Morgan Stanley sees lower truck capacity, higher rates in 2020

Transportation equity analyst Ravi Shanker outlines capacity-curbing catalysts in 2020 that could send rates to 2018 levels

Friday December 13, 2019

In a report to clients, financial services firm Morgan Stanley (NYSE: MS) examines potential reasons truck supply could be constrained in 2020, causing trucking rates to climb.

The firm’s transportation, retail and machinery analysts contributed to the report.

“We see five Trucking supply-side catalysts potentially constraining truck supply in 2020, similar to what the ELD mandate did in 2018. Memories of 2018 are still fresh which should help mitigate the impact but we still see risk to EPS [earnings per share] across Retail, tailwinds for Trucking (TLs) and Class 8 Trucks,” the report stated.

Capacity-constraining catalysts

The firm highlights five catalysts that could draw down truck capacity.

The first is the final electronic logging device (ELD) rule requiring carriers to convert from automatic on-board recording devices (AOBRDs), an earlier version of ELDs that provided significantly less data and the capability to alter some data, to ELDs by Tuesday, Dec. 17, 2019. The mandate is intended to provide a “safer work environment for drivers,” making the flow of data easier and faster and ensuring the data is not compromised according to the Federal Motor Carrier Safety Administration.

The second catalyst highlighted in the report is the precipitous increase in insurance rates. As juries in lawsuits related to catastrophic accidents have begun to award “nuclear verdicts” — those in the tens of millions of dollars — carriers have seen insurance premiums spike by 50% to more than double. Even well-capitalized, larger fleets have noted the pain from the increase in insurance rates.

The Drug & Alcohol Clearinghouse, which aims to speed the reporting of drivers’ positive drug or alcohol tests, was cited as potentially drawing down capacity as well. The clearinghouse is designed to prevent drivers from failing a pre-employment screening with one carrier then finding a job with another carrier before the positive test appears on their record. Reporting of failed tests on the federal database is required starting Jan. 6, 2020.

The International Maritime Organization (IMO) 2020 regulation, which begins Jan. 1, is aimed at significantly reducing sulphur emissions by enacting a 0.5% sulfur restriction in 2020, which is down significantly from the existing 3.5% mandate. This will require the maritime industry to use fuels with lower sulphur content. The expectation is that this will create increased demand for refined products like diesel. The range of forecasts on the impact of diesel demand is wide, with some speculating that as much as 2.5 million barrels of distillate per day would be needed to offset the high-sulfur fuel oil that the maritime industry can no longer use without installing scrubbers.

Morgan Stanley estimates that diesel prices could increase by 5-33%, placing increased financial strain on the smaller carriers, which make up the bulk of the TL industry. The thought is that many smaller operators have inadequate fuel surcharge programs in place to pass through the fuel cost increase to the shipper.

Lastly, the report cited California Assembly Bill 5, or the California AB 5 rule, as a headwind for truck capacity. The rule, which goes into effect Jan 1, 2020, is designed to limit the definition of independent contractors, requiring many of the independent owner-operators with whom carriers contract to haul loads to be reclassified as company employees. While the new bill faces legal challenges, some carriers have already begun to alter their operations in California, with some attempting to unwind their exposure to the state completely.

The Morgan Stanley report stated that the best-case scenario would provide no change to capacity in California if all owner-operators were offered and accepted employee driver positions with a company. However, it labeled this scenario “highly unlikely” and indicated independent contractor rules are a creeping concern as other states will likely begin to pursue some type of similar reform. This is already in the works in New Jersey.

Some of the trucking industry’s largest companies have also highlighted a range of headwinds to truck capacity in recent months.

Potential impact to rates and earnings

The report suggested that 2020 could provide a scenario similar to 2018 with regard to truck capacity and rates. In 2018, the year of the original mandate to ELDs from paper logs to enforce stricter adherence to hours of service rules, some truck capacity exited the industry in lieu of compliance. The firm believes that the 2018 mandate resulted in a high-single-digit to low-double-digit hit to truck capacity, causing TL spot rates to spike 30%, with contract rates moving 15-20% higher.

“2020 could potentially see a repeat of the supply-side constraints that drove truck pricing to all-time-high levels in 2018,” the report stated.

It added that these capacity headwinds could provide potential upside to TL EPS estimates “that could close the 20% gap between post-2018 EPS peaks and current trough earnings” as truck pricing moves higher. The firm estimates that the impact of all five catalysts could be bigger than what occurred in 2018. The “low case” presents a scenario in which contract rates increase 2-3% and spot rates climb 5-10% in 2020. The “medium case” calls for contract rates to increase 5-10% and spot rates to rise 20-25% next year. The “high case” predicts contract rates to rise 15-20%, with spot rates surging 35-40%.

