Early signs of increasing contract rates

Most contracts won’t come up until later this year, but early renewals are seeing higher rates

While the third quarter may be a slow time for contract renewals between carriers and shippers, a few deals have been done so far and the early indications are contract rates are heading up.

John Larkin, managing director of Transportation and Logistics for Stifel Equity Research, says that spot rates have remained strong – they have risen much faster than contract rates in 2017 – but contract rates are finally showing some upward movement.

“Having said that, few contracts come up for renewal in the third quarter, so the sample size regarding contract renewals is admittedly small so far,” he notes. “However, most carriers are optimistic in that they believe the stage is set for at least low single digit contract rate increases when most annual contract renewals are up for negotiation in the fourth quarter of 2017 and the first half of 2018.”

Larkin also notes that most shippers remain reluctant about discussing contracts that are not up for renewal at this time. Rate increases that have happened are in the low single digits and are more prevalent with the larger carriers.

“On top of this, big carriers are having some success pushing up revenue yield through better freight selection thanks to the improvement in demand and fleet downsizing (big fleets only) that has occurred over the past 18 months,” he adds.

A Stifel research note on Friday expanded on the current situation. “Those [fleets] unable to finagle rate increases are working, within the increased demand environment, to select better rated freight from the broadening universe of loads from which they can choose,” the note says.

To illustrate this, the note highlighted one carrier that said dry van load turn downs, on an absolute basis, were up in July versus June.

“Over the years, we cannot ever remember a year where this was ever the case. Flatbed demand continues to lead the way in terms of strength, relative to other truckload sub-segments,” the note adds, but cautions that the “driver recruiting and retention challenge continues to constrain carriers’ ability to maintain their ‘seated’ fleet size, much less grow their fleets.”

The Stifel note added that the American Trucking Associations is working to develop an apprentice program that would allow 18-year-old high school graduates to become drivers and help alleviate this concern.

“Our sense is that this could take several years to run through Congress and the regulators, if the industry association can get any traction at all,” the note points out. “In addition, all the talk of autonomous trucks is scaring away many young people from the industry. Why would a young person want to enter a profession that will soon be disrupted by technology? Of course, the widespread adoption of autonomous trucks might be several decades, or more, away. So, the industry now is challenged to get that message across to young people that might, at least, consider a career as a professional truck driver.”