Trucking rates to increase as economy reopens, capacity tightens

Freight rates and demand are expected to rise as the economy starts to reopen and capacity tightens, analysts said.

In a recent webinar, Chris Pickett, chief strategy officer for Coyote Logistics, said economic recovery is expected in the latter part of the year unless another wave of COVID-19 leads to a second shutdown.

Freight rates were under pressure in the first quarter as a result of overcapacity in the truckload market and the impact of contract rate pressure in 2019, according to the Stephens Truckload Rate Index. The first-quarter index report was recently released by managing director Jack Atkins and associate Wade Schaller, both of Little Rock-based Stephens Inc.

Contracts in the truckload market were being renewed at rates that were flat to slightly down from the same period in 2019, but rate pressure on contract rates rose in the second quarter because of the COVID-19 pandemic, according to Atkins and Schaller. Rates are projected to fall 5.2% in rate per loaded mile in the second quarter. For 2020, truckload contract rates are expected to fall in the low-single digits, from last year.

The analysts have started to see some indications that capacity is tightening and demand has started to recover from the lows in mid-April. The truckload market is expected to continue to tighten through the end of the year and lead to improved supply and demand fundamentals in 2021, according to Atkins and Schaller.

Capacity looks to tighten amid falling new truck orders, according to a shipper report by FreightWaves. And, the low freight volumes and rates are expected to lead to company failures and bankruptcies in the second and third quarters.

“One wild card for capacity that could bolster trucking fundamentals is the fact that the U.S. truck driver population is overwhelmingly older, male and vulnerable from a health perspective, leaving capacity exposed to a contraction should a small portion of the roughly 2 million-driver base contract COVID-19,” the report shows.

If an outbreak were to reduce driver supply, intermodal could fill the void, according to a recent Transport Topics article. North American intermodal volumes reached a bottom of 320,000 units for the week that ended April 11 but have since risen.

In the United States, intermodal volumes were higher in the week ending May 23 than they have been in the past 11 weeks, said John Gray, senior vice president of the Association of American Railroads. Volumes declined 11.2% to 238,076 containers and trailers for the week ending May 23, from the same week in 2019.

“While we can’t yet say whether rail traffic and, by extension, the economy, have turned a corner, these are all encouraging signs,” Gray said. “As areas across the country begin to reopen over the next several weeks, perhaps we can start looking for light at the end of what has become a rather long tunnel. Whatever the outcome, railroads will do their part to get us out of the tunnel safely and reliably.”

Intermodal accounted for 66% of first-quarter income for Lowell-based carrier J.B. Hunt Transport Services. Intermodal volume growth is expected to reach a bottom in mid-2020, and the carrier’s margins in the intermodal segment are expected to improve in the second half of 2020 and 2021, according to a recent report from analyst Benjamin Hartford of Baird. The carrier’s intermodal segment is expected to have long-term growth even as rates rise at slow rates. Baird increased its rating for J.B. Hunt to buy and a 12-month target price of $125.

According to the FreightWaves report, an issue that could affect carrier profitability is the rise in insurance as insurers take into account the increasing risk of nuclear verdicts. This regards the high costs that carriers face as a result of lawsuits involving truck crashes.

Insurance premiums have risen by more than 40% since 2016 and are expected to continue to increase, the report shows. Carriers expect a 20% rise in insurance in 2020. The industry has an average profit margin of 5% but more recently has been operating at breakeven levels.

Truck capacity is expected to fall between 4% and 6% in 2020 as a result of the existing rate of new truck orders so far this year, the report shows.

North American orders for class 8 trucks, the largest truck class, were 4,300 in April, and of that amount, 1,680 were for the U.S. market — down 80% from the same month in 2019, according to the Transport Topics article.

Only 983 class 8 trucks were built for the U.S. market in April as truck plants closed, the article shows. Normal replacement level of demand would be about 11,000 to 12,000 trucks. As a result, about 10,000 trucks have been removed from the highways in April because of the existing build rate.

The decline in truck orders and builds looks to lead to better rates as capacity falls, the article shows.

In the week ending May 24, spot rates continued to rise while seasonal demand increased, according to DAT Solutions. With states starting to reopen and produce season underway, demand has increased and has brought some relief to carriers that have struggled with low rates during the health crisis. In April, dry-van spot rates declined 9.5%, from the same month in 2019. As of the week ending May 24, rates increased 4.8%, from the week ending May 17.

In a recent earnings call, James Reed, CEO of Van Buren-based carrier USA Truck, said new freight opportunities are coming.

“There’s a whole bunch of freight that we’ve been awarded that we still haven’t recognized from the first quarter because of the impacts of the virus,” Reed said. “And we expect that to be kind of a positive double whammy whenever freight returns.”

Kenny Vieth, president and senior analyst for ACT Research, expects the slowdown in freight that started in April to continue into June.

“Our best guess is that the third quarter of this year will mark a transition, with a gradual and slow recovery commencing late in that quarter or in the fourth, followed by a pickup in momentum into 2021,” Vieth said.