, among others.                                                   Chicago, being such heavily populated
though relatively similar in size, have             This isn’t always the case, however. Im-                                              areas, are nevertheless balanced and out-
64   AMERICAN SHIPPER:      NOVEMBER      2008
Value Creation in Truckload
     Figure 7

     Key drivers of truckload profitability aren’t necessarily obvious ones
          Lengths of haul
      1   between 300                                                            Front haul rate
          and 600 miles                                                                                          Average rate
                                                                                                                   per mile
                                                                                 Back haul rate
          Destination                                                                                                                           Revenue
      2   market
          selection                                                                Deadhead
                                                                                                                 Loaded miles                                            EBIT
          Aggressive                                                               Total miles
          marketing                                                                per tractor
      3   in inbound                                                                                                                            Operating
          inbalanced                                                                                                                              costs
                                                                                  Cost per mile
          markets


Source: MergeGlobal analysis.
bound imbalanced markets, respectively,         correlated with operating costs per mile.                                              mentioned, that fleet size is positively
is an indication of their importance as         Thus, we can safely conclude that fleet size                                           correlated with operating costs per mile),
freight hubs.                                   is not among the key profitability drivers                                             the R-squared associated with each line (a
                                                in truckload.                                                                          measure of the explanatory power of fleet
Two sides of an industry                           The scatter plots in Figure 5 and, most                                             size with respect to margins and costs per
   The U.S. dry van, for-hire, OTR truck-       importantly, the regression lines they                                                 mile, respectively) is so low that the cor-
load market has a key characteristic from       produce (which minimize the distance                                                   relations are not statistically different from
a profitability perspective: it is clearly      between them and each observed value                                                   zero. However, this is precisely our key
dominated by two players — Heartland            plotted) suggest that fleet size is at least                                           point: fleet size has no discernible impact
Express and Knight Transportation. In           uncorrelated with profitability. While the                                             on either EBIT margins or operating costs
particular, as shown in Figure 4, these two     regression lines do have a slope, negative                                             per mile. In truckload, you can be big or
relatively similar companies (both have me-     on the left (suggesting that fleet size is                                             small, but that says little about how profit-
dium-sized fleets, are regionally oriented      negatively correlated with EBIT margin)                                                able you might be.
and utilize a decentralized operating model)    and positive on the right (suggesting, as                                                 Asset-based truckload operations, such
have significantly better profitability char-
acteristics than the largest, iconic players
                                                  Figure 8
(Werner, J.B. Hunt Truckload, U.S. Xpress),
long-haul players (Covenant, Celadon), and        Truckload trips between 1–1.5 days
relatively smaller, less known players (USA
Truck, P.A.M. Transportation).
                                                  tend to be the most profitable
                                                  US$ per load
   In the following sections we will define
what factors contribute the most to truck-                                       $3,500
load profitability and, when possible and
relevant, will provide examples of what                                                                  Average revenue
                                                                                 $3,000
Heartland and/or Knight are doing with                                                                   Total cost
                                                  Cumulative revenue and costs




regards to each of those key factors.                                                                    Variable cost (Mileage driven)
                                                                                 $2,500                  Fixed cost (Hourly driven)
The drivers that aren’t
   We believe some closely tracked and                                           $2,000
often-reported operating metrics that                                                                       weet spot
                                                                                                          “s
conventional wisdom would have as
                                                                                                                        ”
                                                                                                   n




                                                                                 $1,500
                                                                                                     i
                                                                                                 Marg




