A Bird’s Eye View of the LTL Sector: On the Road with Roadrunner
Roadrunner’s new CEO and Executive Chairman, Chris Jamroz, and David Ross, Executive Vice President of Strategy, sat down for a Q&A with Stifel’s industry analyst, Bruce Chan, to discuss the LTL landscape from the inside-out, including the remarkable transformation of Roadrunner’s own network and business.
Please give us a quick rundown of your business. How do you position yourselves in the LTL market, and what do you feel sets Roadrunner apart from the rest of your peers?
Roadrunner, or Roadrunner 2.0 as we affectionately call it, is a high-quality operator in the long-haul LTL space. We’re a pure play LTL carrier, and with less handling and faster transit times than our competitors in the markets we serve, we’re a key part of a smart shipper’s LTL carrier roster. We’re certainly aware of the well-deserved reputation of our old network, which was slow, cheap, and inefficient. It was like the rails in the ‘90s, before PSR (precision scheduled railroading). It was focused on the wrong things at the expense of the customer. That’s all changed. We’ve done a complete 180. We overhauled and rebuilt the business from the inside out. Of course, there hasn’t been as much public attention around it, as the whole world has been a little busy with other things since 2020. So, it’s our job now to raise awareness of the new Roadrunner. We have new people, new systems, better data, better visibility, faster transit times, dramatically increased reliability, and significantly lower cargo claims. Our focus is on the customer. What sets us apart is not just our focused long-haul network, where we connect most major markets in the country, but our focus on being a great LTL partner for our shipper customers. That is the new Roadrunner.
Chris Jamroz
Where do you think we are in the cycle, and why? What are you hearing from customers?
When we think about the LTL industry as a whole, we’re coming off a couple very strong years, so we’re past the peak of this cycle. Today, we’re in the softening phase, but how deep it goes and how long it lasts is anyone’s guess. Actually, isn’t that your job, Bruce? Seriously, though, We’re looking every day at how to make this business bigger, better, and more profitable during all parts of the freight cycle. The cycle will do what it does, and Roadrunner should just see higher highs and higher lows.
Chris Jamroz
What are the risks that people might not be expecting? Or is the market over-hyping the risk to freight right now?
As we look at the broader landscape, I see a few risks, maybe a couple people aren’t expecting – some risks of further downside, plus some risk of unexpected upside. And since margins and earnings generally track with volume swings, assume ups and downs relate to all. Risks to the downside would be 1) macro – bigger than expected declines in consumer (goods) spending and/or manufacturing activity – especially any negative surprise on the industrial side, as that’s more highly correlated with LTL volumes, and 2) LTL carrier price aggression like we saw in 2010-2011, led by Con-way and FedEx Freight at the time. The environment appears more rational today, but that changing is a risk. The upside risk, at least this summer, is the potential UPS parcel strike, which could flood LTL networks with volume, even if temporarily. Low probability, but a risk not many are talking about. And while that’s an upside risk to volumes, depending on how carriers manage it, it could be a downside risk to profitability. Taking on too much volume too quickly could choke the system.
Dave Ross
What indicators are you looking at with respect to the direction of the economy? How are they influencing your strategic decisions over the next year or two? Equipment, terminal growth, personnel, etc.
While we watch the macro signals – mainly the ISM Index, retail sales, and inventory levels (I/S ratio) – our strategic decisions are centered around our network and our customers (i.e., self-help) and focused right now on growth in any external environment. There have been more positive changes at Roadrunner than at any other trucking company in years. We’re confident in that. As Chris mentioned earlier, it is truly a remarkable story of transformation that we’re only just beginning to tell. Expect to hear much more this year. It’s exciting.
Dave Ross
Are you more bullish or less bullish in 2023 than last year?
For us at Roadrunner, not due to the macro economy, but rather to all the organizational changes and service upgrades we’ve made, we’re much more bullish on our business in 2023.
