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Knight Transportation (KNX)Stock (Transportation Industry, Trucking Industry)
 Knight Transportation (KNX) is a trucking firm that ships consumer goods, food and beverage, and paper products. As a truckload carrier, KNX contracts an entire trailer-load to a single customer, as opposed to less-than-truckload firms who consolidate freight from several customers in one trailer-load. Knight concentrates on the short-to-medium haul dry van market (contents are non-perishable), with an average haul length of 542 miles in 2007[1]. The company has also expanded into the temperature controlled van market, which transports refrigerated goods. KNX’s regional approach allows it to achieve greater freight volumes since ~80% of all truckload freight moves in the short-to-medium lengths of haul[2]. In addition, shorter routes mean more regular maintenance checkups and fewer equipment breakdowns[2]. To complement its primary trucking business, KNX provides brokerage services (around 4.1% of revenue in 2007) for customers with shipments that don’t fit the company’s offerings[3]. KNX’s management minimizes operating costs by employing late model equipment (the company's tractor fleet had an average age of 1.6 years at the end of 2007), which ensures less breakdowns and delays[4]. The firm also pays careful attention to efficient asset utilization (e.g. not letting a tractor sit under a trailer to be loaded or unloaded for long periods of time)[5]. The advantages of the short-to-medium haul market and Knight’s emphasis on cost reduction have helped the company generate one of the best operating ratios in the industry[6]. The firm's ability to efficiently coordinate customer freight movement lets KNX drivers typically spend three nights a week at home, compared to two nights or less for drivers of other regional-haul trucking companies[5]. Knight is also one of only two trucking firms in the nation to offer its drivers stock options[5]. These factors explain why KNX's driver turnover rate averages 50% at a time when the industry average is well over 100%[5]. As a transportation company, Knight’s earnings are closely tied to the overall health of the economy. The firm maintains a diversified consumer base, with no client accounting for more than 5% of revenues in 2007 and limited exposure to cyclical industries like manufacturing and retail[3]. Another concern is rising fuel prices. After accounting for fuel surcharge recoveries, KNX’s fuel costs increased 11% from 2006 to 2007[1].
[edit] Business FinancialsKnight’s trucking operations focus on the short-to-medium haul dry van market. The advantages of this regional approach and Knight’s emphasis on cost reduction have helped the company generate one of the best operating ratios in the industry, averaging ~83% in the five years from 2003 to 2007[1]. In the five years prior to the economic downturn of 2007, KNX had a 21% compound annual growth rate[1]. Revenues totaled $714M in 2007, a 7.4% increase from 2006[1]. This growth is chiefly due to the opening of eight brokerage branches and four service centers, bringing the company’s total to 27 dry van service centers, four temperature controlled service centers, and twelve brokerage branches at the end of 2007[7]. In the same period, net income decreased 13.5% to $63.1M[1]. A weak economy and record fuel prices weighed on the firm’s margins. KNX’s fuel costs rose 14.5% from $165M in 2006 to $189M in 2007[1]. After accounting for fuel surcharge recoveries, fuel expense increased 11% to $77.0M in 2007 compared to $69.3M in 2006[1]. In the short term, KNX management expects revenue growth to come mainly from its developing brokerage business, which doubled in size from 2006 to 2007[8].