obvious candidates for key value drivers
in truckload have in fact little to do with
contributing to superior profitability. One                                      $1,000
of them is fleet size.
   Simply put, there are no economies of                                          $500
fleet size in truckload. The left-hand panel
of Figure 5 shows that, outside of Knight                                           $0
and Heartland, EBIT (earnings before                                                      0.5              1.0              1.5           2.0             2.5     3.0            3.5
interest and tax) margins in 2007 were                                                                                                Elapsed days
relatively similar (and all below the two
leaders’ margins) for our sample compa-                                                   80               345            660             925          1,180     1,455          1,745
nies regardless of fleet size. If anything,                                                                                       Length of haul (miles)
as shown in the right-hand panel of Figure
5, fleet size seems to even be positively       Sources: Truckloadrate.com, MergeGlobal analysis and estimates.
66    AMERICAN SHIPPER:     NOVEMBER    2008
Value Creation in Truckload
as those conducted by Knight, Heartland
and the rest of our sample truckload com-                Figure 9
panies, are, as the name indicates, asset in-
tensive. It is therefore reasonable to assume
                                                         Controlling for length of haul, market
that asset utilization is probably among the             directional imbalance is a primary driver
key determinants of profitability. If com-               of truckload rates1
panies maximize miles per tractor while
                                                         Load imbalance and deviation from stage-length adjusted length of haul
at the same time minimizing empty miles                  for primary U.S. markets
driven, the argument would go, they would
then maximize the amount of revenue miles                                              0.8
                                                                                       0.7                                                                               Undersupplied
they get out of their assets — thus critically                                                                                                            Salt Lake City
                                                                                       0.6                                               Cleveland
contributing to better profits and returns.                                            0.5                          Kansas




                                                                          Outbound
The problem with that argument is that it is                                           0.4             Memphis        City                          Vineland




                                                  Market load imbalance
not borne out by evidence (Figure 6).                                                  0.3   Tulsa
                                                                                                                                                                    Chicago
                                                                                                                            Charlotte         Laredo
   Knight and Heartland trucks, for ex-                                                0.2                                             San
ample, run significantly fewer miles than                                              0.1                   St. Louis                Antonio                                      Portland
                                                                                         0             Grand Rapids        Greensboro
those of Covenant or Werner. What’s more,                                                                                                          Pittsburgh     Los Angeles
                                                                                      -0.1 Boston             Detroit
Heartland and Knight are among the com-                                   Inbound                        Dallas                                   Cincinnati
                                                                                      -0.2     Phoenix                                            Atlanta
panies in our sample with the highest empty
                                                                                      -0.3                     Baltimore
mile percentage (typically referred to as                                             -0.4                        Birmingham            New      Philadelphia
                                                                                             Minneapolis                                York
deadhead percentage), surpassed only by                                               -0.5                                Houston                Columbus
Werner and (narrowly) by U.S. Xpress.                                                                                              Indianapolis
                                                                                      -0.6                     Miami Raleigh                                   2007 outbound loads 3
   Naturally, this is not to say that compa-                                          -0.7       Jacksonville
                                                                                                                                                                           11 million
nies that park their trucks most of the year                                          -0.8                              San Jose                                           6.6 million
would suddenly start seeing their profit                                              -0.9                                                                                 2.2 million
                                                                                     -0.10 Oversupplied                 Seattle
margins inexorably rising. There certainly
                                                                                     -0.11
is a minimum level of utilization firms must                                            -0.40 -0.35 -0.30 -0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45
get out of their equipment, which is expen-                                                     Deviation from average stage-length adjusted outbound rate per mile (US$) 2
sive, in order to be in business sustainably                      1
