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Forward Air Pinched By Higher Purchased Transport Costs, Sees Stiff Challenge Getting Team Drivers

Forward Air Pinched By Higher Purchased Transport Costs, Sees Stiff Challenge Getting Team Drivers

The tight supply of commercial drivers, and of team drivers in particular, is pinching expedited transportation company Forward Air Corporation, (NASDAQ: FWRD) the company's top two executives said today.

The Greeneville, Tenn.-based company, which yesterday posted solid fourth quarter and full-year 2018 results – achieving records across various metrics – is feeling the escalating costs of purchased transportation. About 25.9 percent of its fourth quarter tractor usage in its core expedited less-than-truckload (LTL) business was sourced from third-parties, up from about 21 percent in 2017. The balance of the company's fleet comes from owner-operators who effectively work exclusively for Forward Air.

Purchased transport expenses for expedited LTL in the fourth quarter rose about $4.7 million from the year-earlier period, the company reported. Across its four units – which also include truckload, intermodal and pool distribution – fourth-quarter purchased transportation costs rose $7 million year-over-year.

"Purchased transport is tight, especially for teams," said CFO Michael J. Morris on an analyst call. "It is still a challenge to get them."

Team driver availability is critical to a company like Forward Air, which provides time-definite services across fairly long lengths-of-haul. The average distance of its expedited LTL runs in 2017 was 650 miles, according to Benjamin J. Hartford, analyst for Baird, an investment firm. With the electronic logging device (ELD) mandate in many cases capping solo drivers' daily runs at 400-500 miles, teams are often necessary to fulfill Forward Air's delivery requirements while ensuring that drivers operate within the regulations.

As difficult as it has been to find qualified solo drivers, it is even harder to find teams – especially at wages that carriers are accustomed to paying. Because the ELD mandate has made them more valuable, teams can typically command six-figure annual salaries. Teams are also scarcer because not every duo is cut out to share a rig for days at a time.

Forward Air reported a 4.2 percent fourth-quarter tonnage decline in the LTL segment. Morris and Tom Schmitt, the company's president and CEO, blamed the decline in part on tough comparables from the 2017 fourth quarter when volumes were strong. The difficult year-on-year comparisons will likely carry over into the first quarter of 2019, the executives predicted. January LTL tonnage rose 1.6 percent over the same period in 2018, the company said. Yields on the LTL traffic were strong, the executives said.

Within the LTL segment, the company's airport-to-airport business, where it moves goods between 90 terminals located at or around U.S. airports, reported lower tonnage. That was offset by gains in its door-to-door business, although the airport business is the larger of the two sub-segments.

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The expedited LTL segment works with wholesale customers like airlines, steamship lines and third-party-logistics providers that represent big shippers to handle goods within the U.S. Its high-velocity, time-definite model is designed to offer a less-expensive yet timely and reliable alternative to air transportation.

On the call, Schmitt said the company will look to further expand its business-to-consumer service, which currently has 100 trucks providing final-mile deliveries on an "over the threshold" basis, meaning the deliveries enter the end-customer's residence. Morris added that a "game plan" has been developed for M&A activity, especially in intermodal – which had a strong fourth quarter with an 18.8 percent year-over-year revenue gain and a 7.3 percent shipment count increase – and in final mile.

Forward Air has budgeted for a "healthy amount" of capital expenditures for 2019, with the focus on information technology investments rather than in the physical plant, Morris added.

Schmitt, who will add the chairman title in May when Bruce A. Campbell, the current chairman, retires, said the company will be announcing new accessorial charges – fees separate from the basic line-haul – rate adjustments and fuel surcharge changes in the March to May time frame. Schmitt strongly hinted at higher charges for moving oversized shipments, saying the company is "not competitive in what we charge" for big, bulky shipments.

Forward Air's quarterly and 2018 results got a warm reception today from investors and traders in an otherwise down equity market. Shares closed at $64.52 a share, up $5.77 a share.

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