Knight and Swift Merger

Trucking companies Knight Transportation and Swift transportation agreed to merge into one company. It’s an all stock deal and creates a behemoth of a trucking company. Forbes reported the combined enterprise value of a whopping $6 billion dollars. The new name will be Knight-Swift. The new organization will have about 70 terminals, 23,000 power units, and 28,000 employees. Now that is a sizable trucking company.

Like everything that happens in the market we wonder what it will mean for the transportation buying industry. Many of you know TJO Cargo is a cargo insurance and risk company mostly for international cargo and higher value domestic LTL shipments. What some of you don’t know is I also spent twenty very enjoyable years in the domestic logistics game so I still follow the industry and the trends. I know weird, right? With those credentials I feel I have as valid of an opinion as anyone talking to themselves on a street corner wearing an aluminum foil hat, so here goes…

Don’t look for any great forces of change that will shake the earth and make politicians honest. The marriage of the two giants won’t create, or dissolve, and new capacity in the market nor will it free up and professional drivers for the market to head hunt. As a matter of fact as a normal truckload shipper you may not notice any difference at all if you deal with 3PL or don’t have large volume. However, if you are a sizable direct buyer of truckload services, you have one new company that will have a great deal of nationwide capacity, although the capacity may come with a slight raise in pricing.

Here is where I see the possible changes due to the merger. With an estimated 70 terminals under one banner it may be a friendlier world for company drivers. The plentiful number of terminals could mean more days home for drivers who want them and more ‘in route’ service locations for maintenance. With 70 terminals it would create straighter transit lines in some cases and could maximize driver miles per pull.  These driver benefits are no small thing. In a market hungry for qualified drivers any additional driver benefit Knight-Swift can offer may make them the employer of choice for drivers. More opportunity for quick cross country transportation will be another benefit. Not all hot truckload freight is run by team drivers. The second option is single drivers hauling trailers terminal to terminal in a pony express type of trailer hand off. This eliminates the freight sitting idle while drivers get their mandated rest periods. While not quite as fast as team drivers, it’s close enough to do the job in many cases and keeps drivers closer to home base.

If you are an investor in the new supersized carrier it may be a wind fall for you. Trucking companies, who have capacity in places when other companies don’t, get to charge higher rates. Michael O’Leary of Fidelis Freight in Jacksonville Florida gets that. He was recently quoted in the Jacksonville Business Journal on the subject and I have placed the quote below along with a link to the article.

“Those synergies could give the bigger company more pricing power when it comes to dealing with customers. “These two carriers, by combining their fleets, will probably be able to leverage their greater market capacity to demand higher rates in the southeast,” said Michael O’Leary, founder of Fidelis Freight. – Jacksonville Business Journalhttp://www.bizjournals.com/jacksonville/news/2017/04/17/experts-mixed-on-what-the-knight-and-swift.html

Here are two reasons why Michael O’Leary is right. The first reason is shippers will pay a premium to use a trucking company, sometimes on contract, with good capacity as their everyday trucking company. The sound logic is by paying the small rate premium there is a greater savings in soft costs and resources attained by fewer freight delays and personnel spending time looking for trucks. It is seldom economical to make freight wait. This positions Knight-Swift well as a contract carrier and they will have the nationwide terminal resources to do it efficiently.

The second reason Knight-Swift will benefit is they are now a more attractive second or third call. Unlike the shippers I mentioned earlier who pay ‘biggie carrier’ rates to secure continuity, the second type of shipper plays the market (beat carriers up on rate) in an attempt to pay the lowest rates possible. While this technique may work in certain transit lanes, e.g. northbound out of Florida, or in certain over capacity environments, it also creates an unstable truck capacity model to work with. As a result of the instability of truck capacity the market shoppers often have a three tier buying system.

The first tier of carriers is the lowest cost, thus called first. These carriers are known for, or have agreed to, very low rates. These low ball carriers are sometimes in high demand and can have sketchy availability. As an additional note, they often have the worst safety records as well. Just saying. In the event there is no capacity in tier one, the effort moves to tier two. The market shoppers expect to pay a 10% to 15% uplift in price moving to the next tier. If no trucks can be found in the tier two carrier base, the search moves to tier three which the uplift in price can be 15% to 20% or more.  Any efforts after tier three are painful, crazy, and sometimes high risk, reaches for any truck that can be found and half the industry’s phones are ringing. Depending on the urgency of the freight, the planned three tiered ‘buy budget’ becomes ancient history. Which system of procurement is better is up for debate, but I can guess which system users sleep better at night and drink less alcohol.

Due to the new mega capacity Knight-Swift will be well positioned to be a second or third tier phone call thus get premium rates for their service. Carriers with 1000 trucks would likely starve as a second or third tier carrier as they would rarely have a truck at the right place at the right time.  Although a carrier with 23,000 trucks and 70 terminals is likely to have an empty, or soon to be empty, truck within 100 miles…’Cha-ching’.  Of course Knight-Swift will also benefit from the new economy of scale. Terminals in major hub areas can be combined and all back of the house administrative functions will be combined.  Higher rates and lower expenses per revenue dollar, sounds like a good plan to me for investor returns.

I doubt this will be the last merger we will be seeing in the trucking industry. We saw it with the airlines, the banks, the global 3PL’s, 4PL’s, forwarders, and we are seeing it in the ocean carrier industries. Consolidation is the latest rage in the pursuit of survival. Over all I believe Knight-Swift, their investors, and to an extent their customers, will see a competitive edge as a result of the merger; though the benefits will have an expiration date on them. As more carriers merge and/or buy up smaller carriers, Knight-Swift will find they are no longer special and will become just one of the supersized crowd.