Yellow Share Gains Providing a Boost but Saia's LTL Backdrop Remains Unfavorable

Senior Equity Analyst

Matthew Young

Saia ranks among the 10 largest less-than-truckload, or LTL, carriers by revenue and is a top-tier operator in terms of profitability and service quality. Pure-play public competitors of similar quality include XPO and best-in-class Old Dominion. Saia was historically a super-regional carrier, serving 34 states across the South, Southwest, Midwest, Pacific Northwest and West. That said, in 2017, it launched an organic expansion strategy into the Northeast, while more recently boosting door capacity and service capabilities in existing regions with solid long term growth prospects such as Dallas and Atlanta. Saia has opened more than 40 new terminal facilities since 2017, with about half of those opened over the past few years, bringing the total to more than 190. 

Saia has bolstered its margin profile (on average) over the past three-plus years with help from disciplined yield management, improved mix (higher margin, heavier weighted freight), and rising lane density within newly expanded regions. Pricing action (aimed at boosting revenue quality) tempered shipment growth in 2021 and 2022, but the company continues to gradually build network density while lifting the mix of shippers willing to pay for high levels of service. In our view, Saia’s terminal expansion positioned it well to take freight diversions (and market share) stemming from the failure of former industry giant Yellow in 2023. This is because capacity growth has been generally limited across the broader LTL industry over the past seven years. Incremental share gains are possible in 2024 following Saia's recent purchase of formerly owned Yellow terminals at auction. 

Freight demand soared in 2021 and 2022 on the pandemic driven inventory restocking surge and e-commerce spike. That said, although Yellow's bankruptcy drove shipments to large high-quality carriers, underlying industry demand normalized in 2023 on soft industrial end markets and muted retailer restocking. Thus, Saia and its peers saw margins ease off exceptional levels. That said, longer term, we look for improving freight mix and density gains to yield incremental operating ratio progress into the low 80% range (lower is better).

Business Strategy & Outlook

Saia is a high-quality, solidly profitable LTL carrier, but we don't believe it has carved out an economic moat. LTL trucking is asset-intensive (requiring real estate, terminals, and tractors) and there are limited opportunities to differentiate over the long run. In our view, most high-quality operators struggle to carve out a durable competitive edge via the common transportation moat sources. The one exception is Old Dominion, which has uniquely built a lane density advantage. In transportation, moats are more common in asset-light third-party logistics, where the network effect can create value, or among the global express carriers and railroads, both of which benefit from efficient scale or cost advantage. 

It is true that entry barriers in LTL shipping are substantially higher than those found in the more fragmented full-truckload space. This is because of the need for a broad network of consolidation terminals (including real estate, which can be scarce), a large fleet of trucks, and sophisticated load path planning software. Thus, a new entrant would incur painful losses for an extended period due to minimal lane density (trucks would need to run but would not be full). As a result, the industry hasn’t seen many new entrants and it’s somewhat concentrated (the top 15 carriers have roughly a 50% market share), especially compared with the full-truckload sector. Thus, a handful of high-quality providers—including Saia—have managed to gain share, raise core pricing, improve mix, and produce meaningful economic profits on average over extended periods, but most have been hard-pressed to post economic profit over a full cycle, and even the best have seen capital returns dissolve during periods of excess capacity as irrational price setting kicks in. 

It might appear that the high-fixed-cost nature of LTL operations should allow for enduring scale-based cost advantages, or perhaps benefits from superior internal processes that optimize line-haul and pickup and delivery efficiency. However, although the process can take many years, network service reach and routines capable of maximizing quality and productivity can be replicated by well-capitalized competitors over time, and for most carriers, scale economies have proven insufficient over the full cycle. 

There have been a few mini trucking-market pullbacks over the past decade (2016-17 and 2019, for example), but the industry has not seen a major economic recession to speak of. In fact, the pandemic-driven demand and pricing surge pushed LTL capital returns to record levels (including for Saia) in 2021 and 2022, and the freight pullback in 2023 was more of a normalization than a demand collapse. It's also true that carriers have become more price- and capacity-disciplined since the Great Recession, but the magnitude of that progress hasn't truly been tested. We still think a major freight recession (one that hits retail and industrial end markets at the same time) would drive yields and ROICs down materially. That was evident throughout the Great Recession when numerous struggling LTL carriers on the brink of collapse slashed prices to unmaintainable levels in a desperate attempt to grab volume and stay alive.

None

Economic Moat

Saia

Saia, Inc. operates as a transportation holding company. The firm through its wholly-owned subsidiaries provides regional and interregional less-than-truckload (LTL) services through a single integrated organization. The firm also offers other value-added services, including non-asset truckload, expedited and logistics services across North America. The company was founded by Louis Saia, Sr. in 1924 and is headquartered in Johns Creek, GA.

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