(our 10-company sample suggests such a                              Average rates for all equipment types (dry van, reefer and flatbed) during June 2008,
                                                                  net of fuel surcharge.
level is somewhere around 90,000 to 95,000                        2
                                                                    For every market, the average stage-length adjusted outbound rate per mile is the rate
miles per tractor per year, with about a 12                       that is justified by the weighted average outbound length of haul to all destination markets.
percent to 13 percent deadhead). But we do                        Thus, the deviation from that rate is the portion of the observed (i.e., actual, as reported
mean that once minimum-utilization levels                         by Truckloadrate.com) weighted average rate that is not explained by length of haul.
                                                                  3
are attained, winning in truckload is not                           Includes all equipment types.
necessarily about maximizing miles per
tractor and/or minimizing empty miles.           Sources: U.S. Department of Transportation Freight Analysis Framework, Truckloadrate.com,
                                                 MergeGlobal analysis and estimates.
Key drivers of truckload                         versus going out (what we call “black hole”                                           in Figure 8, serving the 300 to 600 mile
                                                 markets).                                                                             market has a margin-improving effect
profitability                                       As illustrated in Figure 7, each of these                                          on both rates and cost per mile. A full 26
   In our view, the key drivers of truckload     three key drivers directly impacts one or                                             percent of our sample dry van loads falls
profitability are not necessarily the obvious    more of the discrete elements that define                                             within this length of haul band.
ones (fleet size, miles per tractor, empty       truckload EBIT:                                                                          How does that attractive revenue-cost
mile percentage). And while it might be             • Front-haul and back-haul rates.                                                  differential at 300-600 miles come about?
obvious that rate per mile is among the key         • Deadhead percentage.                                                             Let’s look at the revenue side first. By stay-
value drivers in truckload (as pricing is           • Total miles per tractor.                                                         ing within this length of haul band, com-
critical in businesses of any sort), the way        • Operating cost per mile.                                                         panies improve the likelihood of attaining
to access favorable rates is seldom clearly         What follows will shed light on how                                                attractive (i.e., higher than average) rates
conveyed by either industry analysts or even     exactly these relationships play out.                                                 per mile relative to longer haul operations
practitioners. It might also be obvious that                                                                                           by virtue of allowing their equipment to
minimizing costs is important for margin                                                                                               take more loads per period of time. Why
expansion but, how exactly can carriers
                                                 Driver No. 1: The right
                                                                                                                                       not then serve even shorter hauls? Because
better position themselves to lower their        length of haul                                                                        of utilization risk. Very short hauls typi-
operating costs?                                    Consistently serving loads with lengths                                            cally take place within metropolitan areas
   We believe there are three key profit-        of haul of 300 to 600 miles (or loads that                                            that tend to be congested. Traffic and other
ability drivers in truckload:                    take about one to one-and-a-half elapsed                                              delays reduce asset productivity, possibly
   • Serving lengths of haul of 300 to           days to be completed) allows a firm to                                                below the minimum level described above.
600 miles.                                       expand its operating margin by position-                                              Therefore, it is more attractive for a truck-
   • Carefully selecting favorable destina-      ing itself in the area of the length of haul/                                         load operator to serve shorter hauls (about
tion markets.                                    elapsed time spectrum where the distance                                              250 miles or less) on a dedicated basis,
   • Aggressively marketing the busi-            between load revenue and load costs tends                                             where load factor and utilization risk are
ness in markets that are heavily inbound         to be the largest (what we call the truckload                                         mitigated by the contractual nature of those
imbalanced in terms of loads coming in           margin “sweet spot”). That is, as suggested                                           services. Indeed, 300-600 mile routes tend
68   AMERICAN SHIPPER:      NOVEMBER     2008
Value Creation in Truckload
to be run between suppliers and manufac-
turing plants, and between plants and DCs,            Figure 10
where there is less shipper propensity to
employ dedicated fleets relative to DC-
                                                      Outbound imbalanced shapes are more
to-retail store routes. Moreover, serving             profitable than inbound imbalanced shapes
the 300-600 mile market allows trucking               Dry van triangle itinerary profit margin vs. outbound/inbound load balance 1
companies not to aggressively compete
(rate-wise) with intermodal marketing                                                   40%
companies or so-called bimodal operators
for longer haul loads.                                                                  20%
   On the cost side, first is the issue of driver