Shanker is currently modeling low-single-digit price increases for the TLs in 2020, closer to the low case scenario that calls for spot rates to improve 5-10% in the first half of 2020 with contract rates flat to slightly negative in the first half, but up 2-3% in the second half. The report noted that this scenario results in EPS estimates that are 7-10% higher than current consensus estimates. Further, if the medium case scenario played out, earnings estimates would move at least 10% higher and more than 20% higher if the high case scenario occurred.

From the report, “we have already seen a clear bottom in the second derivative of spot/contract rates, as well as the absolute rates start to rebound, which we believe sets up the TLs well for further boosts in pricing and operating ratio (OR) if truck rates were to sharply rise next year.”

The report also highlighted a scenario wherein there would be upside to Class 8 production forecasts if capacity were culled out of the market due to these catalysts, but it didn’t offer what the impact to earnings for the original equipment manufacturers would look like. The report noted a high correlation between Class 8 truck orders and TL spot rates and stated that Class 8 orders could increase 50-100% in late 2020 to early 2021 if spot rates increased in the 20-25% range.

Class 8 Truck Orders – SONAR: ORDERS.CL8

Lastly, the report noted that the potential increase in rates to ship goods via truck presents an EPS risk (base case) of 2-3% for the retail space and as much as 4-7% downside to estimates if these capacity constraints materialize greater than expected.

Morgan Stanley conducted a survey of approximately 400 carriers, brokers and shippers to produce its expectations around these events. Of those surveyed, 65-70% expect the first three catalysts (ELDs, rising insurance costs and the Drug & Alcohol Clearinghouse) to have at least a small impact on capacity in 2020. Fifty-one percent of those polled expect an impact to capacity from IMO 2020, and 62% see an impact from the California AB 5 rule.

Image: Jim Allen/FreightWaves

Looming Canada-Wide Shavings Shortage Worries Horse Owners

By: Horse Media Group

If you have noticed that shavings are harder to find, cost more, and take longer to arrive at your barn, you are not alone. The slowed production or even closure at lumber mills across Canada, especially in BC and Quebec, is responsible, and those in the bedding industry are warning that it is going to get worse.

Thomas Harbom from Champion Shavings, which has 10 plants across the country and in the US and a head office in Ontario, says “We’re seeing the same problem almost everywhere.” Shavings are a byproduct of the lumber industry, and when there is less demand for lumber, whether for housing or export, the immediate effect is that there are fewer offcuts to make shavings with. Harbom advises that price and availability always fluctuate depending on the price per board foot, which affects the byproduct industry including those who make shavings for horses, or pellets for bedding or wood stoves, or even particle boards, all of which are made of compressed shavings.

“When the market tightens up the way it is right now, the price per board foot is down so there is no incentive to mill more wood. There is a glut of finished pre-cut wood inventory on the market, which has driven the price down and contributed to the slowdown. Some mills have laid off several shifts and some of them have shuttered altogether.”

The US tariffs on softwood lumber have definitely played a factor, as some multinational companies just shifted their production south of the border to avoid the tariffs altogether. Bidding wars for raw materials among shavings and pellet suppliers are not uncommon, also driving prices up. “We’ve already seen prices climb pretty much since May of this year,” says Harbom, adding that farm managers can expect delays of up to eight weeks to receive a shipment of shavings these days. Currently, prices in Ontario are in the $5/bag range, but a check on hayexchange.com shows a wildly fluctuating array of prices across Canada and the US from about $3.50 to $8 a bag.

Some horse owners may choose to switch to straw, but depending on where you live, straw prices are also up because of a poor harvest due to weather. This in turns drives up the shavings demand and costs. A report in the Goderich Signal-Star indicated that while in most years the price per pound has been in the 3.5-4 cent range, this year wheat straw has been selling from six to 10 cents a pound, with some pre-harvest prices going as high as 20 cents a pound at auction, making straw worth more than the grain itself.

We reached out to a couple of other Canadian shavings suppliers to get their take on the issue. Ben Vanderzwan, manager and director of operations at Fraser Valley Hay Brokers in BC, remarked, “It has been affecting us for a while now. Our biggest selling commodity is actually wood pellets for horse bedding. Our suppliers are struggling to get the necessary materials they need to keep up with demand.

