Trucking Conmpany Overview

The Trucking Industry is a cyclical industry that includes companies that offer shipping services using tractor-trailers to commercial customers. Although most trucking companies own and manage their vehicles, some companies rely on leasing. Since overseas shipments are either air- or ocean-based, the vast majority of revenue comes from domestic sources. These companies are not exposed to fluctuations in foreign currencies. This industry is a good indicator of the economy as a whole. Customers ship more goods during the initial stages of an economic boom to prepare for better business conditions. A decrease in trucking demand could signal an economic downturn.

The Operating Basis

This sector is highly competitive. There are many operators available to customers, including private carriers as well as companies that are not part of the industry such air-transporters. As a result, day-to-day operations tend to be relationship-oriented. To generate repeat business, companies strive to establish close relationships with customers. Customers can find another shipper easily so providing excellent service is essential. This group is highly competitive in price and operates with small margins.

A trucking company must have a large number of trailers and tractors in order to be able to meet the needs of customers. The fleet must be maintained and upgraded regularly (every five year for tractor). Regular upgrades can help keep maintenance costs down, as older vehicles are more costly to maintain. A young fleet can attract more qualified drivers, especially in a tight labor market. Trucking companies are required to buy more efficient vehicles due to increasingly stringent U.S. environmental regulations. The economic conditions of the day often dictate how large trucks are sized. Truckers will reduce the number of vehicles they have in service during downturns to ensure that they don’t hold excess capacity. This can lead to lower revenue per vehicle and other inefficiencies when the tractor supply exceeds the demand.

Truckload and less than truckload (LTL) are the two main segments of the Trucking Industry. Truckload drivers load a trailer with large quantities of cargo from one customer. Usually, they have a single destination in their mind. LTL carriers fill a trailer with cargo from several customers. This requires multiple delivery destinations. LTL cargo may be transported between multiple vehicles and terminals before it reaches its final destination. On the other hand, truckload freight is usually transported in one vehicle for the entirety of the shipping route. Both types of trucking companies have a network that includes distribution centers and terminals across the country.

Seasonal factors are a major factor in the industry. All trucking companies experience increased demand during the fourth quarter of the year, when major holiday shopping season retailers stock their shelves. LTL companies might experience higher demand in the middle of the year than truckload operators due to the fact that they are less likely to need to transport large quantities of homogenous freight. LTL and truckload carriers generally experience slack during the first quarter. This is a good situation, as this period often involves weather-related disruptions.

Major Expenses

Trucking companies have to pay several expenses that can impact their profitability. Earnings have a significant impact on labor costs. A large number of drivers and freight handlers are required by trucking companies. There is often a shortage of qualified drivers, which can lead to intense competition for the best talent. To attract top talent, companies must offer competitive wages and benefits. Trucking companies often employ members of powerful labor unions. These workers have strong bargaining leverage and there is the risk of labor strife. While nonunion workers have lower labor costs than union workers, they may not be as reliable. Pension expense and workers’ compensation are two other significant labor-related expenses.

Fuel is another expense that should be managed with care. Long trips, heavy loads, and large engines all contribute to high tractor-trailer fuel consumption. Surcharges are the main way that diesel fuel costs are passed onto customers. However, truckers may not be as profitable if fuel prices rise rapidly. This can lead to delays in recovering all outlays. Surcharges are preferred by most companies over long-term fuel contract hedging.

Cash flow, common equity, and debt can all be used to finance operating expansion and fleet improvements, depending on their cost. Sometimes, it is possible to assume a large debt burden in order to complete a merger that offers greater market coverage. These companies generally have average stock market risk. These companies can accumulate cash reserves over a business cycle. If there is no urgent need for capital investment these companies will reward shareholders with stock buybacks or a large one-time dividend. Managements are most interested in increasing stockholder value through operating network expansion and enhancements.