We just finished our Q2 2016 review of US truckload, rail and LTL carrier results and trends. (See US Truckload Carriers Have Another Soft Quarter in Q2 on Weak Demand, Rail Carriers See Soft Q2 Again in Terms of Volumes, but Stay Very Profitable, and LTL Carriers See Very Soft Q2, Though Rates Held Up Modestly Well.)
All told, it was a weak quarter for carriers in all three sectors, driven by slowing freight volumes, but 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 Q2 earnings calls. Rates were flatish or down in the truckload sector.
We'll take this occasion to once again present some interesting
comparisons on operating metrics across each of these three modes in Q2, 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).
| Q2 2016 US Operating Metrics by Mode |
| |
Truckload Sector |
Rail Sector |
LTL Sector |
| Average Net Income as a Percent of Sales Q2 2016 |
6.4% |
18.6% |
3.8% |
| Average Net Income as a Percent of Sales Q2 2015 |
7.6% |
19.5% |
5.1% |
| Best Net Income as a Percent of Sales |
10.2% |
21.2% |
11.2% |
| Heartland Express |
Kansas City Southern |
Old Dominion |
Average Operating
Ratio Q2 2016 |
88.7% |
66.0% |
93.3% |
Average Operating
Ratio Q2 2015 |
85.1% |
67.3% |
91.1% |
| Best Operating Ratio |
83.2% |
61.3% |
82.3% |
| Heartland Express |
Kansas City Southern |
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 18.6%, though that was down a bit from the average of 19.5% in Q2 2015. By comparison, truckload carriers had profit margins of only 6.4%, and just 3.8%% for the LTL group, both down a little more than a percentage point versus the prior year.
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 22.7 percentage points better than for truckload carriers and about 27 percentage points better than the LTL sector average.
The rail carriers were the only group to improve its average operating ratio in the quarter, which fell to 66.0% from 67.3% in Q2 2015, based largely on a nearly seven percentage point drop in OR at Kansas City Southern, to a sector best of 61.3%, a spot almost always occupied by Union Pacific.
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 seven TL carriers we follow and then divide by seven. Size of the carrier in revenues is not factored in.
Kansas City Southern also took the top spot away from Union Pacific in terms of highest net income as a percent of sales, at 21.2% versus an also strong 20.5% at UP. Both those performances stack up favorably with companies in almost any sector. Compare that to an average of just 6.4% for our truckload carrier group, and 12.1% at consumer products giant Procter & Gamble in Q2.
In LTL, Old Dominion seems finally to have run into the law of large numbers for the second quarter in a row, after several years of regular gains near or above double digits in revenue and profits it saw profits droop and revenue actually fell just a bit in the quarter.
That said, Old Dominion came in with an OR of 82.3%, 11 percentage points better than the LTL sector average and more than five percentage points better than the truckload group average. In fact, Old Dominion's OR was better than the top score in the truckload side, the 83.2% out up by Heartland Express.
If you take Old Dominion out of the calculation, its LTL competitors had an average OR of 96.0% in Q2, meaning Old Dominion was about 14 percentage points better. That in turn means that for every $1 million in revenue, OD drops an extra $140,000 or so to the bottom line than do its LTL competitors as a group.
That is quite an advantage indeed.
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