                                                              Itinerary profit margin
retention. The regional nature of the “sweet                                             0%
spot” length of haul lowers driver turnover
by allowing drivers to be home more often                                               -20%
or, at a bare minimum, by virtually ensuring                                                                                                 y = 1.1909x -1.0831
that a driver will permanently be within a                                              -40%
                                                                                                                                                     R² = 0.6472
day’s drive from his or her loved ones. It
also allows drivers to operate mostly in                                                -60%
                                                                                               60%   65%   70%      75%     80%      85%     90%     95%     100%
familiar territories. Lower driver turnover
                                                                                                           Itinerary outbound/inbound load balance
is one of the most significant enablers of
lower cost per mile. Heartland’s turnover is           1
                                                         Each point in the chart represents one triangle (i.e., A to B, B to C, and C back to A)
40 percent lower than the industry average,            itinerary linking 3 primary markets with at least 10,000 dry van loads per year on each
while its operating cost per mile, as shown            leg. The profit for each triangle itinerary is calculated by subtracting total trucking costs
in Figure 5, was about tied for lowest in 2007         over the three legs from the sum of revenue on each leg, weighted by the leg-specific
among our sample companies. (With USA                  probability of obtaining a load. This probability depends on the outbound/inbound load
Truck, the difference in margins between               balance at each node. If there are more inbound loads than outbound loads at one node,
                                                       the probability to obtain a load for the next leg is assumed to be outbound loads divided
the two is explained by USA Truck’s much               by inbound loads. Otherwise, the probability is assumed to be 100%. The X-axis shows
lower average revenue per loaded mile                  the average probability of obtaining a load in all three nodes, weighted by revenue on
excluding fuel surcharge, which in 2007                the “next leg.” The Y-axis shows profit margin for each full triangle itinerary.
was the second lowest of our sample, with
Heartland the highest.)                             Sources: U.S. Department of Transportation Freight Analysis Framework, Truckloadrate.com,
   Other cost-control advantages of regional        MergeGlobal analysis and estimates.
truckload operations include:                       market, pricing in truckload should be                                 can choose to serve outbound imbalanced
   • More frequent and more consistent              defined, all else equal, by the interaction                            (i.e., supply constrained) markets where
(i.e., in-house conducted) maintenance              between supply and demand. That is, hold-                              rates are likely to be much more attrac-
work performed on equipment (which                  ing everything else constant, truckload                                tive than those associated with inbound
prevents service breakdowns and lowers              rates should be higher where demand                                    imbalanced markets. This is why carefully
insurance premiums).                                outstrips supply and lower where the op-                               selecting favorable destination markets is
   • Improved purchasing power with                 posite is true. Figure 9 provides evidence                             a key driver of truckload profitability and
regional suppliers (of everything from              that in fact that is the case in the primary                           why Figure 7 presented it as impacting
parts to fuel).                                     U.S. trucking markets.                                                 front haul rates.
   • Relatively less complex dispatching               In particular, Figure 9 shows that,                                    Figure 10 provides further evidence that
due to more repetitive load patterns.               controlling for length of haul, outbound                               carefully selecting destination markets
   Among the 59 primary markets in our              truckload rates are higher in outbound                                 translates into higher average rates for
dry van sample (Figure 3), Washington;              imbalanced markets (where demand is                                    truckload carriers. A key distinction be-
Columbus, Ohio; Baltimore; Cincinnati;              higher than supply), and lower in inbound                              tween Figures 9 and 10, however, is that the
and Nashville, Tenn., are the top five in           imbalanced markets (where supply is higher                             latter goes one step further by showing full
terms of most unique OD pairs in the 300-           than demand). What is more, we’ve found                                triangle itineraries that result from linking
600 mile length of haul range. Cleveland,           that the more imbalanced a market is, the                              three markets in succession (which is more
Chicago, Dallas, Houston and Los Angeles            higher the divergence between the market’s                             realistic relative to how truckload companies
(in that order) are the top five in outbound        average outbound rate and its average                                  actually operate), rather than simply com-
loads generated for the same length of              stage-length adjusted outbound rate. This                              paring possible destination markets. It also
haul range (and together account for a 30           market rate deviation from stage-length                                goes further in that, rather than only using
percent share of all our sample 300-600             adjusted rates per mile is best understood                             rates to compare markets, it calculates and
mile outbound loads).                               as the portion of the average market rate                              compares full itinerary profitability.
                                                    not explained by the market’s length of                                   Each point in Figure 10 represents a
Driver No. 2: The right markets                     haul profile associated with the outbound                              triangle itinerary (where a truck may carry
  In 2007, Heartland and Knight com-                loads it generates.                                                    a load from A to B, then another from B
manded the highest net rates per loaded mile           This simply means that, as one would                                to C, and finally a third one from C back
among our sample of trucking companies.             expect, the more demand outstrips supply                               to A) linking three primary U.S. markets
What enabled them to outperform their               in a given market, the higher rates tend to                            with at least 10,000 dry van loads per year
peers in accessing attractive rates? Here’s         be. The key implication of this analysis is                            on each leg. The profit for each triangle
our hypothesis.                                     that truckload carriers that are judicious                             itinerary is calculated by subtracting total
  Like any other reasonably competitive             about which destination markets to serve                               trucking costs over the three legs (which
70   AMERICAN SHIPPER:       NOVEMBER      2008
Value Creation in Truckload
take into account fully loaded operating
                                                   Figure 11
costs per mile and introduce leg-specific
cost drivers, such as traffic congestion)          Marketing efforts can produce meaningful
from the sum of revenue on each leg,
weighted by the leg-specific probability of
                                                   differences in profitability
obtaining a load. This probability depends
                                                     “Bad” Itinerary
on the outbound/inbound load balance
at each node. If there are more inbound                           Outbound                                                                 Annual Miles     95,833
loads than outbound loads at one node,                           imbalanced
                                                                   market.                                                                 Revenue        $161,000
the probability of obtaining a load for the
                                                                                          RPM 1: $1.75, LoH 2: 600                         EBIT             $9,300
next leg is assumed to be outbound loads
divided by inbound loads. Otherwise, the                                                                                                   Operating ratio    94%