Pellets and shavings will most likely go up in price this winter. Our pellets mill has most of their demand in the winter months, both for horse bedding and for wood stoves. They have strong international demand for their product, but not enough supply of their raw material. The thing is that the prices go up ‒ but never do they come down.”

Steve Kratz of Wood Shavings Ontario in West Montrose, a company that has been in business for over 50 years, says, “All of my suppliers are in Ontario; however, most are not as busy as other years. With straw prices as high as they are, the possibility of a shaving shortage is extremely high.”

So what is a horse owner to do? “Unfortunately, they’re to expect prices to be up this winter,” says Harbom, advising, “Order early to make sure that you get your requirements in time.”

He concludes with a warning. “We’ve been through this before; this is not the first time we’ve seen a shavings shortage. The last time that we had a shortage was in 2008 during the housing crisis. They stopped building new houses, so they stopped cutting lumber. No lumber meant no shavings ‒ it was a disaster. What I’m being told is that it will be the same, or possibly worse, this winter.”

New trailer orders plunge 72% from a year ago

September 26, 2019 by Truck News

COLUMBUS, Ind. – U.S. orders for new trailers rose slightly in August, but were down by 72% from a year ago amid economic uncertainty, according to ACT Research.

It said original orders stood at 14,800 in August, up 7% month-over-month.

“After accounting for cancellations, net orders of 10,600 hit their second sequential increase in nine months, rising 2% from July, but down 72% compared to August of 2018.”

Year-to-date, however, net trailer orders were 51% below last year.

“With 2020 order boards fully open, the dramatic lack of fleet interest continues to astound,” said Frank Maly, director, commercial vehicle transportation analysis and research at ACT Research.

“Uncertainty breeds inaction, and many factors are pushing fleets to observe the market from the sidelines. Poor financials, the result of lower freight demand and weak rates, portend a challenging financial road ahead, while more general economic uncertainties generate additional headwinds.”

He said fleets were unwilling to commit investment for next year, while still adjusting this year’s spending.

“Reports indicate that some orders were actually cancel/reorders, effectively pushing late ‘19 volume into next year, sometimes at OEM request.”

UPDATED: U.S. trucker shortage swells to 60,800 in 2018

July 24, 2019 by Truck News

ARLINGTON, Va. – The U.S. driver shortage rose to 60,800 last year, up nearly 20% from 50,700 in 2017, the American Trucking Associations said in a study released Wednesday.

The group warned that the shortage could hit 100,000 in five years and 160,000 by 2028.

“Over the past 15 years, we’ve watched the shortage rise and fall with economic trends, but it ballooned last year to the highest level we’ve seen to date,” said ATA chief economist Bob Costello.

“The combination of a surging freight economy and carriers’ need for qualified drivers could severely disrupt the supply chain.”

An aging driver population, increases in freight volumes and competition from other blue-collar careers were the main reasons for the shortage.

The report, however, said that the shortfall is expected to ease slightly by the end of this year from a combination of slower economic growth and a small bump in supply.

In order to meet America’s freight demand, the report said the trucking industry will need to hire 1.1 million new drivers over the next decade – an average of 110,000 per year to replace retiring truckers and keep up with growth in the economy.

In Canada, it is estimated that the industry will face a shortage of close to 50,000 drivers by 2024.

An earlier version of this article was corrected to reflect that the shortage of 160,000 drivers is projected for 2028. Truck News regrets the error.

Canfor temporarily shutting down lumber mills across B.C.

Low lumber prices and the high cost of fibre are the cause of curtailment, according to the company

Apr. 25, 2019

Canfor has announced it will be temporarily closing down operations at almost all of its B.C. dimension mills.

The company said in a news release Wednesday, it will be shutting down operations for one week starting April 29. WynnWood mill outside of Creston will be the only facility of 13 to remain open.

Canfor cited low lumber prices and the high cost of fibre for the cause in having to curtail operations, which will impact 2,000 hourly employees.

“We regret the impact the curtailments will have on our employees, their families and their communities. We appreciate the hard work of our employees and contractors across all our operations,” said Michelle Ward, director of corporate communications.

She said two other mills in Mackenzie and Isle Pierre will be down for a second week in May.

This is the fourth curtailment that has been announced by Canfor since November of last year.

READ MORE: Canfor curtailing sawmill operations in B.C.

READ MORE: Canfor adds to mill curtailments with brief B.C. Interior shutdowns

Local 1-2017 President Brian O’Rourke said the union doesn’t feel good about the news.

“We heard today that they are going to be curtailing all their operations in B.C. and they are citing low lumber prices and high logging costs. They will be curtailing for one week,” he said.

