Shippers, not carriers, hold negotiating power on rate changes, analysts say

Trucking and shipping companies shouldn’t hold their breath for big rate increases, analysts said. Shippers aren’t in the mood to see their rates rise.

Shippers are offering carriers existing incentives to keep rates low or even to have them reduced, said John Larkin, transportation analyst for Stifel. “Some are willing to engage in some horse trading,” yet for the most part, “the negotiating power still largely resides with shippers and not the carriers.” Shippers understand the risk of capacity reduction as a result of the electronic logging device (ELD) mandate, which goes into effect Dec. 18, requiring drivers who track hours of service to use an ELD.

Capacity is expected to decline in the mid-single digits, but some carriers expect it to fall by as much as 10% after ELDs are installed, according to trucking/transportation analyst Brad Delco of Stephens Inc.

A topic of discussion surrounding the ELD mandate is whether the Trump administration will reverse it, but it’s “extremely unlikely,” according to transportation and logistics analyst Benjamin Hartford of Baird.

While the industry continues to look forward to the implementation of the ELD mandate as a means to tighten capacity, carriers didn’t have the February that they had expected after a strong January. “Oversupply continues to plague” the industry, and “the bid season is not expected to yield much in the way of rate increases,” according to a sector review by Credit Suisse. “At the same time the truckers continue to face headwinds from increasing driver pay.”

Spot and contract prices remain below 2016 levels, according to Barclays. In February, spot rates fell 1%, while contract rates declined 3%. However, demand for trucking is expected to rise, and industrial growth is pushing demand for less-than-truckload carriers.

Rates were not as good as expected, likely because of “excess capacity” and not a demand decrease, said Jack Atkins, transportation analyst for Stephens. With regard to trucking brokers, this might translate to better net revenue margins for the quarter. But because of the importance of March to the quarter, “it is too early to make a definitive call.” In the past, March has been the strongest month for the quarter. “Seasonally, we would expect to see a positive inflection in spot market carrier rates during March with the start of lawn and garden season.”

Though carriers have been disappointed in February results based on the strong start in January, “we believe the weakness was a result of the early Chinese New Year pulling freight forward as well as lingering excess industry supply,” Hartford said. But so far, March looks to be in line with historical trends.

DRIVING FORWARD
Another potential drag on carriers’ first-quarter earnings will be costs, including “weak used equipment prices,” Hartford said. Other costs include “elevated claims and maintenance expenses” related TO winter weather and the rising cost of driver recruiting.

Over the next 12 months, Larkin sees “a lot of economic stimulus on the horizon,” pointing to an infrastructure bill and energy self-sufficiency. A concern with the latter is that it might pull truck drivers from an industry that is already facing a prolonged driver shortage. “If they have the option of making a little bit more money and sleeping in the same bed every night, they may just shift over to construction or to the energy business,” Larkin said.

As a way to combat the driver shortage, carriers are working to attract younger drivers to the workforce through social media and digital media, according to a recent Transport Topics video on recruiting. Transport Topics is a publication of trade organization American Trucking Associations.

In the video, Priscilla Peters, vice president of marketing and training for Conversion Interactive Agency, explained the importance of “showing up in the moments that count in the digital and social media world.” A mix of media “has evolved for targeting drivers,” but the majority is social and digital media. She said 75% of drivers check Facebook daily.

Rich Merich, a FedEx Freight driver and 2016 National Truck Driving Championships Rookie of the Year, said he learned about a FedEx job opportunity while talking to a friend using Xbox Live, which allows members to chat with friends via the internet, a headset and a video game console.

Jeremy Stickling of Nussbaum Transportation, said Facebook has been providing the most leads for its recruiters. The company started recruiting with social media two years ago after starting to develop leads on job boards five years ago.

Vigillo CEO Steve Bryan said that millennials, or those born after 1980, comprise of the majority of the workforce and are the largest segment of the population in the United States. Also, 85% own a smartphone and touch it 45 times a day, he said. They have “very strong opinions about their personal brand, expect things to happen quickly” and to be able “to use technology.”

Kevin Burch, president of Jet Express, explained how the driver culture has changed and that younger drivers want more praise. They also want to be home more often.

“They are more focused on home time and consistent earnings,” said Tim Norlin of Marten Transport. They company’s dedicated segment has allowed it to focus on younger drivers, and the company is finding more leads with digital media and relying less on print. “The drivers are out there,” he said. “They are very selective on jobs.”

TRANSPORTATION TRENDS
In February, ACT Research’s For-Hire Trucking Index was 57.1, lower than in January, but four points more than the “rolling 12-month average. That is the second consecutive above-trend reading in what is typically a slow freight month,” said Kenny Vieth, president and senior analyst for ACT.

ACT Research also projected net trailer orders rose 24% to 26,400 units in February, from the same month in 2016. “We’ve seen delayed timing this order season, as fleets appeared to wait to make their investment decisions ‘post-election,’” said Frank Maly, director of commercial vehicle transportation analyst and research for ACT. “That makes analysis of monthly changes as well as year-over-year results a bit challenging.”

But the trailer orders, like the big rig orders previously, “have exceeded our expectations,” according to transportation analysts Michael Baudendistel and Brady Cox, both of Stifel. While they don’t think this should come as a “significant surprise,” the number of orders has led them to adjust their previous estimates for 2017 production. The analysts expect production to be 265,000 units for 2017, instead of 250,000, and updated the 2018 estimates to 255,000 units, from 240,000.

Another topic expected to see a lot of news over the next 12 months is Amazon, Larkin said. The company is already functioning as a freight forwarder, “building a truck brokerage in house” and recently announced spending “$1.5 billion to build an air-hub in Cincinnati.” The company is starting with 20 Boeing 767 freighters, and “I wouldn’t be surprised if that were 40-60 within a year or two. If I were FedEx I’m a little worried about Amazon bleeding off my baseload of volume.”

As a freight forwarder, Amazon is “moving their own freight and some other people’s freight across the Pacific and around the containership industry and bought quite a large fleet of semitrailers,” Larkin said. Amazon is also leasing tractors and delivery vehicles and experimenting with drones and robots in distribution centers. “They have developed patents recently for warehouses in the sky, suspended in the air with blimps and drones, and will make deliveries from these suspended warehouses. The final 100 feet of delivery will be handled with a parachute attached to the package.”