Larkin: LTL to benefit most from e-commerce growth

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During Tuesday’s lunch at the McLeod User Conference in Birmingham, Alabama, Stifel Nicholaus investment banker John Larkin gave a wide-ranging presentation on trends in transportation and logistics across all modes. Larkin began by complimenting McLeod’s commitment to customer service.

“I often ask people how their technology is serving them,” Larkin said. “Interestingly, just about everyone I talk to who uses McLeod have nothing but positive things to say—which is not always the case with software customers. The secret is that Tom Mcleod and the whole team put the customer first, and that really shows through. Customer service matters in the world of technology, and McLeod seems to have mastered that.”

After those opening remarks, Larkin got into the meat of his presentation and shared his insights into truckload, LTL, railroads, warehousing, air cargo, and maritime freight. First, Larkin talked about full truckload: demand continues to be strong while capacity is suppressed by ELDs and the difficulty of recruiting and retaining drivers. Those interlocking factors will continue to be positive for trucking rates and valuations, and, indeed, Larkin said that some carriers are already going back to their shipper customers and asking for the second sizable increase in contract rates for the year. The higher rates are funding extraordinary  growth in driver wages, but carriers are also expanding margins.

“We expect the third quarter to be very strong across the industry,” said Larkin. “People who have been selling truckload stocks are going to be disappointed with how great the third quarter results will be.”

Larkin was especially bullish on less-than-truckload carriers. He said LTL demand was being fueled by a manufacturing resurgence which required small, dense movements of components and sub-assemblies as well as e-commerce and overflow from truckload. Larkin said that he didn’t expect further consolidation in the industry because regional alliances seem to be working well. The banker also thought that LTLs had yet to completely take advantage of data analytics and APIs to develop dynamic pricing and profit optimization strategies. 

“Think about a situation where you can look ahead to next Wednesday, and you can say traffic looks light from Kansas City to Chicago, so you offer a short term discount and fill that extra capacity up over night. You tap into the sales horsepower that 3PLs have at their fingertips,” Larkin said.

LTL has an easier time feathering in eighteen year-olds, Larkin said, because there’s a career path from dock worker to forklift operator to yard hustler to linehaul driver. While LTL driving is still an extremely labor-intensive job, those carriers do benefit from a wider pipeline of available workers.

“Smaller footprint urban fulfillment centers require smaller shipments to accommodate a broad range of SKUs,” Larkin said. “LTL shipments are now more often the optimal shipment size.”

Turning the audience’s attention to railroads, Larkin recounted his early days at CSX in Jacksonville during the 1980s. “In 1984, CSX’s operating ratio was in the 92% range,” remembered Larkin. “Now you’re seeing railroad ORs in the 50s and low 60s—40% operating margins. A lot of that has to do with the precision railroading techniques popularized by Hunter Harrison… but ‘precision railroading’ is really a misnomer, it’s actually just ‘look to your right, look to your left, one of you is gonna be gone by the end of the day.’ It’s massive downsizing and delayering of organization, but longer, heavier, slower trains are not the answer,” Larkin said.

Intermodal traffic is retreating to high-density, longhaul lanes only, domestic coal is suffering a slow death, and the only good thing about positive train control is that it could provide a foundation for autonomous trains (if the unions will allow it), Larkin opined. 

“Warehousing space has become a hot commodity. Would you believe it that in some markets, warehousing square footage is more expensive than office space?” Larkin asked. The entire sector is evolving with a shift to forward positioned inventory, more inbound containerized freight to the east coast, regulatory issues on the coasts constraining an already tight real estate market, and widespread labor shortages.

Larkin’s remarks on air cargo were brief, but he said that the outlook for growth is strong, and he pointed to Amazon’s construction of an air cargo hub in Cincinnati that will be served by 40 Boeing 767s, initially, with plans to increase the fleet to 100 aircraft. Ocean freight is still plagued by over-capacity, and the industry’s rush into larger and larger vessels isn’t helping. 

The accelerating pace of technological development is a widespread talking point in transportation media, but Larkin put it in the context of the avalanche of venture capital and private equity money that has flooded into transportation technology companies. These firms’ insatiable appetite for freight tech is a new paradigm that has emerged in the past three or four years, and it’s transforming transportation and logistics faster than most people realize. Larkin ended his presentation in awe of the strength of the current American economy.

“We live in the best country in the world. Even with the massive pace of change in automation in this country, we have a massive labor shortage at the same time,” Larkin marveled. Robots aren’t putting people out of work. “We’re digesting all this automation and we still have a labor shortage,” Larkin said. That fact alone shows how robust the United States’ economic growth is.