He added that previous curtailments by Canfor in December were all due to fibre and lumber costs, as well. However, the union has no control over temporary shutdowns.

“We are hoping it will only be short term, a one week thing, and hopefully things will pick up and run as they did normally,” O’Rourke said.

Meanwhile, UNBC economist Dr. Paul Bowles said the scale of the shutdown is unexpected, however, there were signs that something along these lines would continue to happen.

“The price of lumber has fallen by 40 per cent from a year ago, so with weakening demand, big companies are worried about how many losses they are able to sustain in the short run,” he said.

Bowles explained that the point of the curtailment is to bring companies back into profitability by getting the price to go up and taking out some supply from the market.

“Which would eventually be felt by consumers as well,” he said.

“It is going to mean that workers, their income is going to be reduced and interrupted because of this. So that is going to have an impact on the provincial economy but especially in those communities such as Vanderhoof, that are heavily reliant on the lumber industry. It is going to mean less demand there and less activity in the services in the community,” Bowles added.

Dr. Kathy Lewis, Chair of Ecosystem Science and Management and a forestry professor at UNBC, said she doesn’t find the curtailment surprising.

“We have known for quite a long time that there was going to be a short fall in timber supply, so this was no surprise at all. But it is a short, middle-term problem,” she said.

Lewis said in the long run, the industry is going to be strong.

“In fact the industry itself is working to change what they are doing to make better use of wood that is available. So I think the long term prognosis is pretty good, but there will be some short-term problems,” she added.

In terms of timber supply, Lewis said forests are a renewable resource which leads to a fairly good picture for the industry in the long term. However, if various disturbances are added to climate change, it brings more elements of uncertainty.

“So there will always be uncertainty around timber supply and so the industry has to adapt to that and they have been,” Lewis added.

“We have major mills that have been making dimensional lumber, but they are also engaged in making other products from the forest such as pellets and chemicals and different kinds of solid wood products and so on, that allow them to make more of the trees that they cut,” she said.

Canfor Corporation has 13 sawmills in Canada with the total annual capacity of approximately 3.8 billion board fleet.

Trailer orders officially “epic”: ACT

October 25, 2018  by Truck News

COLUMBUS, Ind. – September trailer orders, totaling more than 58,000 units, were up 52% from August and 135% year-over-year, according to ACT Research’s State of the Industry: US Trailer Report.

“Following the strongest July and August net orders in industry history, September results were truly epic, posting more than 58,000 trailers,” said Frank Maly, director, commercial vehicle transportation analysis and research at ACT Research. “The strength of the early open of the 2019 orderboard continues to be felt and the pent-up fleet investment intentions were evident in September’s order pace. Our discussions indicate that order negotiations continue, so there may well be further strength remaining in this early-opening order season.”

In September, 30,000 trailers were shipped, setting a new all-time monthly shipment record.

Record August for trailer orders

September 21, 2018

Trailer orders exceeded the best August in history, according to preliminary data from FTR and ACT Research.

FTR reported orders of 35,300 units, exceeding expectations at 27% higher than July and up 141% year-over-year. Fleets are placing 2019 orders a few months ahead of schedule, FTR reports, with large fleets ordering substantial numbers of dry and refrigerated van trailers to reserve production slots for net year. Parts and component availability remain tight.

“Orders should remain sturdy for the rest of the year, with continued steady freight growth and tight industry capacity,” said Don Ake, FTR vice-president of commercial vehicles. “There is strong demand for new trailers, and we expect this to continue well into 2019. It is a good sign that fleets expect a robust year in 2019 and are ordering trailers earlier than normal in anticipation.”

ACT Research announced preliminary orders of 38,200 units.

“Fleets continued to invest at a torrid pace in August, following a robust July,” said Frank Maly, ACT’s director of commercial vehicle transportation analysis and research. “Industry net orders of 38,200 trailers were up more than 30% from July and over 140% better than this time last year. The summer has shown amazing strength, reflecting commercial fleets’ positive outlook in response to solid freight rates, volumes, and capacity challenges. After seeing the strongest July volume in industry history, August followed suit, surpassing the previous record of August 1994 by more than 11,000 orders.”
Maly added, “Year-to-date net orders of more than 238,000 trailers are greater than 40% versus last year. Eight of the 10 trailer categories are in the black year-over-year, with seven of those posting double-digit or better gains. Year-to-date performance is led by reefers, with net orders up 110% versus last year.”

