It really doesn’t matter what the venue is, or what the stated topic of the scheduled conversation is going to be. It always turns out the same: the talk turns to the supply of drivers.
Earlier this month, as part of the Bank of America Merrill Lynch transportation conference in Boston, a panel with representatives from J.B, Hunt and Schneider Transportation spoke to attendees in person and on a webex in a session entitled “Changing Market Dynamics and the Final Mile.” And while final mile was discussed, so many of the conversations ended up back in the arena of how business decisions are being impacted by the supply of drivers.
For example, Merrill Lynch analyst Ken Hoexter asked Mark Rourke, the executive vice president and Chief Operating Officer of Schneider Transportation, about his views of the strong number of new truck orders in the market. The FTR report on new orders of class 8 vehicles for April was 34,700 units. That was down from the 45,000-plus numbers that were recorded by FTR earlier this year but was still up 50% from April 2017.
Rourke raised some questions about the market’s ability to handle that supply, or even who is doing the ordering. Rourke said Schneider’s conversations with OEMs and dealers is not revealing the segments of the market behind such heavy buying numbers.
“What you’re fearful of is that when you see those kind of net orders is that in a couple of months, you’re going to see that build hit the street or parked against the fence because you can’t get a driver,” Rourke said. While there are vocational programs seeking to pull new drivers into the market, the fuel efficiency gains from newer trucks are significant, and it’s easier to retain drivers in new trucks, “we have not really been able to uncover who is adding the capacity to substantiate those numbers.” He described himself as “highly skeptical” that the market exists for such a strong number of new builds.
Eric McGee, the other panelist and the executive vice president of highway services at J.B. Hunt, said the cycle in the market tends to be a strong market brings in new capacity, the market slows down into a “rate war…and then you start stripping driver pay back.” The ELD mandate, however, might make that rate war less likely this time around, according to McGee, because in the past that new capacity got run hard “when it probably shouldn’t have.” Now with the ELD mandate acting to enforce the hours of service rules, it is a different scenario, he said, so that rate war might not develop as easily as in the past.
Compensation gains not standard
McGee said there is not fixed set of compensation increases that J.B. Hunt has undertaken to retain drivers. He said it varied by market; “some markets might get close to double digits, and others are in the mid single digits. Some could be more than 20%.” The differences are regional, McGee said, and some drivers might only get one increase “while in some instances we could go back to a driver 2-3 times.”
McGee said that during the conference, numerous people had asked him whether shippers are trying to move more of their business on to rails, because of the high price of fuel. Yes, they are making that shift, McGee said, but it isn’t because of fuel. “The preeminent driver of that conversion is not fuel but capacity,” McGee said. It’s a “hedge against the driver market…to give myself a capacity option.” Rourke said he also has seen conversion to intermodal, but also to dedicated service. “It’s not that service of cost is not important, but the primary objective is how do I get appropriate coverage,” Rourke said.
Stability on the rails
McGee said after the railroad issues of the end of 2017 and early 2018, there has been a stabilization. “If we can get to stability, we can plan,” he said. Hunt’s intermodal business is still expecting to see returns in the 11-13% range.
As to the one stated area of discussion in the panel’s title–the final mile–McGee said the final mile business is now about a $350 million part of J.B. Hunt, with the expectation that it will be a billion dollar part of it eventually. “We’re focused on anything that is hard to take into the home,” he said. J.B. Hunt is focused on last mile deliveries of things that are “big and bulky and hard.”
Schneider two years ago made two simultaneous acquisitions in the final mile segment: Watkins & Shepard and Lodeso. At the time of the acquisitions, Watkins & Shepherd was described as a “leading provider of LTL, truckload and logistics services for difficult-to-handle goods, such as furniture and floor coverings.” Lodeso has a logistics technology platform.
The goal, Rourke said, is to take those assets and marry them with the sweep of Schneider’s network. “What we bring is scale,” he said. “Our focus is to bring scale and density to service in a seamless way and eliminate the multiple handoffs that now go on.”
Hunt’s McGee talked about the company’s brokerage business, noting that it had been squeezed by the difference between spot and contract rates. And while the normal easing of rates could put those rates in their more normal state of affairs, with contract rates above spot rates, an event such as a storm could reverse it.
But still, it’s a big play for Hunt, McGee said. The company is investing $500 million over the next five years, he said, and half of that is going into “disruptive technologies.” There won’t be one winner in the space, McGee conceded, but there will be several winners “and it is going to transform what digital brokerage is today.”