                                                    Dea
probability is assumed to be 100 percent.                                                                                                  Deadhead         11.1%




                                                       dhe
                                                                                                          Inbound imbalanced
The figure’s X-axis shows the average                                                         2   : 500
                                                                                        0, LoH



                                                          ad
                                                                                                          market yields only 6
                                                                               : $1.4                                                            Elapsed time:




                                                           3
                                                                               1
                                                                                                          outbound loads for every




                                                             :
probability of obtaining a load in all three                               RPM



                                                           50
                                                                                                          10 loads into the market.                   2.5 days
nodes, weighted by revenue on the “next
leg.” The Y-axis shows profit margin for
each full triangle itinerary.
                                                     “Good” Itinerary
   What we’ve found is that, among all
possible triangle itineraries that we were
                                                                  Outbound                                                                 Annual miles     96,667
able to construct within all primary mar-                        imbalanced                                                                Revenue        $193,667
kets (as defined in Figures 2 and 3) with                          market.
at least 10,000 dry van loads per year on                                                                                                  EBIT            $22,667
                                                                                        RPM 1: $2.10, LoH 2: 300
each leg, the most profitable ones are the                                                                                                 Operating ratio    86%




                                                                                                                             : 75
most outbound-imbalanced (or under-sup-                      RPM 1                                                                         Deadhead         12.9%
                                                                  : $1.9




                                                                                                                          ad 3
                                                                        0, LoH 2
plied) triangles. This is further proof that                                    : 280




                                                                                                                      dhe
                                                                                                                                                 Elapsed time:
carefully selecting destination markets




                                                                                                                    Dea
                                                          Inbound imbalanced market addressed                                                         1.5 days
results not only in better rates, but improved            through increased marketing efforts.
                                                          While market has 8 outbound loads                                         1
                                                                                                                                     RPM= Rate per mile (US$).
overall profitability. The implication is that            for every 10 inbound, marketing
                                                                                                                               2
companies should seek to string together                  improves company’s results to 9                                           LoH= Length of haul (miles).
                                                          outbound for every 10 inbound.                                                    3
                                                                                                                                              Distance in miles.
outbound imbalanced markets when form-
ing the “power shapes” that underlie their
dispatching operations.
                                                 Source: MergeGlobal analysis.
Load tradeoffs                                   rate associated with those loads.                                believe these two indicators are a key part
   Figures 9 and 10 show that outbound              This section will provide commentary                          of Knight’s superior profitability, rather
imbalanced markets are attractive because        on the first of these two alternatives.                          than a hindrance to it.
they sustain higher average rates, and              The reason why we extended two ar-
power shapes (triangles, rectangles, etc.)       rows from Destination Market Selection in                        Driver No. 3: The right marketing
that string together outbound imbalanced         Figure 7 to deadhead and miles per tractor                          No matter how hard dispatchers work to
markets are more profitable than those           (two of the most widely used indicators of                       string together outbound imbalanced mar-
where one or more nodes in the shape are         asset utilization in the truckload industry)                     kets, trucks will eventually end up in inbound
inbound imbalanced markets that drive            is precisely because of the first point:                         imbalanced markets (e.g., New York) where
down the shape’s overall balance.                sometimes, and especially when a truck                           too many trucks chase too few outbound
   However, it is clear from Figure 3 that       finds itself in an inbound imbalanced (i.e.,                     loads and therefore pricing, for the fortunate
there are more inbound imbalanced than           unattractive) market, it is better to leave                      few that get a load, is depressed.
outbound imbalanced markets in our               a market empty in order to get to a more                            Under those circumstances, it is typi-
59 primary market sample. This means             favorable market, even if this worsens the                       cally worthwhile for a trucking company
companies won’t be able to consistently          company’s deadhead percentage and miles                          to invest in a strong, aggressive local sales
move loads from one outbound imbalanced          per tractor indicators.                                          force that can:
market to another.                                  In other words, the blind pursuit of                             • Significantly increase the likelihood
   There are two things that companies can       high asset utilization in truckload has                          of getting outbound loads.
do when serving an inbound imbalanced            consequences, which in many cases means                             • Improve the rates associated with
market:                                          running loads where the company passes up                        outbound loads.
   • Choose to serve an outbound imbal-          favorable markets that would either provide                         • Improve the likelihood of getting
anced market that would put the truck back       a better rate or would take a truck to a place                   outbound loads destined to favorable
into the flow of an outbound imbalanced          where it can rejoin the flow of an outbound                      markets.
shape (bypassing the opportunity of getting      imbalanced power shape. We believe it is no                         Specifically, sales force investments
a load in the starting market).                  coincidence that in 2007 Knight’s deadhead                       should go well beyond increasing the number
   • Conduct aggressive marketing — by           percentage was higher than virtually all                         of sales agents in a market, and focus on
virtue of a strong sales force — in inbound      other companies in our sample that publicly                      developing shipper industry specialization
imbalanced markets in order to maximize          reported it (only Werner’s was higher).                          and operations expertise in order to take
both the likelihood of getting a load out of     Similarly, Knight’s 2007 miles per tractor                       load share away from competitors.
those markets and the attractiveness of the      was the second-lowest of the sample. We                             As it turns out, this is exactly what
72   AMERICAN SHIPPER:      NOVEMBER     2008
Value Creation in Truckload
     Figure 12