Chris Jamroz
When do you believe tonnage inflects? Can industry volumes grow in 2023? Where will that growth come from? Can your volumes grow in 2023?
Well, from an industry level, we’ve watched our public competitors report increasingly negative y/y comps the last few quarters, so this likely will bottom out later this year – it’s just hard to see it shifting to the positive until Q4, 2023 at the earliest. While LTL industry volumes could grow in 2023, we think that’s unlikely based on how the year has started. To grow, we’d have to see a significant cooling of inflation, a right-sizing of inventories, and a pickup in industrial activity. Regardless, our volumes can and will grow this year based on what we mentioned earlier about our business.
Chris Jamroz
Do you foresee any freight conversion from LTL to/back to TL or other modes?
We saw some of this last year (2022), as heavier-weight freight that LTL carriers were moving in 2021 due to the capacity crunch shifted back to TL when TL rates dropped and TL capacity freed up. It wasn’t a huge deal for us – more just a normal part of cycle dynamics. With truckload rates remaining low and LTL still trending higher, this freight doesn’t look to be coming back to LTL this year.
Dave Ross
What are the long-term structural trends in favor of LTL? Are there any that threaten LTL volumes?
When thinking longer-term about the business, there are a few long-term structural trends that favor LTL – two on the demand side, and one on the capacity side. The longer e-commerce stays “hot”, the greater the demand for faster-moving supply chains and smaller shipment sizes. And the bigger one still just in the early stages is the restructuring of global supply chains (aka – reshoring/nearshoring) to favor regional production/sourcing/distribution. This is the move from longer Asia-U.S. supply chains to shorter North American-based or even North American-South American vertical supply chains. The closer goods are produced, the bigger the need for LTL carriers to support production and movement. And with an industry with high barriers to entry, there have been no new entrants of note in more than 30 years. Capacity is fairly limited with the high cost and limited availability of industrial real estate in major markets. We don’t see any structural trends that would threaten LTL volumes.
Dave Ross
Tonnage vs. Shipments vs. Revenue Quality. Industrial vs. Residential vs. Ecommerce. What are the big elements of mix, and how do you balance it all?
Ultimately, it’s about revenue per shipment and cost per shipment. It’s our job to appropriately charge for space and, whether industrial or retail, offer a compelling service product that allows us to make money. We focus more on lane balance and filling our trailers than on balancing shipper categories.
Chris Jamroz
A lot of public peers have talked about shedding non-palletized freight. Are you in the same boat? Does this create opportunities? Where are all the kayaks and rolls of astroturf going?
We’re in a similar boat, and it certainly creates opportunities. As the saying goes, “there’s no such thing as bad freight, just poorly-priced freight.” That’s where accurate costing becomes critical. Usually, this “bad freight” finds its way into networks that are slow to adjust pricing to reflect the true cost of these shipments. We’re happy to haul kayaks and astroturf, to use your example, but our team needs to fully understand the impact that freight has on trailer cube utilization and damage claims and price it appropriately. Like other LTL carriers, we’ve made pricing adjustments for all kinds of freight (especially non-palletized) with better data and more insights into true cost.
Chris Jamroz
How does the mix in your network look today vs. 2019? Are those changes permanent?
Almost everything about Roadrunner looks different today than it did in 2019. And the mix will continue to evolve as we grow. Like most LTL companies, we skew a little heavier to the industrial side, but some of our largest customers are retail. We also enjoy a balance of small shippers, large shippers, and 3PLs – each a valued customer segment for us.
Chris Jamroz
How are your industrial customers’ volumes holding up relative to consumer-focused customers?
Well, that’s a low bar, given some of our retail customers have been facing insanely difficult comps. Yes – they’ve held up much better. But we’ve been onboarding new customers in both retail and manufacturing, so for us, “new customer” comps are infinitely positive.
Chris Jamroz
Has the role of 3PLs in your customer portfolio changed post-pandemic vs. pre?