  [edit] Trends and Forces[edit] Knight’s Business is Susceptible to Economic ConditionsAs a transportation company, Knight relies on a healthy economy to keep goods moving about the country. The firm maintains a diversified consumer base, with no client accounting for more than 5% of revenues in 2007 and limited exposure to cyclical industries like manufacturing and retail[3]. However, a slowing economy and low consumer demand will cause a total volume drop in shipments that can hurt Knight’s earnings. Additionally, many customers use a bidding system, which tends to keep prices fairly competitive. For instance, when Wal-Mart Stores (WMT) needs freight shipped, it asks several shipping firms to submit how much payment they are willing to accept. The lowest bid usually wins the contract. When shipping volume decreases in a weakening economy, small competitors bid down prices in order to win loads so that they can cover the cost of their tractors. [edit] Knight’s Costs Are Affected By Fuel PricesSince 2004, diesel prices have more than tripled from $1.50 per gallon to $4.72 per gallon in May 2008[9]. Like most of its competitors in the transportation industry, KNX determines shipping rates by charging a base rate plus or minus a change in diesel prices. However, this fuel surcharge is not always fully and immediately transferable to the customer. For instance, fuel consumed when trucks are empty, off-route, or idling are not recoverable. KNX’s fuel costs rose 14.5% from $165M in 2006 to $189M in 2007[1]. After accounting for fuel surcharge recoveries, fuel expense increased 11% to $77.0M in 2007 compared to $69.3M in 2006[1]. High fuel costs have led some shippers to switch from trucking to more economical railroad shipping, especially for long distance hauls[10]. Domestic intermodal revenue was up 9.6% in April 2008[11]. And a report by Morgan Stanley found that shippers expected to increase their use of intermodal by 3.2% in the second half of 2008, compared to a 0.8% increase in long-haul less-than-truckload shipping and virtually no increase in truckload shipping[12]. From Knight's standpoint as a short-to-medium haul trucker, this shift means more competition from traditional long-haul truckers looking to compensate for lost business. [edit] New Government Regulations Increase KNX’s Operating CostsThe transportation industry is subject to a number of state and federal rules on issues such as insurance requirements, environmental standards, safety requirements, etc. In 2004, the Department of Transportation reduced the amount of time that drivers can spend behind the wheel[13]. And in 2002, the Environmental Protection Agency instituted new guidelines designed to reduce diesel truck emissions by 2010[14]. The latest stage in this process came into effect January 2007, after which all newly manufactured truck engines have to comply with a set of more restrictive engine emission requirements[3]. Trucks manufactured with the new engines have a purchasing price ~$5,000 to $10,000 higher than older models, are less fuel-efficient, and have higher maintenance costs[15]. KNX purchased a number of new tractors in advance of the 2007 EPA emissions regulations, which will let it postpone the purchase of trucks with the pricier engines for a couple of years[8]. [edit] KNX's Emphasis on Driver Retention Partly Shields It From Labor Supply RisksThe driver market is the tightest it has been in 20 years, with turnover rate exceeding 100% in some large trucking companies[16]. According to the American Trucking Association, the trucking industry faced a national shortage of 20,000 drivers in 2007, a number that will swell to 111,000 by 2014[16]. In such an environment, Knight Transportation's emphasis on driver retention helps the firm attract experienced drivers. The company's concentration on local and regional trucking means shorter routes and higher job satisfaction because drivers spend less time on the road and are able to stay closer to their families[2]. And thanks to the firm's ability to efficiently coordinate customer freight movement, KNX drivers typically spend three nights a week at home, compared to two nights or less for drivers of other regional-haul trucking companies[5]. Knight Transportation is also one of only two trucking firms in the nation to offer its drivers stock options[5]. These factors explain why KNX's driver turnover rate averages 50% at a time when the industry average is well over 100%[5]. [edit] Competition and Market ShareKnight Transportation competes with a range of regional and national transportation and logistics companies. The trucking industry is highly fragmented because of low barriers to entry. There are roughly 360,000 trucking companies (96% operate fewer than 28 tractors and 82% operate fewer than 6) [17]. KNX's most direct competition is with Heartland Express (HTLD), a truckload carrier that also operates in the short-to-medium haul dry van market. Other key competitors in the truckload segment include: KNX also competes with numerous less-than-truckload firms who consolidate cargo from several different customers in one trailer-load. They include:
Market share figures assume trucking industry revenue of $357.7B in 2006[18]. Several of the listed companies earn a portion of revenues outside of transporting goods, such as warehousing and logistics. These instances usually account for less than 10% of the total sales. Note: A parenthesis around the figure indicates a negative number, i.e. (5.4%) is a decrease of 5.4%.
 Knight Transportation2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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