Earlier last month, Phoenix-based trucking firms Knight Transportation and Swift Transportation caught the industry by surprise when they announced their merger, which will make them one of the largest trucking companies in North America. The merger has been hailed as a positive move for both companies, but some observers see it as a herald of a new era of consolidation, which could seriously change the logistics landscape.
The Swift-Knight merger will turn these already large companies into a behemoth with a projected annual revenue of over $5 billion. It comes on the heels of years of aggressive acquisitions on the part of Swift, including M.S. Carriers and Central Refrigerated Service. Though it has been described as a “merger of equals,” Swift is by far the larger company, with nearly 42,000 company-owned tractors to Knight’s roughly 4,300. Despite this, Knight’s management is set to take over the new company, and has promised to bring a more efficient set of best practices to the arrangement. The change in leadership may also be explained by Swift’s stunning report, released April 25, that they experienced an 84% drop in profits in the first quarter of 2017. The heads of the new company (to be called Knight-Swift) alluded to the friendship between the founders’ families as a primary reason for the merger, but market analysts have pointed to “slower economic growth, a soft freight market, and pricing competitiveness within the truckload market” as the best explanations for this move.
Whatever the reasons for it, the merger has been greeted enthusiastically on Wall Street, with shares of Swift Transportation jumping 23% in the wake of the announcement, while Knight’s shares climbed 10%. However, despite Knight-Swift’s rosy predictions for their revenue growth, some analysts have cautioned that the company may not be able to capitalize on its synergies as fully as they have promised, with Market Realist calling the prospect “overstated.”
The Knight-Swift merger is big news, but even a $5 billion company hardly stands to dominate the $360 billion North American trucking industry. Yet the relative ease and profitability of this merger may set the stage for a new wave of industry consolidation. In an editorial, Transport Topics speculated that the merger “is but the opening salvo of the great truckload mergers and acquisitions-palooza of 2017.” At the moment, larger companies may simply be better equipped to handle fluctuating fuel prices, the industry’s ongoing driver shortage, and the (at least temporary) productivity shortfall anticipated by the upcoming ELD mandate.
While this shift may not be a welcome change for industry veterans, it should come as no surprise. Indeed, for years outsiders have wondered why the truckload sector (as opposed to less than truckload) is not more consolidated, given its enormous economic scope and overall profitability. According to SupplyChainBrain, the top 25 TL carriers have traditionally only accounted for 8 to 10 percent of the sector’s total revenue, making it ripe for consolidation. For customers, this trend will likely offer both advantages and disadvantages. On the plus side, trucking consolidation may help businesses expand geographically into new markets, and access to larger fleets of trucks and drivers could make for a more reliable experience. On the other hand, decreased competition between companies is all but certain to drive up prices, as fewer companies are free to set rates as they see fit. Shippers will need to keep a close eye on these changes, and adjust their plans accordingly.
For more on this subject, please come back next week, when we’ll discuss the driver shortage and its larger effects on the industry.