Stifel’s 3Q 2013 Domestic Transportation Update

   Year-over-year truckload volume comps turned positive in May after several years of negative or near-negative growth, but that change was largely due to a corresponding decline in length-of-haul. Absolute index volumes remain well below pre-recession levels. We attribute the bulk of freight market lethargy to persistent weakness in underlying core economic growth.    Truckload yields have been positive for the past 14 quarters, but were on a steady path of deceleration since their 2Q11 peak. 3Q13 results were sequentially flat, which could mean nothing, as it barely changes the downward trend line, or it could signal an end to the slide. Rising yields would necessitate a more meaningful capacity tightening, in our view. We note that these results exclude fuel surcharge, so the trend reflects a degradation in core pricing momentum, as volume trends have stagnated.    Better utilization and capacity discipline, especially among the larger, more well-capitalized carriers, has helped breed an improving trend in revenue-per-tractor-per-week, a very important metric.    Ultimately, slow recovery in the core economy has produced a sluggish freight climate, which has hindered traction on the yield side and made it difficult to make strides in average industry operating ratios. As revenue-per-tractor-per-week has improved, so too has the cost of operations increased.    Less-than-truckload volumes have been uninspired for the majority of the last two years, which, in our view, has helped carriers stay disciplined with respect to pricing and capacity additions. However, as the soft market persists, carrier discipline may begin to falter.    LTL yields (as measured by revenue-per-hundredweight, including fuel surcharge) have been positive for the past three years, but appear to have decelerated. Net of fuel, however, underlying pricing trends remain steady, but may soon come under pressure in the face of tepid volume fundamentals, especially as larger national accounts come up for rebid.    Average weight per shipment increases have stalled due to the slow recovery and are generally not a big cause of yield changes.    It’s been a mixed bag with some carriers like Saia and Old Dominion making significant strides in their margins, whereas others — Vitran, ABF, and YRC Freight — continue to lag.