Yes – although 3PLs have always been an important customer segment for us. We have just spent more time with them to align our service and lanes with their customers’ needs, focusing on customer-specific pricing (vs blanket).
Chris Jamroz
What are the margin and operational implications of e-commerce and home delivery? How does that play into your strategy?
General e-commerce traffic that might be FC to FC flows right in with the rest of the network and is hard to break apart, other than to say it’s often a lower average shipment size. As for home delivery, it’s not a big part of our business. We’ll handle it where the customer can pay for it and where we can deliver with the quality we want.
Dave Ross
How does the Supply/Demand balance in LTL look today vs 2019?
Both industry demand and supply are up from 2019 levels. Given where pricing is, demand growth since 2019 is still ahead of supply growth.
Dave Ross
How valuable is knowing what your peers are doing/charging? What indicators are you monitoring to understand your peers?
It is good to know, especially around their technology adoption, surcharges, and network plans, but it’s not something that dictates our strategy. We monitor the publicly available data for benchmarking, but we don’t wait to know what others are doing to set our agenda. We have plenty to work on internally to get better and grow our customer base.
Dave Ross
Are you beginning to receive pushback on core pricing? How can you mitigate?
We aren’t getting a ton of pushback on core pricing or regular rate increases, although there was more pushback than last year. Certainly, shipper RFPs are increasing this year, as they become more strategic again with their supply chains, and everyone wants to make sure they’re not overpaying. This actually favors us, as we’ve been off the radar for a while, and this gives us an opportunity to get back in with many shippers and show them the new, improved Roadrunner. We expect to continue to be invited to more RFPs and to perform well.
Chris Jamroz
Balancing pricing and volume growth – strategies, indicators, relationship-based, etc.?
After a couple years of significant network changes, IT upgrades, and personnel upgrades, we’re most focused on growth. We’ve kicked out some bad freight (or poorly priced freight) that no longer serves us and are using our capacity for shippers who fit our network and align with our values. It’s about establishing a new, more positive and interactive relationship with our customers. That should bring both volume and pricing growth.
Chris Jamroz
I might as well be asking you astrology questions, but what are your expectations for FSC this year, and what are the likely scenarios with respect to yield? Does your base case call for decline?
Well, Saturn’s recent move into Aquarius will have huge impacts on the world, and that likely includes pricing. Saturn will be in Aquarius for two years, meaning 2023 and 2024 will be a time of significant innovation and progress. Could we finally see simplified pricing come to the LTL industry with the death of the NFMC-based tariffs? Let’s hope! We’re certainly investing a lot in technology to allow for more transparency and simplicity in pricing, which only leads to a better customer experience.
Dave Ross
There’s been a lot of talk about terminal count growth from the likes of OD, Saia, and XPO. Is overall door capacity growing, or shrinking?
It’s definitely growing. The door count reductions at Yellow and TFI have been exceeded by the additions at the rest of the carriers in the industry. It takes a while to add doors or service centers to a network. Some of the capacity that is coming on this year was put in motion in 2019-2021, and we expect net growth to continue the next couple years.
Dave Ross
How do you think about your fixed capacity infrastructure? Is it time to grow, or to shrink?
We’re not shrinking. Today’s focus is on growth and upgrading our freight mix (culling low-margin freight, as we add higher-margin freight to reflect our improved service product). In fact, we just reopened service to Denver and plan to add a couple more select markets later this year. Our next stage is growth – both in freight quality (mix upgrades) and service lanes.
Chris Jamroz
Is pricing broadly rational in the industry right now? Any signs of that cracking, whether by geography/market, freight class, etc.?
Yes – pricing is generally rational. We’re not seeing anyone getting back to 2010 craziness. Everyone’s costs have gone up – labor, equipment, real estate, tech investments, etc. – so it’s pretty easy to hold the line at the moment and get modest increases. These are not the level of increases of the past couple of years, but they are still moving higher.
Chris Jamroz
We’ve seen signs of consolidation in the past couple years—is there room for much more? What is the most likely source – PE, domestic strategic, foreign strategic?