9 months into ELD mandate, confusion persists

Joe DeLorenzo, director of the Office of Enforcemnt and Compliance for FMCSA, has the inevitable task of attending events such as the Great American Trucking Show last week in Dallas and standing in front of audiences to represent FMCSA’s viewpoint on regulations and enforcement. In the past year, most of the sessions have focused on the electronic logging device (ELD) rule.

While his sessions at GATS this year was not been met with as much anger and finger-pointing as previous sessions have been, it did come with several questions from attendees, even after DeLorenzo spent much of the 60-minute session on Friday going over the common questions and confusion the agency continues to hear from carriers, drivers and law enforcement nearly six months after the hard enforcement date of April 1 and almost 9 months after the first compliance date.

DeLorenzo started the presentation with the common exemptions from the ELD rule, as he noted that drivers continue to use ELDs when they don’t need to. “On at least a weekly basis, I talk to at least one driver or one company that is eligible for an ELD exemption and is not taking advantage of it,” he said.

Those exemptions include:

  • Drivers not required to maintain a Record of Duty Status for more than 8 days in a 30-day period
  • Drivers operating within 100-air-mile radius
  • Drivers operating within a 150-air-mile radius for non-CDL freight drivers
  • Drive-away, tow-away operations where the commodity being delivered is the vehicle itself
  • On vehicles where the engine was manufactured before model-year 2000 or the vehicle was manufactured before model-year 2000.

“When we did the rule, we needed to have a cutoff at some point, where the technology [is more difficult to integrate] or the engine doesn’t have an ECM,” DeLorenzo said. “We chose 2000.”

There are additional exemptions, such as the ag exemption where drivers operating within 150 air miles of the source for ag commodities are exempt. Because hours-of-service rules don’t kick in until the driver leaves that 150-air mile radius, the ELD rule also doesn’t begin until then.

Once the exemptions were addressed, DeLorenzo moved to the top issue facing drivers and roadside inspectors: AOBRDs. Users of AOBRDs are exempt until Dec. 16, 2019, and therefore not subject to the ELD rules.

“The number-one point of confusion on roadside inspections is whether the driver has an AOBRD or ELD,” he said, noting that drivers sometimes don’t know which device they have installed. “The more you know, the easier the inspection goes. Knowing right off the bat whether you have an AOBRD or ELD will make that inspection go easier.”

Some devices can operate in either AOBRD or ELD mode, DeLorenzo said, but when in ELD mode, it is required to meet the specifications, and that includes the driver maintaining a copy of the instruction book and the data transfer sheet, as well as knowing how to transfer the data if requested by law enforcement.

DeLorenzo also touched on something that many drivers have forgotten about, he said, annotations.

“I think when we moved to ELDs, people forgot how to use annotations,” DeLorenzo said. “Annotations are available, so use them to explain away situations.”

The notations can be a great way to explain why the driver forgot to log into the ELD in the morning, or used the vehicle for personal conveyance, or went over driving time. They explain away “unaccounted for driving,” DeLorenzo said.

He also said fleets should remind drivers to log off and on to ELDs.

“You can save yourself a lot of aggravation … by making sure you log out at the end of the day and log in the next morning,” DeLorenzo said. “And that is why we have annotations to deal with unassigned miles.”

In the Q&A portion of the presentation, he touched on what to do if your ELD-exempt engine doesn’t include a model-year label, as required (“keep a copy of the paperwork FMCSA requires you have to have in the office in the truck”), the ag exemptions and personal conveyance.

On the ag exemption, which FMCSA has tried to clarify several times, DeLorenzo reiterated the 150-air-mile exemption for agricultural commodities moving from their “source.” A source can be the field or the grain elevator, he noted.

Even more confusing has been the personal conveyance rule that allows a driver to operate a commercial motor vehicle in an off-duty status if the reason for the operation is personal in nature. This can include going to get something to eat or shop, or to visit relatives. It doesn’t include, though, trips home after dropping off a load.

“The trip home is not personal conveyance,” DeLorenzo said. “You cannot [drop a load] and head home, that is a continuation of the trip.”

To clarify, he noted that FMCSA considers a load to be a round trip, either back to the original location or to the next location for pickup. A commenter asked why a driver going on vacation after dropping a load, or visiting a relative, can be considered to be personal conveyance but a driver returning home is not. “I can only tell you what the rule says,” DeLorenzo answered, with little agreement from the audience. “Going home is considered part of the return trip.”

While some in the audience didn’t seem satisfied with the official’s answers, the routine has become part of the continuing dialogue and ELD education of the industry that FMCSA, it appears, needs to continue.

