Knight-Swift's LTL Opportunity
After $1.5 billion in acquisitions this year, the largest US truckload operator has a chance to advance the reinvention of LTL trucking
Welcome to the ninth edition of The Fifth Wheel with Bill Cassidy, an occasional look at a particular aspect of trucking and transportation that’s on my mind or in the news or just caught my eye. Something of a reporter’s notebook. I’ll also post insights and reflections on transportation history.
They say it’s impossible for a new player to break into the less-than-truckload (LTL) business. The start-up costs — building terminals, buying trucks, hiring drivers — are just too high. That’s true, unless you’re Knight-Swift Transportation Holdings.
Knight-Swift, the largest US truckload operator, isn’t starting a new LTL business from the ground up, of course. The company has purchased existing LTL carriers that have more than 100 terminals from the Southeast to the Pacific Northwest.
This week Knight-Swift announced the acquisition of Midwest Motor Express (MME), a North Dakota-based regional LTL carrier, for $150 million. In July, Knight-Swift spent $1.35 billion to acquire southern LTL carrier AAA Cooper Transportation (ACT).
The parent of Swift Transportation, Knight Transportation, and other truckload carriers, had no LTL operations last year and now has spent $1.5 billion to build an LTL network covering more than half the country. That’s more than impressive.
Currently, MME and ACT operate as independent subsidiaries within Knight-Swift. “While preserving and supporting MME’s identity and culture, we expect to bring many synergies from Knight-Swift,” the holding company said Monday.
The question now is, what do they do with these companies? I don’t believe Knight-Swift has spent $1.5 billion — with more acquisitions likely to come — just to create an LTL interline network from a stable of regional carriers. That’s a 1980s vision.
To get the return on its investment Knight-Swift will want for its shareholders and customers, the company will have to put their new LTL subsidiaries through a crucible to create a company that competes with the largest LTL operators.
There’s a precedent for this: the acquisition and merger of Viking Freight and American Freightways in 1998 and 2001 to create FedEx Freight in 2002. FedEx Freight is not only the largest US LTL carrier, it’s the largest US trucking company.
FedEx Freight also is one of the most profitable LTL carriers, with an unadjusted operating ratio of about 83 percent in its most recent quarter and an operating margin of 17 percent. At that margin, it’s the most profitable FedEx division.
ACT and MME aren’t in the top tier of LTL companies. Their revenue placed them 17th and 35th respectively in the rankings of 2020 Top 50 US and Canadian LTL Carriers completed for The Journal of Commerce by SJ Consulting Group.
But Knight-Swift expects them to have $917 million in combined revenue this year, which would have them bumping at the docks of the Top 10 LTL carriers. The 10th largest carrier, Southeastern Freight Lines, had $1.26 billion in revenue last year.
The value in these acquisitions is not what ACT and MME have been (both carriers have long histories) but what they could be. They’re foundational building blocks for a new business, one that’s much bigger in scale and its potential scope of service.
Knight-Swift “didn’t get into LTL to stay little,” Satish Jindel, president of SJ Consulting, told JOC.com this week. “They’re going to aim to be in the top five.” The LTL Top Five last year had revenue ranging from $2.9 billion to $7.1 billion.
Acquisitions alone aren’t going to get Knight-Swift there. The company will have to take its independent LTL subsidiaries and build a nationwide platform with the technology and service it needs to compete against top tier LTL carriers.
One rival Knight-Swift is surely watching is TFI International, the largest Canadian transportation holding company and owner of TForce Freight, the former UPS Freight. TFI has a large portfolio of LTL, truckload, and courier subsidiaries.
TFI spent $800 million this year to buy its way into the LTL Top Five (UPS Freight ranked fifth last year, after Estes Express Lines). It is reworking the business of its big acquisition, cutting terminals, raising pricing, and changing its freight mix.
But TFI is taking interesting steps in the truckload arena, too. Last month TFI combined its largest US truckload subsidiaries, merging Transport America and some smaller subsidiaries into CFI, doubling the carrier’s size and diversifying its services.
On a more cautionary note, Knight-Swift also has to examine the experience of Yellow, which after years of bruising losses is in the process of merging its regional and national carriers to form one multi-regional LTL network.
Customers and competitors are watching to see who Knight-Swift acquires next, how they will run the LTL business, and how they will use technology to improve service and bolster bottom and top lines at what may become “Knight-Swift Freight.”
Knight-Swift no doubt has work to do at its new subsidiaries. But in an LTL market where demand for capacity and service is expected to remain high in 2022, Knight-Swift has a real opportunity to accelerate the reinvention of LTL trucking.
Here are some related articles from myself and my colleagues:
Knight-Swift expands LTL presence with Midwest carrier buy (Dec. 6, 2021)
E-commerce draws Knight-Swift to LTL sector with $1.35 billion deal (July 6, 2021)
UPS Freight sold to Canada’s TFI for $800 million (Jan. 25, 2021)
LTL carriers ‘right size’ networks for higher profitability (Oct. 29, 2021)
And from LTL guru Satish Jindel, president of SJ Consulting Group:
Market is ripe for spin-off of FedEx Freight (Nov. 3, 2021)
If you like this newsletter, you’ll love Please Haul My Freight, a Substack newsletter from my esteemed colleague Ari Ashe, Senior Editor for Southeast Ports and Intermodal Rail at The Journal of Commerce/JOC.com.
You’ll also enjoy Rethinking Supply Chains by JOC Senior Analyst Cathy Morrow Roberson and The LogTech Letter from JOC Senior Editor Eric Johnson.
Thanks for subscribing to this newsletter. For those that don’t know me, I’ve been the senior editor for trucking and domestic transportation at The Journal of Commerce and JOC.com since 2009. Before that, I spent 13 years as managing and executive editor at Traffic World, a weekly magazine once owned by the JOC. I got my start in this business with Fleet Owner, a monthly magazine then owned by McGraw-Hill.
I can be reached at bill.cassidy@ihsmarkit.com, on Twitter at @willbcassidy, and on LinkedIn.