We just finished our Q3 2016 review of US truckload, rail and LTL carrier results and trends. (See Tough Q4 and Full Year 2016 for Truckload Carriers, Rail Carriers Keep Profits Rolling in Q4 Despite Weak Volumes,and Amid Soft Q4, Old Dominion Takes Nearly All the LTL Profits.)
All told, it was a weak quarter yet again for carriers in all three sectors, driven by slowing freight volumes, as it was for all of 2016. However, for the most part the carriers turned in decent operating results in terms of profitability, helped in the rail and LTL sectors by a still modestly strong rate environment, based on commentary in their Q4 earnings calls. Rates were down in the truckload sector, according to earnings releaes and the Cass Linehaul Index.
We'll take this occasion to once again present some interesting
comparisons on operating metrics across each of these three modes in Q4, as shown in the graphic below. Note that net income is
based usually on each carrier's total business, which may include other sectors, such as the large intermodal business at truckload
carrier JB Hunt, and not just straight truckload or LTL results. Still, the comparisons are useful (though operating ratios are usually just for that TL or LTL business unit, as reported by the carriers).
| Q4 2016 US Operating Metrics by Mode |
| |
Truckload Sector |
Rail Sector |
LTL Sector |
| Average Net Income as a Percent of Sales Q4 2016 |
6.4%% |
19.0% |
3.4% |
| Average Net Income as a Percent of Sales Q4 2015 |
7.6% |
18.8% |
4.0% |
| Best Net Income as a Percent of Sales |
9.4%% |
22.1% |
9.2% |
| Heartland Express |
Union Pacific |
Old Dominion |
Average Operating
Ratio Q4 2016 |
90.3% |
65.8% |
94.0% |
Average Operating
Ratio Q4 2015 |
87.1% |
68.9% |
93.6% |
Best Operating Ratio
Q4 2016 |
83.3% |
62.0% |
84.5% |
| Heartland Express |
Union Pacific |
Old Dominion |
| Source: SCDigest Analysis |
As can be seen, rail carriers as a group are simply far more profitable than truckload or LTL carriers, with profits as a percent of revenue for the quarter of 19.0%, up a bit from the average of 18.8% in Q4 2015 on mixed volumes (some up, some down). By comparison, truckload carriers had net profit margins of only 6.4%, and just 3.4%% for the LTL group.
That is of course reflected in the different operating ratios, or operating expenses divided by operating revenue - a key metric in the transportation sector - which for the rail carriers is an astounding 24.5 percentage points better than for truckload carriers and about 29 percentage points better than the LTL sector average.
The truckload and LTL sectors saw average operating ratios rise in the quarter, though just barely in LTL, while the rail carriers saw more than a three percentage point improvement. Truckload carriers on average saw a sharp 3.2 percentage point increase. Union Pacific again led the way here, with an impressive OR in the quarter of just 62.0%.
Note: The "average" operating ratio per mode is unweighted, meaning for example that to calculate this number for the truckload sector, we simply add the operating ratios of the six TL carriers we follow and then divide by six. Size of the carrier in revenues is not factored in.
Union Pacific also as usual took the top spot in terms of highest net income as a percent of sales, at a strong 22.1%. The sector average of 19.0%, however, stacks up favorably with companies in almost any industry. Compare those numbers to just a 4.0% profit margin at GM, or 10% at consumer products giant Unilever.
In LTL, Old Dominion after a multi-year run has started to see its results slow. Q4 revenue was up just 1.5%, and net income was down 5.1%. For many years until recently Old Dominion was seeing near or more than double digit gains in those metrics.
That said, Old Dominion came in with an OR of 84.5%, almost 10 percentage points better than the LTL sector average and 5.8 percentage points better than the truckload group average. In fact, Old Dominion's OR was beaten in the truckload segment by only two of the seven carriers we follow: Heartland Express and Knight Transportation, and that by two points or so.
If you take Old Dominion out of the calculation, its LTL competitors had an average OR of 97.1% in Q4, meaning Old Dominion was about 13 percentage points better. That in turn means that for every $1 million in revenue, OD drops an extra $130,000 or so to the bottom line than do its LTL competitors as a group.
That is quite an advantage indeed.
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