 

 

Tariffs not enough to derail trucking economy

First in a series of FreightWaves’ Market Update webinars highlights economic outlook, impact of ELD mandate, and areas of freight strength

While there is a lot of noise surrounding tariffs and potential trade wars, FreightWaves’ Chief Economist Ibrahiim Bayaan isn’t as concerned as some that the noise will result in action that could derail the economy.

“The size of these tariffs and the goods they are being placed on are really not big enough to derail the [overall economy]; they really impact specific industries but [won’t significantly hurt] the broader macro economy,” Bayaan said during the inaugural FreightWaves’ Market Update webinar on Thursday. “What you do worry about is how these tariffs spill over into the rest of the economy. Just thinking about how the growth of the economy is, much of it is driven by how consumers feel about the economy, how businesses feel about the economy.”

Consumer confidence remains strong, but Bayaan, who was joined on the webinar by FreightWaves CEO Craig Fuller, noted that if talk continues, business may start adjusting their plans, particularly as they relate to inventories.

“What you will find is that businesses will start to hedge their bets,” he said. “As long as the tariffs stay where they are now and don’t escalate, I think the overall macroeconomic impact will be small.”

If businesses get concerned, especially about tariffs on goods imported from China, they may adjust tactics. “Companies may start to build up their inventories just in case,” Bayaan said. “If you assume these products you import from China are going to have a 25% tariff on them, you might build up inventory so you have time to figure out where you are going to source them from [in the future].”

The webinar is part of a new monthly series from FreightWaves that will highlight market impacts. This month’s presentation, titled “Market Update: Is this the end of just the beginning? What the data is telling us about the freight market,” focused on data points and what that data is suggesting for the freight markets for the remainder of 2018. The answer: A lot of good for carriers, and not so much for shippers who will continue to be faced with higher prices.

All of the data used was pulled from FreightWaves’ own SONAR platform, which aggregates hundreds of data points into a single intuitive dashboard to help brokers, fleets and shippers better prepare for and navigate the freight markets.

Tariffs were a big topic, but not the only one. Bayaan highlighted many of the positive economic data points that suggest strong second quarter GDP when announced later this month.

“Right now, the economy is kind of firing on all cylinders heading into the third quarter,” he said.
“The second quarter is likely to be the strongest quarter of the year. The third quarter will still be strong, not as strong as the 4.2% GDP [growth] we expect in the second quarter, but still good.”

That strength, pending something unexpected, should continue. The outlook for 2019, though, will be start to “return to normal,” Bayaan noted, pointing out that 2018 has been helped by a number of tailwinds.

“Right now, the economy has a number of things helping it,” he said. “We are still kind of benefiting from the tax cuts and there were a couple of one-off [events] that helped trade [during the second quarter].”

Off of trade, another key topic was capacity. It should remain tight, Fuller added, following up on Bayaan’s answer to a question on whether more drivers were being added to the workforce.

“More drivers are being hired but not enough to ease the capacity crunch,” Bayaan said. “I suspect for the rest of this year we are going to be in this very tight capacity environment.”

That environment has continued to push rates up, with long-distance rates up 9% year-over-year, and forcing shippers to look at possible alternatives to moving freight.

“If you are noting high rates of price inflation in trucking, shippers are beginning to investigate whether they can move freight via other modes of transportation,” Bayaan said. “What this does is it starts to increase the demand for intermodal services and that is having a spillover effect on pricing.”

Intermodal pricing is up over 15% year-over-year, he noted.

The capacity crunch is being driven in part by the lack of drivers. Bayaan pointed out that the industry is now adding jobs at a higher rate than the overall economy, but it just isn’t enough. Finding drivers is also being impacted by the overall low unemployment rate, with many industries, including construction, manufacturing, and warehousing, having trouble finding workers.

Fuller said that warehousing employment “is on fire right now” with employment in that sector up 52% since the end of the Great Recession, according to SONAR data. By comparison, trucking employment is up 10% and retail 7% during that timeframe.

He attributes that warehouse growth to e-commerce as Amazon and other companies selling online have adjusted strategies to move facilities closer to end users and shorten delivery times.

“One of the questions we get often is whether the growth of Amazon is actually increasing or decreasing the amount of freight in the market,” Fuller said. “It actually increases the amount of freight in the system, not detract from it.”

Bayaan agreed, saying that e-commerce freight is adding “an additional leg of transportation because they have to move the goods” closer to the end consumer, and then to the final destination.

The strong labor market is one of the continued reasons for the overall economy growth, Bayaan said. With hiring still happening fast and unemployment, while up in June, remaining at 4%, it continues to provide financial might to consumer pocketbooks. Retail sales were up 6% year-over-year in May after taking an early dip in January/February. They have risen each month since February, and even February was up 4% year-over-year.

