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ELDs and converging dynamics: Will they alter truckload, LTL landscape?

Nov. 15, 2016
Analysts have already suggested that the coming ELD mandate could see some adjustment with the incoming administration. Consider it a wildcard — that and other trends are converging in trucking and could make for some unusual dynamics, notes one financial consulting firm.

Analysts have already suggested that the coming electronic logging device (ELD) mandate could see some adjustment with the new administration. Consider it a wildcard — that and other trends are converging in trucking and could make for some unusual dynamics, notes one financial consulting firm.

Following publicly traded carriers' third-quarter earnings reports, Brad Delco, an analyst at Stephens Inc. covering the truckload/less-than-truckload and transportation markets, walks Fleet Owner through some influencing factors to watch for.

1. Carriers are becoming more "disciplined" with their fleets. "Larger carriers are focusing on rightsizing their fleets — reducing their fleet size — and we saw a gain both sequentially and in year-over-year utilization, or miles per truck," Delco says. "It's a good leading indication of fleets becoming more disciplined with capacity for the type of market we're in right now."

2. Freight pricing is generally soft, and due to annual contracts, will be the norm through the first half of 2017. "Contract rates that were negotiated earlier this year went effective earlier in the summer," Delco explains. "So we need to live with this weaker pricing environment for at least 12 months, and that's going to put pressure on earnings in the first half of 2017."

3. Once current contracts are up, analysts expect freight pricing will climb. "Contract rates next year should get more positive" in the second half of 2017, Delco speculates. Spot contracts have seen a recent uptick, he notes, and those tend to be a leading indicator for annual contracts. Also, with carriers reducing some capacity, it could contribute to higher rates when contracts come due for rewrites.

4. New truck orders have been low for some time. OEMs have scaled back production a bit and dealers are still looking to reduce inventories, Delco notes. "I think a lot of them have been focused on inventory destocking, which means that if we just return to normal industry restocking levels, that would be a bump in demand," he says. However...

5. The used equipment market has been weak. Delco points out that increased depreciation of trucks is putting some pressure on carriers' earnings. "What you're seeing is that in a weak used truck environment, gains on sale of equipment are going down," he says. That has contributed to slower new truck sales, since overall, carriers and fleets are getting less residual value out of their used trucks and may purchase fewer new ones or wait longer to make that purchase.

6. Meanwhile, given a green light by the courts, compliance with the ELD mandate is approaching. Barring some change perhaps in the implementation timeline or otherwise, the mandate marches on. Most commercial drivers will need to be using some form of electronic logs — either ELDs or devices compliant with older Automatic Onboard Recording Device (AOBRD) standards — by Dec. 2017.

But there's speculation that the mandate could push some smaller carriers and owner-operators out of the mix, Delco says. "There've been some comments from the load boards that a portion of owner-operators want to leave the market instead of being compliant with ELDs," he contends.

7. Get ready for some X-factors. In theory, Delco explains, any smaller carriers and owner-ops exiting the market also would lower freight capacity and could mean a boon for freight pricing. "But those are typically the folks purchasing used equipment, and at the same time, they're also the ones that [if they exit] will likely increase the supply of used equipment," he tells Fleet Owner.

So a possible thinning of that smaller carrier/owner-operator herd could mean the used equipment market stays weak or even dips, which in turn could have a negative impact on new truck orders and carriers' earnings. That would mean a potentially dimmer outlook for truck OEMs and the used market, even as a number of factors for freight pricing are looking up.

"I don't believe we've ever seen supply-demand fundamentals improve for carriers to where pricing got more positive without used equipment prices improving," Delco contends. "It could be that truckload profitability in the public arena could improve but could be pressured by a continuation of a weak — or at least not as strong — used equipment market."

What else might all these things mean for, say, the widespread driver shortage? That's harder to say, and of course, how all these factors will come together against a changed political backdrop remains to be seen. Carriers have been tightening up their fleets somewhat, according to the Stephens analysis, and those doing so ought to need fewer drivers; that would be a pressure-relief valve in terms of driver shortfalls.

And meanwhile, as carriers are rightsizing to get more in line with freight demand, "any improvement in utilization means your drivers are making more money," Delco says. Even so, if new regs like the ELD mandate chase some drivers out of the industry, it would push things the other way, decreasing the available pool of drivers and contributing to the driver shortage.

"It's interesting to think about, but we don't know how it's all going to play out," Delco says. 

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