Well, there will probably be a little more, but the deals you’re referring to (e.g. Knight-Swift’s acquisitions in the space) haven’t really changed industry supply at all. If anything, they’ve been modestly positive for industry yield discipline. There haven’t been any new entrants to the business since the early 1990s, and perhaps for good reason. But we have heard inklings of digital LTL solutions—is there any truth or potential in that model? A pallet of physical goods can’t move from Dallas to Chicago in the metaverse. It has to move through the real world. This won’t change. The closer you are to the freight, the better the service. Density and service are critical to a successful operational. We haven’t seen any digital solutions with either – certainly not with both.
Dave Ross
Trends in cost inflation? Where are you seeing relief and what’s worsened?
Drivers. Equipment. Real estate. Insurance. Those have been the main reasons for cost inflation. We see driver costs leveling off, but not much relief overall.
Dave Ross
Understanding cost on a shipment level – what does it take? And is it table stakes to compete profitably today?
To compete profitably – yes, it is table stakes. If you don’t understand your costs, you’re either overbidding or underbidding on freight – and neither is good. How do you understand true shipment cost? First, you need accurate and timely data. This is harder than you may think. We didn’t have it two years ago, but we do now. Still, that’s not enough. You then need to understand where the costs are (pickup, dock, linehaul, delivery, etc.) and how to allocate – which is more art than science sometimes. It’s critically important, so we have a team focused on making sure all costs are accounted for, including the significant investments we’ve made to improve service.
Dave Ross
Are costs increasing faster than pricing?
Not yet. We’re still able to cover cost inflation with our annual contract renewals and basic rate increases. But at Roadrunner, we’re also moving up the service spectrum, which should be a pricing tailwind for us for a while.
Chris Jamroz
How much of a headwind is insurance? Premiums and claims – have they stabilized?
It’s still a much more difficult market than it was historically, but we’ve been focused on self-help. And our significant improvements in accidents and cargo claims (>80% reduction!), which are now better than the industry average, have really helped.
Chris Jamroz
Where do you stand in terms of 3rd party PT vs. employee vs. O/Os? What is an optimal mix for you, and how long until you’re there? Thinking about the start of the next cycle, when do you start to position offensively in terms of lining up capacity?
We have business partners – owner-operators. They form the backbone of our local PUD and linehaul networks. We’re happy to partner with them and plan to continue. We fill in the rest with PT, recently completing an RFP for our truckload carrier base. Having moved away from rail (0% of freight goes over the rail today), our truckload partners are very important to us and our customers.
Chris Jamroz
Are drivers still a constraint? Any markets that are harder than others? Linehaul vs. City?
Drivers are not as much of a challenge today as in 2020-2021. We’ve taken the opportunity to increase our hiring standards, ensuring lower turnover and higher quality. Linehaul historically has higher turnover, but both driver pools are in good shape at Roadrunner today.
Chris Jamroz
Where do you stand in terms of dock labor? Any challenges hiring and retaining?
There are always pockets of need here and there, but in general we’re well-staffed on the dock throughout our network.
Chris Jamroz
Unionization risk? Is this a concern for you?
No risk of the drivers due to our business partner model. If our business partners are successful, we’re successful. It’s the same with dock labor. We provide significant win/win incentives and a great team work environment to keep organizing talks a non-issue.
Chris Jamroz
Where do you see the most opportunity for technology in the industry today?
Anything that reduces steps or decreases friction with the customer. Less paper, fewer clicks, fewer emails, and better service – that’s the goal. There is still lots of opportunity in the industry.
Dave Ross
Can you talk about dynamic vs. static linehaul planning? Is dynamic the goal, or is it more important to focus on a stable base of freight. How does the strategy vary between a linehaul-focused model like Roadrunner, vs. a super-regional hub-and-spoke model?
