Knight-Swift is starting to see positive TL rate trades

Truckload revenue fell 6.1% year over year in the third quarter to $1.1 billion. Most of the decline came from a 5.6% drop in the average number of tractors in service. Utilization metrics such as miles loaded per tractor (down 0.2% year-over-year) and revenue per tractor (down 0.6%) were largely unchanged. However, management said there was some noise in the mileage metric, as it has moved some of the US Xpress teams to cover higher-priced regional cargo compared to longer, smaller shipments. price it carried.

Knight-Swift will look to cut a “few hundred” tractors over the next two quarters, but said better route and load selection will free up incremental capacity in the remaining fleet, allowing it to take advantage of spot market opportunities. Knight-Swift said it has seen rate increases in recent tender awards and its spot rates are still higher than contract rates. However, he said both spot and contract rates remain at “unsustainable levels”.

Revenue per loaded mile, excluding fuel surcharges, was $2.76 in the quarter, but up 2 cents from the second quarter. Knight-Swift hopes to reduce the cost per mile by 2025, or at least keep it flat, allowing planned rate increases to flow through the income statement without any offset.

Knight-Swift CEO Adam Miller said the company typically reallocates 25 percent to 30 percent of fare increases toward driver pay increases. However, the company needs to improve margins first after a prolonged slump and see a tightening in the driver market before that happens this time.

“I think (by) 2025, we’re going to have to convert, as an industry, any rate improvement into margin improvement,” Miller told analysts on a call Wednesday evening. “Our focus will be to keep inflation to a minimum … to continue to improve on a cost-per-mile basis while driving performance down at the margin.”

Guidance calls for a slight increase in revenue from the third quarter to the fourth quarter, with a low- to mid-single-digit sequential decline expected in the first quarter. Changes in the unit’s operating margin are expected to follow a similar cadence.

The TL unit reported an adjusted operating ratio of 95.6% (inverse of operating margin), 70 basis points worse y/y but 160 bps better than Q2. Knight-Swift’s legacy operations saw a sequential OR improvement of 250bps, while US Xpress operations were a rub of 220bps in the quarter.

Miller’s current outlook on rates calls for a “slow and gradual” build through next year’s bidding season with increases likely in the low to mid-single digit range (potentially in the high digits later in the season of offers). He said current indications show solid demand through Thanksgiving, but what happens after the holiday will really be the indicator for the 2025 bidding season.

High teenage growth is expected in LTL

Knight-Swift is on track to grow its LTL network by 1,500 doors this year, a 32% year-over-year increase.

It has opened 34 terminals by 2024 and plans to add four more before the end of the year. Acquired 25 locations (12 of which are leased) for $54 million from Yellow Corp. (OTC: YELLQ) in bankruptcy. It also acquired Dependable Highway Express (DHE) and its 14 service centers in July. The expansion is expected to drive a year-over-year percentage increase in revenue (excluding fuel surcharges) in the fourth and first quarters.

The LTL unit saw revenue (excluding fuel) rise 16.7% year over year to $280 million in the third quarter. Shipments rose 11.1% while revenue per shipment (excluding fuel) rose 4.8%. Revenue per hundredweight (excluding fuel) increased 9.2% year over year and was partially helped by a 3.9% decrease in weight per shipment.

Management said LTL rate increases are moderating as the industrial economy remains stagnant and as year-over-year offsets become tighter. However, as more of your network connects and transitions to a national carrier, you will see longer journeys, which often include heavier shipments. Both of these changes will increase shipping revenue and margins.

The unit posted an adjusted OR of 89.6% in the third quarter, which was 470 bps worse year-over-year. Incremental costs associated with adding new locations were a headwind to margins. A high OR of 80 is expected again in the near term.

Other takeaways from Q3

The logistics unit posted a 9.5% year-over-year decline in revenue as a 21.1% drop in cargoes was partially offset by a 13.6% increase in revenue per cargo. The unit reported an adjusted OR of 94.5%, which was 120 bps worse y/y. The guidance calls for a similar operating room in the first and fourth trimesters.

The intermodal unit approached break-even in the quarter. The segment posted an adjusted OR of 101.4%, a sixth consecutive operating loss, but a 310bp year-over-year improvement. The unit is expected to break even in operating results over the next two quarters.

Knight-Swift lowered its 2024 net capex guidance to a new range of $525 million to $575 million (from $600 million to $650 million). It will continue to replace equipment and make investments in its terminals.

The adjusted EPS number for the third quarter excluded acquisition-related charges, non-cash impairments of property and equipment and a $12.1 million (7 cents per share) write-off of a minority investment in a freight technology company. Earnings from equipment sales totaled $9.2 million in the quarter, a 1-cent headwind from the year-ago period (assuming a normalized tax rate). An increase in net interest expense was a headwind of 3 cents y/y.

Shares of KNX were down 2.7% at 10:31 a.m. EDT Thursday compared with the S&P 500, which was up 0.2%.

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