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: