Less-than-truckload carriers are left out of the weak volume conversation

A great deal of focus has been placed on the seasonal weakness in truckload (TL) volumes and the deterioration of spot market pricing, but the less-than-truckload (LTL) sector has been overlooked to a degree, and what its volumes are signaling is equaling concerning.

The LTLs are a good barometer of the industrial freight market. The LTLs typically don’t see the boom-bust cycles of the TL carriers and are somewhat insulated from the spot market, but a good portion of freight moved in this mode is related to manufacturing and industrial production. Many LTL carriers look to the Institute of Supply Management’s Purchasing Managers Index (PMI) as a benchmark for what future LTL volumes might look like.

Those numbers are in decline.

The PMI sat at 52.1 in May, down from 52.8 in April and 55.3 in March. The survey of purchasing managers at manufacturing firms continues to move lower since this cycle’s peak of 60.8 in August 2018. A reading higher than 50 indicates economic expansion while a value lower than 50 indicates that the economy is in contraction.

Institute of Supply Management’s PMI – SONAR

FreightWaves Chief Economist & Market Expert Ibrahiim Bayaan, “All of the signs around manufacturing are pointing to stalled or declining activity so far in 2019. The manufacturing PMI data is at its lowest point in over two years. The factory orders data has stalled essentially since the third quarter of 2018 and manufacturing industrial production growth is in negative territory as of April.”

This was the theme in the LTL intra-quarter updates over the last couple of weeks.

All of the major public LTL carriers that provided intra-quarter updates reported meaningful declines in tons per day (considered the key volume metric in any LTL operation). The average year-over-year decline seen by the group in April and May is 5.1 percent and 5 percent, respectively.

Intra-quarter Public LTL Key Performance Indicators

In a June 5, 2019 note to clients, Stifel analyst David Ross lowered the firm’s 2019 LTL industry volume forecast from a range of down 2 percent to up 2 percent to a range of down 5 percent to flat. “Volumes just aren’t there. Looking around the country, though, nobody is seeing significant deceleration and shippers have not reduced volume forecasts for the remainder of the year yet,” Ross said. The report also showed that first quarter 2019 LTL volumes (from all public carriers with meaningful LTL exposure) were down 2.4 percent compared to the first quarter of 2017.

While the headlines have been dominated by the lack of an uptick in seasonal freight demand and TL spot market rate declines well over 20 percent, the LTLs haven’t seen as much attention because revenue is still holding ground. This is most notable in revenue per hundredweight (revenue/cwt), due to solid increases in the price to move LTL freight.             

Revenue/cwt can be a tricky gauge for pricing because the number often doesn’t exclude changes in freight mix and sometimes fuel. That said, this is commonly viewed as the pricing metric for the LTL group. So far in the second quarter of 2019, it appears that revenue for the LTLs is modestly positive with pricing offsetting volume declines. While LTLs aren’t nearly as fragmented as the TLs and their higher-touch service provides some stickiness in their customers’ supply chains, at some point the lack of volume may catch up with pricing.

Also concerning is that the decline in weight per shipment is driving the decline in tonnage as total shipments remain close to level on a year-over-year comparison. Typically, this suggests a decline in heavier industrial- and manufacturing-related freight as the mix shifts to lighter consumer freight.

In the first two months of the second quarter of 2019, Old Dominion Freight Line (NASDAQ: ODFL) has seen shipments decline 2 percent on average, with weight per shipment down 4 percent. ArcBest Corp. (NASDAQ: ARCB) reported an average 1 percent increase in shipments with a 3.5 percent average decline in weight per shipment. SAIA, Inc. (NASDAQ: SAIA) has seen a 2.2 percent average increase in shipments, up 3.2 percent when making the adjustment for 2019’s Good Friday, which occurred in the second quarter in 2019 versus the first quarter of 2018. SAIA didn’t provide weight per shipment metrics, but clearly these are lower as the company’s average tonnage was down 3.6 percent so far in the quarter.  

While the declines in tonnage haven’t led to meaningful revenue declines, if U.S. manufacturing slows further, the LTLs could see an inflection point in price which would lead to a decline in revenue.

“While the ISM has been showing growth the last couple of quarters, it has been decelerating growth. The ISM has been negative year-over-year for some time. We find it difficult to see it turn up again soon and rather believe we have seen the highest readings for this cycle,” said Ross.

Ross continued, “LTL volume comparisons should be toughest in second quarter 2019 versus the tight TL market in second quarter 2018, but we wouldn’t expect year-over-year growth for the sector until fourth quarter 2019 at the earliest – most likely first quarter 2020.”

The Federal Reserve will release Industrial Production for May on June 14, 2019.

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes Old Dominion Freight Line (No. 9) and ArcBest (No. 26).

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.