Trucking companies hoping for a bump-up in rates this holiday season may be disappointed by the latest analysis Stifel Capital Markets, as the firm doesn’t expect rates to improve for carriers until the second quarter of next year – if at all.
“We’ve seen a very difficult rate environment for the TL sector, particularly on the spot market side,” noted John Larkin, managing director and head of transportation capital markets research for Stifel, in a conference call with reporters.
“Pricing pressure in TL and in intermodal is the big story for the first half of 2016 and there is no relief in sight for rest of this year – even though e-commerce demand will grow between now and December,” he added. “Don’t expect pricing to be any better until second quarter of 2017 – and it’s not clear they’ll improve by then either.”
Larkin also pointed out that pressure on contract pricing increased this year as well as many shippers reverted back to what he dubbed “aggressive pricing tactics” to win rate cuts.
Yet Larkin does expect a “rebound” in rate pricing to happen “as we get deeper in 2017” due to the combination of what he called “anemic” U.S. gross domestic product (GDP) of 1% to 1.5% occurring alongside less available truck capacity as big and small fleets continue to downsize.
“That will help bring supply and demand back in to balance,” he said.
David Ross, another of Stifel’s freight transportation analysts, added that LTL carriers should benefit from any capacity tightening in the TL sector.
“If capacity tightens in TL next year, expect to see a boost to LTL in expanding volumes and margins,” he said. “However, right now, we’re seeing nothing but a slow growth environment as we look around the world these days.”
That’s because, from Stifel’s perspective, the U.S. economy continues to suffer from “sluggish” economic growth freight demand “still pretty weak” overall.
“There is no noticeable pick up except in a few areas,” noted Larkin. “Grain markets and e-commerce will grow but everything else is still very soft.”
Another big negative being faced by motor carriers now and for the future revolves around fuel surcharges or, rather, the lack of them.
“This year was the worst of all worlds in terms of revenue production as concerned for TL carrier fuel surcharges,” Larkin said.
“Fuel surcharge revenue is off and contributed to a 3% to 5% reduction in revenue growth, creating underlying pressure on spot market and to a lesser extent the contract market,” he added.
With freight volumes, rates, and fuel surcharge revenue all down, it is making turning a profit more difficult for motor carriers, Larkin pointed out.
However, for those fleets who are the most fuel efficient, with the youngest equipment, and who adopted speed limiters before they were mandated: “If they are able to run their fleet with better MPG [miles per gallon] than what is embedded in their fuel surcharge, they can be made whole on that surcharge,” Larkin stressed. “But the reverse is also true. So for those fleets with older trucks and lower MPG, there will be more [margin] pressure, especially for smaller carriers.”
For LTL carriers, Ross said that fuel surcharge conundrum adds up to a 250 to 300 basis point “headwind” though the impact differs based on the density of an LTL carrier’s network, their pricing strategy, etc.
“For the most part, [LTL carriers] are unable to recoup all of that lost revenue thru pricing,” he said. “It’s a negative on the margin side.”
Other observations regarding the freight markets from Stifel’s analysts include:
- LTL carriers are remaining “disciplined” regarding how their price their services, according to Ross. “They’ve learned lesson of last downturn; remain disciplined on pricing as they move through this soft volume period,” he said. “We expect pricing to be rational thru end of the year.”
- Larkin noted that the retail sector growing fairly steadily but hasn’t been extremely robust. “The most recent data suggests 2% growth,” he pointed out. “The industrial economy remains very volatile. We saw a little bit of strength in the late spring/early summer period, but then it cooled off again in August.”
- One big topic of discussion going forward for the freight markets: the absolute amount of inventory that has piled up. “The inventory to sales ratio actually bottomed out late 2011/2012 time frame, but it has been growing since then at steady pace,” Larkin emphasized. “It appears the retail supply chain has too much inventory. Part of this explained by growth of e-commerce and omni-channel markets; they need more inventory in the system and need it closer to customer to support them. But we don’t think that explains it all. Weak overall consumer demand is the other big factor.”
- Intermodal has been a surprise because pricing has been very weak of late, Larkin noted – largely due to the aforementioned with the inventory surplus and tepid consumer demand. “Lower fuel costs favor trucking, as well as the excess of truck capacity at the moment,” he explained. “Some shippers can’t resist that [so] they are pulling shipments off intermodal and switching them to truck.” Yet he still feels that, long term, intermodal “is a great opportunity.”
- Domestic logistics is a sector that witnessed a lot of merger and acquisition activity in past years and Stifel expects additional deals in the future. “We’re seeing a number of 3PLs growing very aggressively and organically,” Larkin said. “There is a lot of potential growth in this space still. Investors like this space because it’s not asset intensive.”
- The logistics sector may suffer some margin contraction as freight capacity tightens, but Larkin said that should be offset as mid-size shippers turn to third party logistics (3PL) providers and brokers for capacity as the big fleets dedicate more of their capacity to big box retailers.
- The Hanjin bankruptcy won’t create as big an impact on global supply chains as the West Coast port slowdown did last year – but it will rattle shippers, noted Ross.
- Growth of e-commerce volumes “is a trend we’ve been talking about long time [and] it is one of the leading areas of growth in broader freight universe,” Ross added. He said it’s helping FedEx, United Parcel Service, DHL and Amazon as well.
- He said Amazon’s effort to build its own delivery network “won’t put FedEx or other parcel carriers out of business.” Though that effort my limit their growth, it won’t cause them to shrink. “There’s going to be a lot of growth to go around over the next five years in e-commerce,” Ross stressed.
- Secular growth in “truck outsourcing” should continue, he noted, with more of it occurring in 2017 and 2018 as trucks get more expensive and harder to maintain.