Recent analyst reports suggest that the TL segment may be reaching the peak earnings point of the current freight cycle, meaning both rates and margins may begin trending downwards as capacity is expected to become more “balanced” in the months ahead.
Wolf Research LLC recently noted that TL capacity “just doesn’t feel tight anymore” due to a number of factors: an “easing” of “driver pressures,” mainly due to hours of service (HOS) reforms put in place last year, an increase in the truck population due to high order volumes, improving intermodal service, and milder weather.
“In our latest shipper survey, which we are currently compiling, 58% cited tight TL capacity in March, down from 95% last quarter [the fourth quarter of 2014] and 76% from a year ago [the first quarter of 2014]. This is the biggest quarter-to-quarter drop in our survey since the third quarter of 2006,” the firm noted.
“Meanwhile, 36% of shippers are now citing balanced TL capacity, with 6% now citing TL overcapacity; up from 5% and 0% last quarter,” Wolf added in its report. “If our survey continues to point to more balanced capacity, we would expect pricing gains to start slowing later this year or by next year.”
Wolf added that its estimates new heavy-truck production in the U.S. will top out at 340,000 units this year, or about 90,000 more than historical replacement levels.
“If you assume a [total commercial] fleet of about 2.5 million trucks, based on the past 10 years of cumulative truck builds, this implies about 3% to 4% fleet growth this year,” the firm noted. “Combined with the reversal of HOS [34 hour restart] rules, improving intermodal service, rising driver pay, fewer energy jobs and milder weather, we think there could be about 5% more TL supply in the market this year which explains why capacity doesn’t feel as tight anymore.”
Research firm FTR Transportation Intelligence pointed out that its Shippers Conditions Index (SCI) declined in February declined to a negative 1.0 reading from January, due to the short-term positive impact from one-time adjustments for rapidly dropping diesel prices and suspension of the 34-hour restart rule.
“For shippers, spot market capacity has certainly eased from the very tight market in 2014, with Truckstop.com showing a 15% increase in available trucks in February versus last year,” noted Jonathan Starks, FTR’s director of transportation analysis, in a statement.
“Also coming to an end is the rapid declines in fuel costs … so shippers will once again be in parity with what truckers are paying and charging for fuel,” he added. “Conditions for shippers will likely stay modestly negative for the balance of 2015 – an improvement over the last couple of years.”
DAT Solutions noted that the number of available loads on its spot TL market board decreased 2.4% while capacity increased 4.5% during the week ending April 25.
The firm said spot dry van and flatbed rates on its load board continued to soften while the average reefer rate was unchanged compared to the previous week.
Nationally, DAT noted that the average dry van rate fell for the fourth straight week, dropping 2 cents to $1.87 per mile as capacity increased 5.7% and the number of available loads fell 7.4%.
On top of that, the average van load-to-truck ratio decreased 12% to 2.6, meaning there were 2.6 available van loads for every truck posted on the DAT network.
The freight market may be affected more broadly by the recent spate “tepid” economic data. Lindsey Piegza, chief economist for Sterne Agee, pointed out that this “uncertain economic environment “plagued by declining business investment and hiring, stagnant wage momentum, and heightened uncertainty surrounding the sustainability of the U.S. recovery is leading to a decline in consumer confidence.
“While durable goods orders rose a whopping 4% in March – the strongest since last July – it does little to reinstate confidence in an improved [business] investment trend, as that monthly increase was centered in transportation orders,” she explained. “Capital goods orders excluding defense and aircraft orders – which are a proxy for business spending – actually fell 0.5% in March; the seventh consecutive month of decline. Thus year-over-year business spending is down 4%.”
As a result, Peigza added that Bloomberg’s median forecast for first quarter U.S. gross domestic product (GDP) is now just 1%, which would make the weakest quarterly growth rate since the second quarter of 2014.
All of those data points indicate to Wolf’s analysts that 2015 could actually represent the peak point of earnings growth for the TL segment for this freight cycle.
“That is, we see increasing potential for TL carriers to report flat to down year-over-year earnings due to a combination of slower pricing gains, potentially rising fuel prices, and lower gains on sales,” the firm said. “Our estimates reflect continued strong earnings per share [EPS] growth this year, but slower EPS growth next year. For next year as we assume 3% pricing [gains], small year-over-year fuel headwinds and flat to down year-over-year gains on sales.”
Still, the longer-term trends eyed by those same analysts continue to indicate far tighter trucking conditions could develop on the horizon.
FTR, for one, estimates that the contract side of the TL business remains well above 95% utilization and that from here on out its SCI metric will “deteriorate” under pressures building from new regulations hitting the trucking sector along with continued freight growth and expected upward movement in energy prices.
Even Wolf believes the tide could turn quickly for trucking in terms of earnings potential.
“TL [earnings] reports in the first quarter have been solid, with pricing even stronger than expected for most and no apparent impact from weaker spot rates,” the firm noted.
“Looking ahead, stronger consumer and housing demand could lead to tighter capacity, and capacity should tighten seasonally the next couple of months,” Wolf added. “[While] electronic logging devices (ELDs) also remain a long-term [tight capacity] catalyst, we anticipate legal delays will push this out a few more years.”