It’s something of a conundrum being faced by trucking fleets today, according to one industry analyst at least.
In the near term, trucking capacity is readily available due to sluggish economic activity – gross domestic product in the first quarter inched up a measly 0.5% after all – so many shippers are attempting to take advantage of the situation and obtain lower freight rates.
That’s putting pressure on the bottom lines of many motor carriers just when they don’t need it, as fuel costs are rising, equipment prices are increasing, and they are all trying to pay drivers more.
That’s also a big reason we’ve seen Class 8 orders drop like a ton of bricks in recent months, noted Kenny Vieth, president and senior analyst for ACT Research in a recent update.
"The supply of Class 8 trucks continues to rise faster than demand for trucks," he pointed out. "In addition to overcapacity relative to current freight activity, a widespread inventory overhang is compounding the problem," with fleets surveyed by his firm noting that freight continues to be soft, without the usual April "uptick."
That's why, from a long-term perspective, shippers may be cutting off their noses despite their faces.
Because though capacity is plentiful now, even modest economic growth could eliminate that overage in a snap.
Add in a “tidal wave” of regulatory efforts – including the mandate to use electronic logging devices (ELDs) by the end of 2017 and probably speed limiters at some point that year or the next as well – that will surely exacerbate an already acute shortage of drivers and you’ve got the potential for drought-like conditions when it comes to tractor-trailer availability; the so-called “mother of all capacity shortages.”
In sum, shippers are now basically engaged in pissing off the very folks they’ll probably need as very close friends in less than a year; not exactly what one would call a recipe for success.
And though those aren’t the exact words of John Larkin (at right), managing director and head of transportation capital markets research at Stifel Financial Corp., they come pretty close to the point he’s trying to drive home for shippers and truckers alike.
“Shippers should be careful what they wish for,” he stressed in a market brief this week. “Shippers, for the most part, appear to be shrugging off any near-term possibility of a capacity shortage. Evidently, they have heard that the ‘mother of all capacity shortages’ is coming; however, the currently very loose supply/demand dynamic seems to confound the capacity crunch thesis which has hung around a little too long with little hard evidence surfacing so far.”
Based on his conversations with motor carriers and shippers of late, Larkin said many shippers suggest that freight will be lost if rates are not cut 10% or more.
On top of that, large third party logistics (3PL) companies that source capacity mostly from smaller carriers are “leading the rate cutting charge,” often submitting “very aggressive bids” with confidence that they can purchase capacity in the open market over the near term, at least, at even more “aggressive price” points.
“Only a select few enlightened shippers will even entertain the notion of rate increases, presently,” he added.
(Guess all the talk about building more collaborative relationships in the freight world might all be for naught.)
Larkin noted, too, that shippers “seem to argue” that the trucking industry always seems to adapt to regulations, rate pressures, overzealous brokers, labor shortages, etc., and believes that reflects a “shipper mindset” that they will “happily deal with the capacity crisis” when, and if, it ever materializes.
In a word: Ouch.
For in reality, what lies just over the hill for trucking – whether shippers and 3PLs want to acknowledge it or not – are some major challenges that could out a severe crimp in capacity in the worst possible way; by driving companies out of business.
“Spot rates have been pushed down so aggressively by 3PLs that many small carriers reliant on them for some or all of their freight may not make it to the end of next year (2017) when ELDs, under the present rule, must be installed in all trucks engaged in interstate commerce,” Larkin stressed.
He added that industry pricing, especially in the spot market, is so weak that many motor carriers – even “non-compliant” carriers, or ones skirting hours of service (HOS) rules – may not survive until the end of 2017.
“And if they do, they will have to do some serious introspection to determine if it makes sense to install ELDs given the [freight] rate levels currently prevalent across the industry,” Larkin emphasized. “The theory is, if they cannot make money while bending/HOS rules at current rate levels, how will they be able to economically survive while following the rules to the letter of the law in the post-ELD era?”
From a big picture perspective, then, Larkin thinks the short term outlook is weak for trucking. Yet what he characterizes as the long term outlook is in many ways becoming “more bullish” at the same time.
“With rate and volume trends so uninspiring, it may be best to be cautious … until we see some positive turn in industry fundamentals perhaps as early as later in 2016 or as late as the second half of 2017,” Larkin said. “Longer term, we think the weak rates and sluggish freight environment will exaggerate the supply/demand tightness as the toxic combination of weak spot rates, soft freight markets, and capacity constraining regulations will push out more industry capacity that would have been pushed out had rates not take such a turn for the worse.”
Grim stuff for sure.
