Covenant Logistics (CCJ Top 250, No. 36) moved more of its fleet onto multiyear contracts as management anticipates another year of double-digit rate increases amid rising costs.
Chairman and CEO David R. Parker said approximately 80% of its fleets were under long-term contracts at quarter-end. Expedited had seen the most significant shift—about 58% of tractors now serve committed capacity agreements, and Parker expects 75% to 80% by year-end, up from about 25% in January.
Contracts typically run two to four years with minimums, and customers can exit only if service isn’t corrected within about 90 days, Parker said in a call with analysts.
Demand is increasingly driven by high-security loads and high-value freight, including technology and data center-related loads, Parker said, supporting its shift toward committed capacity agreements.
The move carries a cost: recruiting, trailer positioning and driver pay for new dedicated team operations pushed the Expedited adjust operating ratio to 94.1%, up about 50 basis points.
On the other hand, Parker said the company has an advantage in the team-driving market, especially as regulatory enforcement by the Federal Motor Carrier Safety Administration ramps up. He estimated about 3% of truck capacity and 4% of drivers have left the market, with another 3% to 4% likely to follow.
“It’s very difficult to start a company today and say, ‘I’m going to get in the team business.’ It’s hard. It’s tough. It’s difficult, but we have got the infrastructure to be able to do that,” Parker said.
Executives also pointed to electronic logging device (ELD) violations as another factor affecting the competitive landscape. Parker estimated that 30% to 40% of trucks on the road are manipulating ELDs, allowing some solo drivers to operate beyond legal hours-of-service limits and compete with legitimate team operations. He expects FMCSA to move toward third-party certification of ELD companies.
As enforcement tightens, Parker said it could affect available capacity and boost demand for compliant team-driver operations.
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Costs keep climbing
The Chattanooga, Tennessee-based carrier reported $353.9 million in total revenue, up from $296.9 million a year earlier. Freight revenue excluding fuel surcharges increased 17.2% to $315.1 million from $268.8 million. Net income rose to $10.7 million, up from $9.1 million from the prior-year period.
Truckload freight revenue per mile rose about 19.7% in the quarter, while truckload operating expenses increased about 20.8% year over year, driven by wages, benefits, equipment and technology.
Parker said that after double-digit increases this year, most of Covenant’s operating ratios have improved only 1 to 1.5 points, which he said isn’t enough. He expects the industry to keep pushing rates higher in 2027, noting that increases will remain in the double digits. “I hope it does, but that’s my expectations,” he said.
In Dedicated, Covenant President Paul Bunn said annual contract escalators haven’t kept pace with driver pay, equipment and insurance inflation, so Covenant is renegotiating with customers. He compared it to 2021, when costs rose and rates followed.
“We’ve just got to work customer by customer to get the rates to justify the cost increases,” Bunn said, adding that the company sees no sign that truck prices, insurance or driver pay will go down.
[RELATED: Trucking cost per mile sets new record high]
Segment performance
- Expedited: Freight revenue fell 12.0% as the fleet shrank 21.4% to 677 tractors, but revenue per tractor per week rose 12.0%.
- Dedicated: Freight revenue rose 4.2%, and revenue per tractor per week rose 6.2%. the adjusted operating ratio was 96.1%, up 140 basis points, on unseated tractors, higher driver pay, equipment costs and heat-related volume losses in agricultural fleets.
- Managed freight: Freight revenue rose 68.4% to $121.6 million, and adjusted operating income rose 133.3% to $7.1 million, driven by customer rate increases and easing capacity costs.
- Warehousing: Freight revenue rose to $26.7 million, but margins slipped on inefficiencies at new customer sites and general labor inflation.
Freight market and balance sheet
Covenant said demand is adequate in most sectors and strong in sectors related to U.S. economic growth. Parker said the market went from about two loads per truck in the second quarter to roughly 1.3 in the third. That is still favorable, but spot rates eased as an estimated 5% to 8% of freight moved to intermodal.
Net indebtedness fell $12.4 million from year-end to $283.9 million. Debt-to-capital improved to 40.2% from 42.3%. Net capital expenditures are expected to be $35 million to $40 million for the rest of 2026.
For the fourth quarter, Covenant expects a modest sequential EPS increase, with better truckload margins by lower TEL income within a range of $3.7 million to $4 million.
