Most carriers have been struggling to secure contract rate increases so far in 2017, but James Reed, CEO of Van Buren-based USA Truck, said the carrier and customers recently agreed to “quite a few 10% rate increases.”
When asked if the carrier received any pushback from customers, Reed said, “No, most customers were wondering when we were going to figure out that our rates were 10% below the market.”
Reed, who recently replaced former CEO Randy Rogers, spoke at the 2017 Stifel Transportation & Logistics Conference in Key Biscayne, Fla., on Feb. 15.
With fourth-quarter earnings reports in the books, trucking companies have turned their attention to 2017, and have reason to be optimistic about the year, as rates are expected to rise and freight volumes rebound. But some headwinds remain as shippers continue to charge customers less and brokers’ profit margins are squeezed.
This squeeze should come to an end as truckload supply and demand become tighter over the next six to 18 months, “provided a recession does not materialize,” according to Stifel.
Transportation analyst John Larkin of Stifel expects truckload contract rates to rise between 1% and 3% in the second half of the year as a result of increased demand and declining capacity and viewed the following factors as having potential impacts on pricing in the sector:
• Capacity is expected to “remain loose” through the middle of the year, but some tightening in supply and demand might be possible in the second half of 2017. Capacity continues to be impacted by congested highways, roads in disrepair, driver recruiting and retention and fleet downsizing.
• Intermodal “has largely rebounded” and has become a “cost effective option” for shippers.
• While several federal regulations remain in place, others are subject to delay, being changed and removed under the Trump administration. “Rules in jeopardy include the speed limiter rule and the sleep apnea rule,” Stifel noted.
In January, trucking companies experienced “pockets of weakness” in freight volume as a result of severe weather, specifically in the West and Southeast, according to an industry note by transportation analyst Brad Delco of Stephens Inc..
Freight volume rose faster than capacity, according to ACT Research’s For-Hire Trucking Index for January. This might mean the rebalancing of capacity that started in the second half of 2016 is accelerating in 2017.
“Hopefully, January’s readings represent a sustainable improvement in freight creation as rising commodity prices boost investment and lead to increased demand for machinery,” Kenny Vieth, president and senior analyst for ACT Research, said in a news release. “Of course, as the move was such a strong deviation from the trend, some of January’s high-side surprise may be related to longer plant shutdowns in December as inventories continued to be rebalanced.”
Carriers operating flatbed trailers have reported the largest increase in freight volume, according to Stifel. Companies running dry-van trailers and intermodal carriers also have seen volume rise toward the end of 2016 and into early 2017. But in February, demand for dry-van carriers declined. Less-than-truckload carriers also have seen demand increase.
Larkin expects less-than-truckload rates to increase 2% in 2017 and sees the following factors impacting pricing for the less-than-truckload sector:
• Loose capacity in the trucking industry is hurting less-than-truckload demand. But as trucking supply and demand comes into balance it might “spill over to LTL.”
• Domestic production and automated manufacturing allows for more freight shipment opportunities, but it’s being slowed because of a strong U.S. dollar.
• Freight that’s more concentrated and efficiently packed is leading to order sizes that are more often shipped by less-than-truckload carriers. They are also making more final mile deliveries for larger items purchased online.
In January, less-than-truckload carriers saw an increase in tonnage and reported between 3% and 5.5% increases in contract rate renewals, according to Delco.
The growth of the U.S. economy might be a potential headwind to the trucking industry if it’s held back by “rising interest rates and tight credit,” a strong dollar, uncertainty related to trade and “a tepid customer base.” But these could be offset by “low commodity prices” or “favorable federal fiscal policy and regulatory changes.”
Also, “supply and demand have tightened some” because fleet sizes have been reduced and inventory has been adjusted. While the ratio of inventory to sales has declined recently, “the ratio still has a long way to go to match pervious lows,” according to Stifel. However, the target low might need to be adjusted as e-commerce and omni-channel retailers need more inventory to meet “very rapid fulfillment demand.”
Even so, “the mother of all capacity shortages” might still take place as a result of fleets continuing to downsize, federal safety regulations and President Donald Trump’s planned policies being carried out, according to Larkin. “However, we wouldn’t expect severe capacity shortages until 2018 at the earliest.”
In 2016, some fleets took advantage of the soft freight demand to downsize in order to make better use of equipment and maintain driver pay. Some carriers “modestly” increased their fleets, helping “needy manufacturers” while also preparing for better freight conditions, according to Stifel. Most companies have reduced the average age of their fleets to become more fuel efficient and improve driver satisfaction.
In a recent industry note, Delco looked at how depreciation and the sale of used equipment impacted carriers’ bottom lines. In 2016, the companies saw operating income fall nearly $360 million, compared to 2015, and about 45% of the decline can be attributed to increased depreciation and rent costs and decreased revenue from the sale of used equipment. “These bottom-line impacts were the biggest headwinds in more than 20 years as a result of newer equipment as carriers completed significant refreshments and reduced average age of fleets combined with the challenged used truck market as freight demand was lackluster in an oversupplied market,” Delco wrote.
But Delco was optimistic, seeing “signs of the used truck market stabilizing, creating an opportunity for earnings growth to inflect positive in the latter part of 2017.” The abundance of used semitrailers “continues to dictate pricing. But demand may improve mildly now that the uncertainty of the presidential election is behind us, and tax cuts and regulatory rollback are on the table,” according to NADA’s Commercial Truck Guidelines report for February.
No group of stocks “ran up harder and faster than the truckload group” after the election, but since mid-December, the trucking stocks that Stifel follows have fallen about 6% while the S&P 500 stocks have risen 0.83% in the same period. Larkin expects that trucking company stocks “still have at least another 5%, on average, to correct over the near term.”