     Outbound revenue within 300-600-mile length of haul
     vs. market imbalance in primary U.S. markets1

             Seattle




            Portland                                                                 Minneapolis
                                                                                                                      Grand                Rochester
                                                                                                                      Rapids
                                                                                                        Milwaukee                      Buffalo          Albany   Boston
                                                                                                                          Detroit
                                          Salt                                                              Chicago
                                        Lake City                                                                                    Cleveland
                                                                                                                                                             New
                                                             Denver                                                    Dayton                                York
                                                                                                                                      Pittsburgh
                                                                                                         Indianapolis        Columbus                Philadelphia
                                                                                 Kansas City                             Cincinnati
                 Sacramento                                                                     St. Louis                                          Baltimore
                                                                                                                                                 Washington, D.C.
                                                                                                                Louisville                    Richmond
                 San Jose                                                                                                     Greensboro
                                                                                          Tulsa                                                     Virginia Beach
                                      Las Vegas                                                            Nashville
                                                                       Oklahoma City                                   Greenville          Raleigh
                                                                                                Memphis                             Charlotte
                                                                                                                  Spartanburg
               Los                                                                                                         Atlanta
                                                  Phoenix
             Angeles
                                                                                        Dallas           Birmingham                        Charleston
                       San Diego
                                              Tucson                                                                                    Savannah
                                                            El Paso
                                                                               Austin
                                                                                                                                       Jacksonville
                                                                      San Antonio             Houston
                                                                                                         New
                                                                                                        Orleans                        Orlando
                                                                                     Laredo                               Tampa

          Total revenue (US$)                                                                                                               Miami
                                          Color legend: Market load imbalance
                         $5 billion
                       $10 billion            Heavily                     Heavily
                                             inbound                     outbound       1
                                                                                         Dry van loads only. Load imbalance calculated for all lengths
                       $15 billion         imbalanced                   imbalanced
                                                                                        of haul.