Even with all the economic growth, inventories have steadily risen, which is generally a negative for freight outlooks. But, in this case, Bayaan said that inventories have not risen out of line with sales. The inventory-to-sales ratio has been trending down and remains below what would be expected in a high-demand environment, at 1.35.

“The relationship between the two has actually been falling so what this is telling you is that the companies have very lean inventories and when you have lean inventories, that means they are turning over faster and faster and this puts [added] pressure on freight,” Bayaan noted. Strong demand across the board “creates a high demand environment for shipping in the U.S. market.”

Industrial production has recovered nicely from its dip in 2015-2016, Bayaan pointed out, due in part to a “resurgence in oil prices which has helped with drilling,” rising 3% year-over-year.

Fuller noted that each new oil rig added brings online about 1.1 million truck miles.  “As oil goes up, to a point … it actually increases demand for trucking services,” he said.

Larger carriers are less affected by this as they pass “along fuel surcharges, so [it’s] the shippers that are picking up the bills.”

The oil and agricultural markets are driving strong freight market demand in the Missouri Valley and Southeast, right now, Fuller said.

While those markets are strong right now, the West Coast has cooled. That should change, according to SONAR data, which tracks container shipments out of China. Fuller explained that container volumes out of China typically are reflected in pricing and volumes on the West Coast about four to six weeks later.

“This week we saw a very violent move up which suggests shippers just don’t care [about higher container prices], they are going to move goods,” he said. “We expect in four to six weeks we will see high demand for trucking services heading into peak season.”

Container prices have spiked to $1,661 on the Freightos Baltic Index.

A few other data points the pair touched on included overall trade, which is up between 8% and 9% year over year, continued improvement in housing numbers, and firming in used truck pricing. With the backlog of new truck orders at eight to ten months right now, Fuller said his team is looking to the used market to see if there is spillover there.

“We’re starting to see a little bit of firming in used truck prices,” Fuller pointed out, noting that a 3-year-old used Class 8 tractor is now going for an average of $62,654. “That’s still below the 2015 numbers and we’re not seeing a large mass of independents adding trucks yet. They are adding trucks, but not at levels that [affect the overall capacity].”

Fuller also noted the impact the hard ELD enforcement date of April 1 has had on capacity. The result is that he doesn’t think it removed the capacity that people expected. What he said SONAR data is indicating is a new reality for carriers and shippers in the types of freight they choose and the rates at which they are willing to haul it which is leading to more drive time for drivers.

“The capacity constraint is less about how many miles the load is going and now how much time it will take,” he said, noting that data shows that beginning in March, the number of hours the average driver is driving starting going up. Prior to March, the average daily driving hours was 6.45 hours per day, according to SONAR data with top-performing drivers averaging 6.8 hours. Starting in March, that daily driving number started creeping up and is now at 7 hours of daily drive time.

By itself, the data may not indicate more effective use of driver time, but Fuller said that correlating the HOS data with FreightWaves’ Tender Reject data (the number of electronically transmitted loads not being accepted by a carrier) shows that carriers are being more selective about what freight they haul, particularly freight in the “tweener” lanes.

The Tweener Tender Reject Index (loads traveling 451 to 800 miles) shows rejections ranging from 27% to as high as 34%. That means that 34% of all loads in this range distance are not being accepted by carriers. What carriers are accepting are more local loads, with the Local Tender Reject Index (1-99 miles) sitting at just 8.5%.

“Now that ELDs [are in effect], it means drivers are much more sensitive to the types of loads they take,” Fuller said. “There is very little pricing pressure in the local, short-haul market and more pressure in [the tweener market]. Where you see high tender rejections, you will see that reflected in the pricing data.”

The impact of more selective freight choices is better driver utilization, as noted in the higher average drive times.

“As we moved into the April 1 hard mandate, we can see that drivers were starting to maximize their hours,” Fuller explained. “What that meant was drivers were being more selective about what freight they were picking.”

Concluding the inaugural webinar, neither man sees any near-time risks, short of an all-out trade war, upsetting the current market. Fuller further suggested that spot rates should remain stable for a bit short of some sort of shock to the system, such as the hurricanes from last year that jolted rates.

“If there is any kind of shock to the system, like we had with the hurricanes last year, that could send spots rates through the roof,” he said, while predicting continued capacity tightness, strong rates and continued economic growth.

