Demand for spot market freight has been on the rise headed into peak season as Tesla turns its attention to the trucking industry to announce its electric big rig this week.
Spot freight volume rose 65% in October, from the same month in 2016, according to DAT Solutions, and it’s expected to rise again before the end of December. October volume was driven by the ongoing recovery from the hurricanes in Texas and Florida. The volume declined 3% from September.
On Thursday (Nov. 16), Tesla is expected to announce an electric big rig that “will blow your mind clear out of your skull and into an alternate dimension,” Elon Musk wrote in a tweet. The company was expected to announce the electric truck Oct. 26, but Musk delayed the announcement as the company focused on production issues with its new vehicle, the Model 3, and increased battery production for hurricane-ravaged Puerto Rico and other affected areas.
While spot market rates remain elevated, “much of the shock caused by significant weather events” in the third quarter “has normalized across much of the country,” according to transportation analyst Jack Atkins of Little Rock-based Stephens Inc. The upcoming “peak season is expected to be one of the strongest peaks since the 2008/2009 recession, which we believe could cause further constraint on industry truckload capacity, causing spot market carrier rates to move higher.”
In a report on Stephens’ annual Fall Conference in New York, trucking/transportation analyst Brad Delco of Stephens said consistent themes at the two-day event were the tight truckload market, LTL benefiting from a good economy with “strong demand and pricing trends” and intermodal expected to benefit in demand and price from a tight truckload market. The driver shortage is expected to keep capacity tight, and this freight cycle is expected to be longer than the “2014 up-cycle.”
“We believe these takeaways cement our view that we have seen a cyclical inflection in freight fundamentals, and that 2018 bid season will see a strong acceleration in pricing trends,” according to Delco.
At the conference, management of Van Buren-based carrier USA Truck said the use of its trucks could potentially be improved between 10% and 15%. Also, they expect net income to rise in the fourth quarter, from the third quarter, and net income is expected to increase in 2018. The third quarter was the first positive quarterly earnings for the company in 2017.
Management of Fort Smith-based ArcBest, parent company of LTL carrier ABF Freight, highlighted the positive weight/shipment trends in the third quarter and “attributed some of those trends to the new space-based pricing” the carrier established Aug. 1 and is still being rolled out, Delco said. The carrier noted the 6.8% rise in contract rate renewals in the third quarter was the second highest level in the past 15 years. And, “management alluded to the fact that the pension is a 700 bps (or 7%) drag to margins. Overall, commentary was positive around fundamentals with a belief that the cycle is setting up similar to 2004/2005.”
In industry update, “Truck Drivers Tougher to Find Than New York Giants First Downs,” John Larkin, trucking/transportation analyst for Stifel, said the strongest message he’s heard about the existing market was while attending a shipper conference, in which shipper participation was sparse, implying that “shippers themselves were too busy trying to secure capacity for peak season to be spending more time than needed at trade shows. Those shippers who had participated were commonly in and out, and not around to socialize.”
The expansion of technology and how it allows owner operators transparency on market pricing and access to loads is another challenge to large carrier driver retention, Larkin said. “Brokers and load boards are offering owner operators not just back haul freight but also ‘the next haul’ — that is attractive freight that is not simply used when empty miles need to be filled. This makes it more difficult for large carriers to offer the value proposition sufficient to keep drivers.”
The Stephens Truckload Rate Index, which measures trucking revenue divided by loaded miles, increased 3.8% in the third-quarter of 2017, from the same quarter in 2016, and was the largest year-over-year increase since the third quarter of 2015 and the second consecutive quarterly increase in 2017, according to a quarterly update on the index by Delco. In 2017, rates are expected to rise 1.9%, and in 2018, they should rise to 4.2% “as we believe the truckload environment remains tight with expectations for a robust 2017 peak season and a strong 2018 contractual bid season.”
Carriers are looking to receive “upper-single-digit rate increases for 2018, up from the mid-single-digits they had to start the year given the current state of the driver market and supply/demand dynamics that are in their favor,” according to Delco.
In the Stephens Less-Than-Truckload Yield Index, revenue per hundredweight, (excluding fuel surcharges) rose 2.2% in the third quarter, from the same quarter in 2017. The index also increased 1.7% from the second quarter in 2017.
“Yields have held up on a year-over-year basis, while weight per shipment trends have remained positive year-over-year,” according to an index update by Delco.
LTL contract rate renewals rose between 4% and 7% in the quarter, while public carriers reported general rate increases earlier in the year “are holding up as well.” LTL pricing is expected “to be stable if not accelerate” into 2018, according to Delco. The rise will be “driven by the continued disciplined behavior from the majority of carriers, combined with an improving industrial environmental supported by 14 consecutive months of expansionary ISM/PMI data.” Low-single-digit increases in core pricing are expected for 2018.
In October, intermodal volumes increased 6.4%, and this continues to drive growth in the railroad industry, according to a monthly update by analyst Justin Long of Stephens. Intermodal volumes hit a record high in the third quarter, and growth was at the strongest levels seen in the past three years.
“We believe intermodal is also set up very favorably into 2018 given a tightening truckload environment, a substantial truck driver shortage, the implementation of the ELD mandate next month and recently rising fuel prices.”
At the Stephens conference, management of J.B. Hunt Transport Services reported they are seeing a 10% to 30% discount between intermodal and truckload rates in the West, while intermodal rates are higher than truckload contract rates in some sales lanes in the East, according to Delco. The discount is typically between 5% and 20%. As truckload contract rates start to rise, the discount difference in the East is expected to return to more normal levels, “presenting growth opportunities for (J.B. Hunt).”
The Lowell-based carrier’s intermodal segment accounted for 66% of its total operating income in the third quarter.
The company expects the installation of trailer and container tracking devices to be completed by the second quarter of 2018. In its dedicated segment, the carrier is focused on its final-mile delivery expansion and “highlighted more emphasis on predictive delivery, particularly targeting within an hour delivery window for customers,” Delco said. The carrier’s recent decision to delay guidance for 2018 “was prudent…until they get a better sense of how 2018 bid discussions will settle out given the rapidly-improving freight market heading into peak season.”