Old Dominion’s conundrum: Revenue falls as weight per shipment soars

A sharp decline in the amount of freight hauled by Old Dominion Freight Line this month has been accompanied by an unexpected shift: a big increase in the weight per shipment.

For an LTL carrier like ODFL, that increase can create problems for maintaining its yield as measured by revenue per hundredweight. In its first-quarter earnings, ODFL management cited an increase in weight per shipment as a reason why revenue per hundredweight had deteriorated during the period.

In the call with analysts that accompanied the release of the earnings, CFO Adam Satterfield laid out some of the numbers the company has seen in its business, many of which don’t logically tie together but are coming out of a market that is unprecedented in the body blows and disruptions it has dished out.

In March, Satterfield said, weight per shipment increased 6.3%. From February to March, that translated to a 113-pound gain, with the end result of revenue per hundredweight (cwt) dropping 56 cents. Revenue per cwt for the quarter was $22.68, up from $22.10 in the first quarter of 2019 but below where it had been trending toward after the first two months of the quarter.

Satterfield noted in the call that an increase in weight per shipment does not work in perfect reverse correlation to yield. So although LTL pricing at its most basic calculation is set by weight, “It is important to understand revenue per hundredweight is a yield measurement that is not always equivalent to actual pricing,” Satterfield said on the earnings call, according to a transcript supplied by SeekingAlpha. “Multiple factors can have a significant impact on revenue per hundredweight,” he said, citing average length of haul along with weight.

That jump in weight per shipment was historic; ODFL had never recorded one that big previously, Satterfield said. Between June and July 2018, weight per shipment rose 60 pounds. That was in one of the strongest freight markets in history, and LTL carriers were fretting about truckload volumes spilling over into the LTL sector.

But according to Satterfield, that increase then led to an increase of 54 cents in revenue per cwt excluding fuel surcharges, as opposed to the drop in revenue per cwt that this jump in weight per shipment created.

He also said that increases in weight per shipment are normally seen “in an environment where the economy was really strong,” marking the current trend as an outlier.

What the LTL carrier is carrying also is a factor in yield, Satterfield said. “Changes in revenue per hundredweight are also not linear with respect to changes in mix,” he said.

The trend has continued into April, Satterfield said. The average weight per shipment this month is up close to 10% from last April, he said. But that’s one of the only barometers that’s up; Satterfield said revenue per day is down close to 20% in April compared to April 2019 and shipments are “trending slightly worse than revenue.”

April shipments are generally 0.9% higher than March, Satterfield said. He estimated they are down about 15% from March.

But as negative as the company’s shipments have been, ODFL expected worse. “Our actual results have been slightly better than we initially expected when the stay-at-home and similar orders were implemented throughout the country,” Satterfield said of the impact on ODFL so far.

Responding to a question from an analyst, Satterfield said that “multiple factors” were creating the increase in weight per shipment. Elsewhere in the call, it was noted that about 20% of ODFL’s customers were closed. The increase in weight per shipment, Satterfield said, could be nothing more than “which customers remain open and the fact that there’s probably more demand for those customers’ products.”

Satterfield compared the decline ODFL is facing with what it dealt with during the start of the great recession in 2008 and 2009. He said the fourth quarter of 2008 dropped about 5% or 6% and then declined 15% to 20% in the first quarter, “and then it kind of got to its worst in the second quarter.”

During this slowdown, he said, the company did start to see a significant downturn in March, but it was mostly in failing to get the normal bump that ODFL sees at the end of March going into April. “And it may have been a little bit soft, but I think that many customers still had kind of orders in the chain, if you will, and we continue to make some of those deliveries,” Satterfield said.

“But now, and kind of as we anticipated, we saw the rapid drop-off in April, and it’s obviously much harder to respond to that type of change and to be able to keep the network of 238 service centers remaining fluid and our service metrics high,” Satterfield said, while praising the company’s operations team, “and how they’ve made these adjustments cutting out costs, minimizing empty miles.”

And although the company did see a sharp downturn at the start of April, Satterfield said the decline had steadied and is not picking up pace.

Satterfield said that although the market is tough, he is not seeing price wars break out. The LTL providers are “disciplined,” he said. Additionally, they aren’t in position to do a lot of price cutting.

“When you look at many of the carriers’ margins, it’s not really in a position to really go out and try to trade price for volume,” Satterfield said. “In fact, it’s probably better to go out and try to implement more of an increase to try to shore up their profit levels.”