Setting The Table: The Freight Transportation Industry
NOTE: This is intended to be a living reference document and may read like a dictionary so my recommendation is to skip right on ahead to the Old Dominion writeup.
The scale of freight transportation in the U.S. is quite large: it’s a $1T/year spend industry in the United States, or about 5% of U.S. GDP. Virtually everything you touch went through the physical supply chain at some point. It’s a timely topic today as supply chain problems are impacting tons of physical goods (see: Peloton).
Here’s how that $1T in spend breaks down by transportation sub-segments:
Freight Breakdown by Spend
Let’s go through each of these VERY briefly:
Trucking:
For-Hire Truckload (“TL”) – These are point-to-point freight haulers which contract with a single customer to move a single shipment of freight (e.g.: Target). Also called “line-haul.” Highly fragmented, cyclical business with low barriers to entry. 90% of industry capacity estimated to come from trucking companies which operate 6 or fewer trucks.
Public truckload companies: $KNX, $SNDR, $JBHT, $WERN, $HTLD, $MRTN, $USAK, $CVLG
Private/Dedicated – Company owned and/or turnkey trucks and drivers that work exclusively for single customer. It’s not possible to invest directly in Private (since these are run by Wal-Mart/Target/etc.). However Dedicated is an investable subsegment. Fundamentally Dedicated is a scale game, and the value provided by Dedicated providers is the ability to hire drivers, buy and maintain equipment, and manage the entire product at scale with a turn-key solution that emphasizes convenience for the shipper.
Public companies with Dedicated offerings: $R, $JBHT
Less-Than-Truckload (“LTL”) – These consolidate smaller shipments (typically averaging 1,000-1,500 pounds/shipment) in a region, consolidates into larger shipments at a terminal for a longer line-haul component before reaggregating into local delivery to a business at a second terminal. This is a hub-and-spoke business model which naturally gravitate towards oligopolies. Fairly capital intensive since this business requires a network of warehouses where freight consolidation/deconsolidation activities can occur. Within LTL there are national and regional players: it’s possible to only focus on specific geographic regions.
Public LTLs: $ODFL, $SAIA, $YRCW, $ARCB, $FWRD
Public companies with LTL offerings: $FDX, $UPS (sold recently to $TFII), $XPO
Other Trucking/Trucking Niches – There are lots of niches/splits within trucking, some highlights:
· Last Mile: companies who handle high service final mile delivery, the typical example is appliance delivery which requires the driver to carry the goods into the building and installation ($XPO, $JBHT).
· Van/Reefer/Flatbed: Most goods are hauled in the familiar semitruck trailers. However some goods require refrigerated trailers (which also have higher service demands as these can’t arrive too late) and other goods cannot fit inside a box (e.g.: windmills).
· Expedited: Long-distance driving requires team-based drivers (so one can sleep while the other drives).
· International Drayage: Trucks that move goods when the are offloaded from ocean freight containerships at the port to local warehouses near the port.
Odd Duck Trucking Companies: $TFII
Parcel
Similar to LTL, a hub and spoke business model but each shipment size is much smaller and is typically a B2C business where consumer products are delivered directly to a customer’s door. In addition to the 3 public players, the U.S. Postal Service is a fourth option. The key factor here is network density: ideally you have more shipments within a more limited time frame. Another interesting distinction here is that $UPS started as a trucking company and $FDX started as an airfreight company, which is one reason $UPS has union drivers while $FDX does not.
Public parcel companies: $FDX, $UPS, $DPSGY
Railroad
Carload – Hauls commodity items (coal, forestry products, oil, automotive) in specialized railcars. There’s 7 Class I railroads in the United States. These are capital-intensive regulated oligopolies/monopolies which are basically impossible to replicate today because it’s very expensive to find contiguous land as well as build new track into major industrial areas which have cropped up around railroad tracks. Also notable, capex perpetually outstrips depreciation and amortization because of long useful lives and labor and material costs today are higher than they were when the track was first laid.
Public railroads:
· East: $CSX, $NSU
· West: $UNP, $BNSF (part of $BRK-A)
· North: $CP.CN, $CNI.CN
· Other (Cross-border to Mexico): $KSU
Intermodal – These are truck->railroad->truck hybrid products. A trucking drayage provider handles the trucking component to and from the railhead and handles the customer experience on behalf of the railroad, and are thus demand-side aggregators corralling lots of small shipping customers to use one of a few railroad options. Typically, these are 15-30% cheaper than using trucks exclusively and take a day longer in transit. The cutoff for truck vs. intermodal usually is between 300 and 500 miles. Similar to freight forwarders although Intermodal (sometimes called “Intermodal Marketing Companies” or “IMCs”) tend to own their containers and trucks so it’s more capital intensive.
Public companies with intermodal offerings: $JBHT, $HUBG, $XPO
Airfreight
By far the most expensive transit option, but also the fastest. Typically reserved for extremely high value and/or time sensitive items. Airfreight is also typically used in emergencies.
Public airfreight companies: $AAWW, $ATSG
Water
Domestic – Barges typically used for transportation of commodities in bulk. Cheapest transportation method of all.
Public domestic water companies: $KEX
International – International containerships and bulk carriers. Both are tough businesses, characterized by high capital expenditure requirements, commoditized offerings, and intense competition (especially on the continership side where there are less price sensitive quasi state companies).
Public international container shipping companies: $MAERSK-A, $1919.HK, $HLAG.DE, $0316.HK, $011200.KS, $2609.TW, $MATX
Public international bulk carriers: $STNG, $EURN, $DHT, $TNK
Third Party Logistics
Truck Brokerage – Truck brokers are two-sided marketplaces matching two very fragmented user bases: shipping customers and trucking companies. Because brokers don’t usually own the underlying assets moving the freight, they tend to have very high returns on invested capital.
Public truck brokers: $CHRW, $XPO, $LSTR, $ECHO
Public companies with truck brokerage offerings: $JBHT, $KNX, $SNDR, $WERN, $CVLG, $USAK, $ULH, $UPS
Freight Forwarders – Freight forwarders are demand-side aggregators who consolidate smaller customer shipments into larger ones to put on planes or massive containerships. Freight forwarders typically own/lease warehouses near airports/ports to consolidate and break up shipments, but don’t own the underlying boats or planes and thus has the potential to earn good returns on capital.
Public freight forwarders: $EXPD, $CHRW
Public companies with freight forwarding offerings: $FDX, $UPS
International freight forwarders: $DSV.CO, $KNIN
Data Providers/Other Services
There’s also a lot of other associated companies that provide data, news, and other services to the transportation industry. My hope is that we’ll eventually dig into these and others, stay tuned 😊.
Relevant tickers: $CKN.L, $INFO
Appendix: Freight Breakdown by Tonnage