Synergies emerge despite heavy dedicated exposure and falling truck count
When you add together Knight Transportation and Swift Transportation’s pre-merger total revenues from the first quarter of 2017 and compare them to post-merger revenues from the first quarter of 2018, the trend line is essentially flat. Excluding fuel surcharges, Knight-Swift brought in $1.12B in the first quarter of 2018. Click through to Knight-Swift’s earnings presentation slide deck.
The difference is that both brands, Knight and Swift, were much more profitable the past quarter than they were to start off 2017: their combined adjusted operating income increased 147% year-over-year compared to the two companies’ numbers from a year ago.
Knight-Swift, the behemoth of the American trucking industry, the product of an historic mega-merger last fall, reports that it is ahead of schedule on realizing synergies.
Knight’s trucking operation led the way, improving its operating revenue 790 basis points down to an impressive 81.6%. Average revenue per tractor grew 17.4% as miles per truck increased 1.8%. Knight’s logistics business improved its OR by 90 basis points, down to 94.6%, driven by a 25.2% increase in brokerage revenue and the brokerage’s gross margin growing to 14.5%.
Swift’s consolidated operating ratio for its trucking business was 92.9% in the first quarter of 2018, with its large dedicated division leading the pack (88.8%) and its intermodal business lagging (95.7%).
During this afternoon’s earnings call, Knight-Swift chairman Kevin Knight said that he didn’t think there was any reason why the efficiency gap between his red and blue brands couldn’t be bridged. “We have an expectation that under our approach to business, at Swift we can be just as profitable as we are at Knight. That doesn’t mean necessarily that we’re gonna get there the same exact way,” Knight said. “I don’t see Swift being as big a player in non-contract as Knight,” he continued, “but certainly we’ll be a bigger player in the non-contract market than we’ve been int he past. We don’t see anything structurally or fundamentally that will keep us from getting there.”
One of the factors slowing down Swift’s progress is its large dedicated fleet, which runs on a much longer cycle (two to four years according to Kevin Knight) than traditional contract or spot commitments. Dedicated truck revenues are still pegged to agreements made more than a year ago, during a period of doldrums for trucking. “It takes a year to basically work through a book of business on irregular [over the road]. On dedicated, it takes two or three or four years, depending on the lengths of your contract. We also have the ability to go back on the dedicated side and ask for help—sometimes we get supported and sometimes we don’t,” said Knight.
Kevin Knight said that between the Knight and Swift brands, there were about 6,000 dedicated trucks—heavily weighted toward Swift—and complained that in many of Swift’s dedicated lanes, its competitors were content with mid-90s operating ratios.
Knight reports its average revenue per tractor on a quarterly basis, not weekly, and in the first quarter of 2018 improved that figure to $48,348 from $41,177 a year ago (17.4%). Divided by the 13 weeks in the first quarter of 2018, the average revenue per truck was $3,719. Knight’s non-paid empty miles percentage increased from 12.6% to 13.1% year-over-year.
Swift’s average revenue per tractor for its truckload division was $45,176 for the first quarter of 2018, which works out to $3,475 per week. That figure grew 5.2% over the first quarter of 2017. Meanwhile, as mentioned above, Swift’s large dedicated division weighed on growth, growing its average revenue per tractor only .1%.
One of the biggest challenges at Swift has been its company driver count, which went negative in the third quarter of 2015. The driver losses have accelerated, and Swift operated with 385 fewer trucks compared to the fourth quarter of 2017, down 8% year-over-year.
Kevin Knight cited macroeconomic factors such as strong GDP growth, low unemployment, and accelerated manufacturing and construction activity as creating a very competitive environment for vocational labor like truck drivers. He said that not only has driver pay gone up—Knight-Swift expects to pass on about 30% of its rate increases to drivers in the form of wages—but so has every other kind of expenditure on labor, including marketing, recruiting, retention, and mechanics’ wages.
“Knight plans to leverage Swift’s competence in sourcing and training new drivers and Swift wants to leverage Knight’s experience at sourcing experienced drivers,” said Kevin Knight.
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Tim Branca
You need to have guaranteed pay of at least $1000 a week to keep drivers. $500 doesnt cut it to work so many hours and being away from home.