Pay up: Companies confronting the driver shortage one dime at a time

Despite national unemployment rates sitting at an “18-year low of 3.8 percent,” the so-called driver squeeze continues to make headlines in 2018, marking it “a pretty rowdy year in wages,” according to Gordon Klemp, president of the National Transportation Institute (FreightWavesThe Washington PostUSA Today, and NPR). Some trucking companies are pushing back against the shortage with announcements of their own: pay increases for their drivers. Klemp calls the phenomenon a “perfect storm of shrinking capacity, growing demand, [and] shrinking experience.” The American Trucking Associations’ 2017 Driver Shortage Reportdescribes the industry’s effort to combat fluctuations in the market:

The natural market reaction to any shortage is that prices rise. In this case, price is driver wages, which are again increasing significantly. Most fleets instituted large pay increases in the summer of 2014 with many repeating the increases again in 2015. Even with the soft freight environment in 2016, many fleets increased pay rates last year as well. Today, sign-on bonuses are used throughout the industry as competition for drivers heats up. Expect driver pay to continue rising as long as the driver shortage continues. Good benefits are also part of a total compensation package in the industry.

As the report above addresses, each company has a different approach to distributing their benefits—some increase their mileage rates, others promise yearly bonuses or guaranteed weekly earnings. The way the companies distributed the information was as varied as the content itself. From pop-up windows to press releases, many of these announcements were front and center on company websites, grabbing the attention of potential new drivers and news agencies alike. May 2018 was a particularly busy month for industry increases, as both Schneider National and C.R. England announced investments in their driver pay rates, each taking effect by the end of the month.

Schneider circulated the news via a series of press releases. A flashy graphic (“Again? Yep.” superimposed on an image of a wallet stuffed with hundred dollar bills) sits in the corner of the article announcing that, as a result of weekly driver pay evaluations, “Schneider is proud to announce a second round of significant team and solo driver pay increases in 2018” right “on the heels of a February pay increase.” The aforementioned February increase boosted van truckload rates by up to $.04 per mile. Additionally, teams have the opportunity to start $.56 per mile, while OTR drivers can start at $.52 per mile, and regional drivers can earn $.50 per mile. Although “pay increase amounts will vary by experience level and geography,” “all Van Truckload drivers of all experience levels have seen one or more market-based mileage rate base pay increases in the last year!” May pay increases continued to rise, averaging $.01-$.02 per mile. Team drivers also saw an increase in base pay ($.56 per mile to $.57 per mile). In the last 20 months, Schneider reports that their rates “have increased by as much as $.10 per mile” in response to market conditions.

C.R. England’s May 25, 2018 press release is vague in its details, but introduces “multi-million dollar investment in our drivers” as a response to the “ever-changing and increasingly competitive marketplace” according to CEO Chad England. Chief Sales Officer Brandon Harrison reports that C.R. England’s drivers are “now among the highest paid in the industry” following an $11 million investment in line haul pay. Dependent on experience level and position, 60% of the driver force will enjoy pay increases anywhere from 5.3% to 25%. Evidently, they have the right idea: in an aggressive market, C.R. England is up over 200 drivers year over year, maintaining “first and foremost a competitive pay package” and adding guaranteed weekly pay, according to Harrison.

In April 2018, Groendyke Transportation announced their “largest driver pay increase in company history,” which went into effect this May. “The raise includes a mileage pay increase across the board of up to 6 cents per mile and an average hourly non-revenue rate increase of 9.4 percent for all drivers. In addition, Groendyke’s chemical drivers will receive a flat-rate increase that will bump their pay significantly.” Groendyke’s president, Greg Hodgen, notes that the organization aims to “have a sustainable pay model that proactively keeps its drivers’ pay competitive in the tank truck industry and in trucking overall.”

 

 

 

 

 

 

 

No matter the approach, pay has risen across the industry, as evidenced in the graph above provided by the National Transportation Institute. Derek Leathers, CEO of Werner Enterprises, as quoted in NPR’s January 2018 article, notes that “Pay in the industry’s come up considerably. Here at Werner our pay’s up 17 percent over the last couple of years,” while Chad Brueck, Vice President and General Manager for Pegasus Transportation calls it “the most competitive driver market I’ve seen in 15 years.” Schneider, in its January 2018 press release, acknowledges that their “Average solo Van Truckload Over-the-Road mileage rates have increased almost 15 percent in the last two years, with Regional and Team mileage rates close to 10 percent.”

While it’s difficult to make a definitive statement on how to best accommodate the driver squeeze, it’s clear to see that each company will be taking a different approach in keeping the industry aggressive and appealing to drivers.