It’s been hard to get an accurate read on the outlook for the trucking industry of late, and we’re not just talking about the month-to-month truck tonnage numbers here.
Figuring out whether bright sunny skies or angry storms becloud the near-term future for motor carriers is getting tricky because the trends remain quite mixed.
For example, on the one hand, trailer orders remain robust right now compared to the same point last year in part because many fleets are projecting an improvement for freight volumes – a view that triggers capital investment in new equipment, which is also why truck orders remain elevated at the moment.
Yet, on the other, many analysts remain decidedly unsure if freight activity is actually increasing. On top of that, many shippers continue to put the squeeze on truckers in terms of rates and payment policies – two efforts that aren’t exactly associated with either tight trucking capacity or an increasing flow of goods.
John Larkin, managing director and head of transportation capital markets research for Stifel Capital Markets, recently elaborated on those conflicting trends in a short research note filed after he attended a variety of industry events, where anecdotal conversations combined with current freight data didn’t exactly result in rosy scenarios for motor carriers
“Demand remains sluggish, with a few exceptions,” Larkin explained. “Dry van freight has yet to show much more than a modest seasonal uptick.”
He stressed that the industry also needs to “watch out” for what he dubbed a “temporary head fake” of short term tightness in supply and demand.
“Our guess is that we might see some temporary tightening of supply/demand as weather improves, pent up seasonal demand is released, and peak produce season off the West Coast kicks in,” Larkin said. “However, more shippers seem to prefer to handle [such] temporary tightening with temporary solutions such as the creation of ‘pop-up fleets,’ which are temporary dedicated fleets operations at temporarily high rates or temporary reliance on a tight spot market.”
He added that shippers seem to be asking why upwardly adjust contract rates when expensive but temporary solutions are available – and with plant shutdowns, vacations, and a now-muted “back to school” surge in retail sales, supply and demand are likely to soften up heading into the third quarter.
“Sustainable tightening of supply and demand may be nine to 12 months away [or] longer than that,” he warned. “We believe that we will need more demand and/or less capacity for longer than just a month or so, in order to begin reversing out some or all of the contract rate pressure [on trucking] that has existed for the past 18 months.”
Some other trends Larkin noted also don’t bode well for trucking, either:
- Persistently “mediocre” freight demand seems to be a function of “uninspiring” consumer spending, a wet/cool start to the late Spring/early Summer shipping season – which has depressed demand for items such as lawn mowers, gas grilles, pool furniture, fertilizer, charcoal, etc. – softening in the automotive sector, and recent weakness in the housing market.
- Some shippers are looking to stretch carriers’ accounts receivables out to 90 days or even 120 days, he said; a phenomenon that puts marginal carriers in the undesirable position to exchange quick pay for further rate reductions. “Cash flow is more important than profitability for many of these carriers,” Larkin emphasized. “Longer term, shippers may wish that they hadn’t pressed so hard on payment terms, when marginal carriers are forced to exit the industry or downsize their fleets as a result of this increasingly popular practice.”
- Shippers continue funding increasingly forward positioned and larger inventories – a trend that’s developed to facilitate same hour fulfillment offered by some e-commerce and omnichannel-based retailers. “Suppliers may regret this commitment to maintain the forward-positioned inventory, as interest rates rise and the cost of carrying all that forward positioned inventory rises dramatically,” Larkin noted.
- Leasing companies are continuing to cope with depressed used truck values. “The soft freight market has made life challenging for carriers and, more noticeably, for leasing companies, as trucks are often ‘underwater’ on their owner’s respective balance sheets,” he emphasized. “Many carriers and leasing companies have held on to equipment longer than normal as a result, in the hopes that used truck values will rebound. But, older trucks can be more expensive to operate as they are typically less fuel efficient, require more maintenance, can be less reliable, and are typically less appealing to drivers,” who are already in short supply.
Not exactly a happy mix of trends for trucking executives to contemplate. Hopefully, though, we’ll start see them change for the better as summer arrives. We’ll see what happens.