We run a specific point-to-point network, moving freight direct from market to market. We now have regular schedules but always need to have a dynamic component, based on seasonality, cyclicality, and new customer wins. I’d say the strategy probably doesn’t vary too much between us and the hub and spoke carriers – it’s just that our model is a little more precise and must have more defined schedules for service.
Chris Jamroz
Dimensioners. We’ve been talking about them for a decade. Some carriers swear by them, some carriers say they’re over-hyped. What do you say?
We swear by them. Dimensioners are important for transparency, costing, load planning, and pricing. We’ve installed multiple DIM machines in all our major facilities. Dimming is one of our key dock KPIs.
Chris Jamroz
There’s been some talk of Electric Vehicles (EVs), on a limited basis for yard hostlers, and maybe even city trucks. Have you looked into it at all? Do you see a future for EVs in LTL, and how long before they start showing up in fleets for anything beyond experimentation?
We have not, since we don’t buy the power units. Of course, we’d support any of our drivers who want to bring an EV into their operation. It’s just hard to see in the long-haul lanes due to the limited range of and limited infrastructure for EVs. This may come in sooner on the PUD side, but we don’t see it as big deal for LTL operations in the near to medium term.
Chris Jamroz
Is there a better way to compare LTL operations financially besides the almighty operating ratio (OR)? What KPIs are most important to you, as a private company?
Hard to beat OR. It’s simple and effective. For us, given the turnaround, our service KPIs are at the top of the list. If we’re consistently better than our peers, customers will reward us with their business. And a lot of this is getting it right from the start – no missed pickups and making sure the freight leaves the origin terminal on-time. On-time departures lead to on-time arrivals and happy customers.
Dave Ross
Where are the biggest efficiency/productivity opportunities within your network?
Volume is usually the number one driver, and we’d say that’s still true today. After that, it’s the mix changes I mentioned earlier.
Chris Jamroz
Can the LTL industry keep methodically marching down/right along the OR chart akin to the Rails?
Over the last decade, Old Dominion has really opened everyone’s eyes to what’s possible. Therefore, while we don’t expect to see everyone operating at a 71% OR, we do see an opportunity for improvement for those carriers serious about doing things better. We’re one of those who expect to “close the gap” with Old Dominion over the next few years.
Dave Ross
Chris, you’ve made some important changes to your physical network over the past few years. Some of your public peers are going through arguably even bigger changes. In your mind, what are the pitfalls of major network changes?
Well, we don’t know of any carrier in the industry that has gone through bigger changes than we have over the past 2-3 years. If you’re referring to a large unionized competitor, they’ve been in constant change and restructuring for nearly 15 years now. Ours was focused and acute – big changes and then done. And most importantly, we focused on service improvement, not just network rationalization. The changes in our network, IT, and people have meant our service product now vs 2020 is night and day – much more reliable, significantly faster, better visibility, and safer handling. We’re now on the other side of the massive internal restructuring and excited about our current network and the future of our business.
Chris Jamroz
Do you expect your public peers to be mostly successful? Do you anticipate share gain opportunities?
Yes and yes. Most carriers have structurally improved their business, so most should be successful – but not all are growing and/or thriving. We do expect share gain and see it coming from four areas: 1) our relative service proposition getting much better (self-help should take us from underpenetrated in our existing lanes to “market”), 2) good carriers walking away from lanes that don’t really work for their network, which should allow us to step in where it makes sense for ours, 3) struggling carriers continuing to shed lanes, shutter terminals, and/or provide substandard service – again, opening the door for Roadrunner, and 4) the addition of select markets to our network, bringing existing customers with us, as we continue to grow and provide outstanding service.
Chris Jamroz
Has the industrial real-estate market cooled? Or are prime terminals still fetching top dollar?
Well, it doesn’t appear to be going up anymore – but I’m not sure I’d call it “cooled.” Key markets (SoCal, NJ, and Chicago) are always at a premium, but even there, we’ve seen some increased availability and nearby new construction.
Dave Ross