Source: U.S. Department of Transportation Freight Analysis Framework, Truckloadrate.com, MergeGlobal estimates.
Heartland has done in markets traditionally                 mile load range, but are heavily inbound                  acquisition, for example, it is important
recognized as “black holes” due to their being              imbalanced. Truckload carriers who often                  to assess how well positioned a target is
heavily inbound imbalanced, such as Miami.                  find themselves in those markets should                   in terms of generating profitable loads in
From a marketing standpoint, Heartland is                   assess the effectiveness of their sales force             combination with the acquirer’s opera-
uniquely positioned in markets that other                   (preferably on a local basis) and consider                tions. For example, subscale or inefficient
trucking companies might be too quick to                    strengthening it.                                         workforce teams (at the market level)
dismiss as ones with poor return on invest-                    Miami, which is an important market                    from either side of the transaction can be
ment. The key point is that small changes in                from a total loads standpoint (i.e., consid-              combined into a more capable, unified
outbound load conversions and better rate                   ering all lengths of haul), is relatively not             workforce where geographic coverage is
negotiations in inbound imbalanced markets                  as strong when looking specifically at the                enlarged or deepened and internal best
have a big impact in profitability, as Figure               amount of outbound loads within 300-600                   practices are shared.
11 exemplifies on a conceptual basis.                       miles it generates per year (in contrast with                Furthermore, acquirers can look at target
                                                            Jacksonville, for example, which is not that              customer lists or, more to the point, the
Finding attractive markets                                  big a market relative to other key markets                load patterns of those customers, to assess
   The most attractive markets as defined                   nationwide, but most of the outbound loads                whether the load profile of a target would
in this article (outbound imbalanced, with                  it generates are within the length-of-haul                complete previously inaccessible power
high demand for loads in the 300-600 mile                   sweet spot). The implication is that sales                shapes, or complement shapes already run
“sweet spot”) are mostly located in the up-                 efforts should be particularly scrutinized                in everyday operations.
per Midwest and the mid Atlantic (Figure                    for a market like Miami, which is not only                   Finally, acquirers need to assess the
12). The majority of attractive markets are                 heavily inbound imbalanced but also biased                length of haul profile of a target and
located east of the Mississippi, coinciding                 towards out-of-the-sweet-spot loads.                      determine whether it would improve or
with U.S. population density patterns and                                                                             deteriorate the length of haul profile of the
with early market development impacts of                    Implications for growth                                   combined entity relative to the favorable
the Interstate Highway System.                                                                                        band introduced earlier.
   Areas like Texas, the U.S. Northeast                     strategies
and the California Bay Area, all clearly                      The three key value drivers outlined                    What’s ahead?
relevant from a general economic and                        above can serve as an effective tool for                     Figures 13 and 14 present historical and
trucking activity standpoint, are important                 companies developing and/or implement-                    forecast annual data on
markets in their own right for the 300-600                  ing growth strategies. In the context of an                  • U.S. economic activity.
74   AMERICAN SHIPPER:            NOVEMBER          2008
                                                                                                                                                                                                       Value Creation in Truckload
          •
      Truck tonnage.
          •
      Industry capacity utilization.                                              Figure 13
          •
      Industry pricing.
   For 2008, we expect tonnage to close the
                                                                                  U.S. economic activity and truck tonnage
year a bit slower than the way it opened it,                                      trends: 2002-2012
but it will still end up with year-on-year                                        Percent change from year before
growth of about 3.1 percent. The reason
for the second-half reduction in tonnage
                                                                                                                          4.5%
growth is an expected further slowdown in                                                                                                                                                                     Forecast
                                                                                                                          4.0%
consumer spending, due to the combined
                                                                                                                          3.5%




