Trucking industry remains strong; intermodal looks to benefit from freight demand

The trucking and transportation industry has shown strength in the first quarter as it did in the second half of 2020, according to recent FreightWaves research. Capacity remains tight and freight volumes are strong and spilling into the intermodal and rail sectors.

Trucking spot rates are up about 30% from this time last year, according to FreightWaves’ Carrier Rate Report. For 2021, dry van contract rates are expected to rise by high single digits to low double digits.

“The trucking market is as healthy as it has been since 2017-18, when a very robust backdrop for carriers prevailed,” the report shows. “However, in mid-2018, the cycle peaked as far too much capacity rushed in to take advantage of positive fundamentals and the trucking industry embarked on an 18-month downtrend. This downturn, along with other – such as trucking bankruptcies, deeply negative new truck orders and dramatically rising insurance premiums – cleansed the market of a great deal of capacity. In contrast to the mid-2018 peak, we believe the strong fundamentals that are emerging have staying power and that the backdrop of high rates and tight capacity can last well in 2021.”

In a recent presentation hosted by The Association for the Work Truck Industry, Andrej Divis, director of global heavy-truck research at IHS Markit, expects strong economic growth to lead to more investments into freight and other industries. He expects the investments in the U.S. economy to continue and that imports and exports should recover in 2021.

Federal legislators have been urging the Federal Maritime Commission to expedite its investigation into reports that vessel-operating common carriers (VOCCs) are declining to ship U.S. agricultural commodity exports from U.S. ports. In March 2020, the commission launched Fact Finding No. 29, International Ocean Transportation Supply Chain Engagement, and expanded it in November to include the reports that the carriers are delivering shipments to U.S. ports but declining to refill empty containers with U.S. exports. Recently, the legislators, including all of the U.S. representatives and senators from Arkansas, sent letters to commission chairman Michael Khouri seeking to expedite the fact-finding. The legislators’ March 9 letter asked for monthly reports on the commission’s progress.

“With more than 20% of U.S. agricultural production aimed for export, reaching foreign markets is essential to American producers and the viability of our agricultural sector at large,” the letter shows. “It is cost-prohibitive for producers of these agricultural commodities, particularly perishable products, to use alternative methods to fulfill overseas contracts in a dependable and affordable manner. Should it be found that VOCCs are predatory or unreasonable in refusing to export these American agricultural products or imposing unreasonable fees, they must be held accountable by the commission for the harm they are causing our producers.”

Also, lawmakers in the House and Senate introduced Wednesday (March 10) the DRIVE-Safe Act that would establish a training program to allow truck drivers under 21 years old to haul interstate freight. Most states allow drivers to obtain a commercial driver’s license when they are 18, but existing law requires they must be at least 21 to haul freight across state lines. The program would require drivers to complete at least 400 hours of on-duty time and 240 hours of driving time with an experienced driver in the cab with them.

A coalition of nearly 90 companies and trade associations endorse the legislation. Lawmakers from Arkansas who are co-sponsors include Sen. Tom Cotton, R-Ark., and Rep. Bruce Westerman, R-Hot Springs.

“This bill has strong, bipartisan backing because it’s both common sense and pro-safety,” said Chris Spear, president and CEO of American Trucking Associations (ATA). “It raises the bar for training standards and safety technology far above what is asked of the thousands of 18- to 20-year-old drivers who are already legally driving commercial vehicles in 49 states today. The DRIVE-Safe Act is not a path to allow every young person to drive across state lines, but it envisions creating a safety-centered process for identifying, training and empowering the safest, most responsible 18- to 20-year-olds to more fully participate in our industry. It will create enormous opportunities for countless Americans seeking a high-paying profession without the debt burden that comes with a four-year degree.”

The legislation is aimed to mitigate the driver shortage, which has affected the foodservice distribution industry.

“The DRIVE-Safe Act comes at a time when the national economy is reeling from pandemic-related job losses,” said Mark Allen, president and CEO of the International Foodservice Distributors Association. “At the same time, the pandemic highlighted how essential professional drivers are to our everyday life, increasing the demand for this specific kind of job. The DRIVE-Safe Act will hasten our economic recovery by providing an opportunity for new drivers to enter the workforce while reinforcing a culture of safety far and above the current standards.”

The driver shortage is expected to worsen in the coming years as more drivers move into retirement and freight demand rises, according to the ATA. Over the next decade, the industry will need to hire 1.1 million new drivers or about 110,000 annually, to keep up with demand.

Divis noted e-commerce freight demand will continue to be strong in the first half of 2021 but is expected to slow in the second half as more people resume spending on services such as restaurants, hotels, events and travel.

Truck sales rose in the second half of 2020 and into early 2021, but the majority of those purchases replaced existing trucks as opposed to expanded fleets, according to IHS Markit. Registrations of Class 8 trucks, the largest truck class, fell to 197,000 in 2020, from 269,000 in 2019. The registrations are expected to rise to 226,000 in 2021 and to 231,000 in 2022 before falling again.

Divis said some capacity expansion will be needed in 2021 to handle the expected level of economic activity.

Amid tight capacity in the trucking industry, contract truckload volumes have risen 21% from the same time in 2020, according to the FreightWaves report. The tight capacity is bleeding into the intermodal and rail sectors, and carload freight volumes have risen by double digits and rates are rising.

The recent winter storm, however, is expected to have a between $15 million and $20 million impact on first-quarter operating income for Lowell-based carrier J.B. Hunt Transport Services Inc., according to a recent FreightWaves article. In a recent investor conference, John Kuhlow, J.B. Hunt’s chief financial officer, said this has been “probably one of the hardest winters that we’ve ever seen, and it’s spread throughout the U.S.” The storm is expected to have the biggest impact on the carrier’s intermodal segment as it likely affected between 20,000 and 25,000 loads in the period.

Brad Delco, J.B. Hunt’s vice president of investor relations, said congestion continues on the West Coast. Efficiency issues in the West affected the carrier’s results in its intermodal segment in 2020, and the issues had started to lessen before the storm. Delco expected a return to normal in the next week or two.

Longer-term, management is optimistic about the intermodal segment, which accounted for 48% of the carrier’s revenue and 60% of its operating income in 2020. They see the opportunity to convert between 7 million and 11 million truckloads to intermodal freight.

Wells Fargo also looks favorably on the intermodal segment, which comprises nearly 20% of U.S. rail freight revenue, according to Seeking Alpha. Meanwhile, inventory levels within the United States remain below levels seen before COVID-19.

“We believe such a backdrop should lead to continued volume growth, which combined with a scarcity of assets, will also help pricing power continue to improve throughout 2021 and into 2022,” according to Wells Fargo. The firm maintained an overweight (buy) rating on J.B. Hunt stock, and increased its 12-month target on the shares to $174, from $167.

Shares of J.B. Hunt (NASDAQ: JBHT) closed Wednesday at $157, down $3.69, or 2.3%, in heaving trading. In the past 52 weeks, the stock has ranged between $164.30 and $75.29.