                                                                                         consumption growth
effects of the credit crunch, depressed




                                                                                          GDP and personal
housing prices, growing unemployment, a                                                                                   3.0%
weaker dollar than in the recent past, and                                                                                2.5%
an overall lack of consumer confidence.                                                                                   2.0%
   We expect consumer spending to remain                                                                                  1.5%
                                                                                                                                                                                                                               Real personal
depressed through the first half of 2009.                                                                                 1.0%                                                                                                 consumption
The consumption outlook will begin to turn                                                                                0.5%                                                                                                 Real GDP
around during the second half of 2009, as                                                                                   0%
credit availability improves and as dispos-                                                                                       2002   2003   2004    2005                                  2006     2007   2008   2009   2010   2011   2012
able income previously devoted to expensive                                                                                7.0%                                                                               Forecast
                                                                                                                           6.0%
                                                                                                   Truck tonnage growth
gas at the pump is temporarily diverted to
                                                                                                                           5.0%
non-oil consumer goods, so long as the global                                                                              4.0%
economic downturn keeps oil prices below                                                                                   3.0%
recent highs. As consumer confidence is                                                                                    2.0%
gradually restored, we expect tonnage to                                                                                   1.0%
grow faster in the second half of 2009 relative                                                                            0.0%
to the first, driven by shipper restocking of                                                                             -1.0%
                                                                                                                          -2.0%
shelves in anticipation of a more generalized
                                                                                                                                  2002   2003   2004    2005                                  2006     2007   2008   2009   2010   2011   2012
economic recovery by late 2009/early 2010.
Indeed, we project faster tonnage growth in
2009 than in 2008 (Figure 13).
   We expect personal consumption and                                           Sources: American Trucking Associations, Bureau of Economic Analysis, MergeGlobal
overall GDP to peak in 2010, before cool-                                       estimates.
ing down somewhat in 2011-12. In the                                               Capacity utilization for the trucking in-                                                                         failures, the lowest Class 8 sales rate in de-
meantime, we expect tonnage growth to                                           dustry bottomed in 2007, which coincided                                                                             cades, fleet reductions by large companies,
also peak in 2010 and then quickly slow                                         with the lowest net rate growth (actually, a                                                                         and strong truck exports in 2007 that have
down (relative to the macro economy)                                            decline) of the past several years (Figure                                                                           continued, albeit at a lower rate, in 2008)
to the point of being nearly flat by the                                        14). We project 2008 capacity utilization                                                                            than by an uptick in demand.
end of 2012, as trucking would lead our                                         to improve relative to 2007, aided more by                                                                              We expect capacity utilization to improve
expected overall slowdown of the U.S.                                           the fast rate at which capacity is leaving (or                                                                       at a much faster rate in 2009 and 2010
economy in 2013.                                                                not coming into) the industry (due to truck                                                                          than in 2008 because of the combination
                                                                                                                                                                                                     of recovery in demand, and a more dis-
        Figure 14                                                                                                                                                                                    ciplined approach to capacity additions
                                                                                                                                                                                                     by truckload carriers, for several reasons
        U.S. Class 8 capacity utilization                                                                                                                                                            (a resolve to recover their cost of capital
        and truckload pricing: 2002-2012                                                                                                                                                             by 2010, a much more stringent access to
                                                                                                                                                                                                     credit, and an expected relatively muted
                           8%                                                                                                                          90%                                           2009-10 pre-buy season, among others).
                                                                                                                                                             Truckload capacity utilization




                           7%                                                      Forecast                                                            87%
                                                                                                                                                                                                     Utilization rates will then start to slightly
 Truckload rates growth




                           6%                                                                                                                          84%
                                                                                                                                                       81%
                                                                                                                                                                                                     ease up during 2011-12 as demand growth
                           5%                                                                                                                                                                        (in terms of tonnage) decelerates on the one
                                                                                                                                                       78%
                           4%                                                                                                                                                                        hand and either new or existing players try
                                                                                                                                                       75%
                           3%                                                                                                                          72%                                           to capture market share through capacity
                           2%                                                                                                                          69%                                           additions on the other.
                           1%                                                                                                                          66%                                              As for pricing, as it has been the case
                           0%                                                                                                                          63%                                           in the past, we expect it to continue to
                          -1%                                                                                                                          60%
                                 2002    2003    2004    2005    2006    2007     2008            2009                       2010    2011   2012                                                     move closely with utilization rates. More
                                                                                                                                                                                                     immediately, we expect truckload net
                                Class 8 capacity utilization (right axis)                                                                                                                            rates to be about flat in 2008 relative to
                                Truckload revenue per loaded mile, excluding fuel surcharge, year-on-year growth (left axis)                                                                         2007 and to start growing in earnest by
                                                                                                                                                                                                     the second half of 2009. Thereafter, we
Sources: American Trucking Associations, Bureau of Economic Analysis, Ward’s Auto,                                                                                                                   project rate growth to continue through
Vehicle Inventory and Use Survey, U.S. Commerce Department, Truckloadrate.com,                                                                                                                       2012, at an average annual rate of about
Securities and Exchange Commission Filings, MergeGlobal analysis and estimates.                                                                                                                      4 percent.                                  ■
                                                                                                                                                                                                     AMERICAN SHIPPER:        NOVEMBER         2008 75

				
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