High rates, tight capacity to continue

 Panelists during a financial session listen as John Larkin, managing director at Stifel (second from left), speaks. Also on the panel, held at Transparency18, was Ravi Shanker of Morgan Stanley (to the right of Larkin) and Donald Broughton (right) of Broughton Capital. It was moderated by John Kingston, executive editor of FreightWaves.

Panelists during a financial session listen as John Larkin, managing director at Stifel (second from left), speaks. Also on the panel, held at Transparency18, was Ravi Shanker of Morgan Stanley (to the right of Larkin) and Donald Broughton (right) of Broughton Capital. It was moderated by John Kingston, executive editor of FreightWaves.

A panel of financial experts were mixed when asked during a panel discussion at this week’s Transparency18 conference at the Georgia International Conference Center in Atlanta whether the industry would see higher spot rates one year from now. The question was posed to the panelists by moderator John Kingston, executive editor of FreightWaves, at the conclusion of a session entitled, “The Bull, The Bear, and The Other Guy.” The panel was sponsored by TriumphPay.

Ravi Shanker, executive director of Morgan Stanley, said he believes spot rates, as tracked by DAT, would be lower one year from today while Donald Broughton, managing partner of Broughton Capital, suggested they would be higher. John Larkin, managing director at Stifel, noted he thought they would be flat, however, he could see a scenario where they are higher, agreeing with Broughton on that point.

The panelist shared their views on a number of topics related to the industry, including earnings season, autonomous vehicles and ELDs.

Reaffirming what many in the industry already know, Larkin noted that in conversations with carriers, 3PLs and 4PLs, “80% to 90% are saying this is the best freight market they’ve ever seen.” He also said the underlying fundamental is the lack of available labor, not just in trucking, but in many industries, as the U.S. hovers near record low unemployment.

Broughton also cited labor as a partial cause but highlighted higher oil prices and industrial demand combined with the continued consumer strength as additional factors. Part of that strength, he said, is due to Millennials finally getting into the marketplace to purchase goods. Add in already tight capacity in the freight market, and the ingredients are ripe for the current conditions.

All the panelists agreed that the primary cause for the tight freight market is not the ELD mandate. “The vastness of the tightness of capacity is due to the [economy],” Broughton said. “I think that you are seeing [the ELD effect] most earnestly in the flatbed segment.”

Larkin added that fleet downsizing from 2014 to 2016 is also contributing to the tightness as larger fleets do not possess the excess capacity to meet demand they did in previous upturns.

These impacts were seen in first quarter earnings reports from public carriers, but Shanker said there was some surprise in the reports, with pricing up more than Wall Street expected. But, the Street didn’t respond favorably to that, believing the reports “too good to be true” and the results unlikely to last, Shanker said.

Shanker, though, believes the current condition of capacity tightness will last for at least six more months with high single digit to double digit rate increases and continued high spot market rates to continue.

When the discussion shifted to how the industry is handling the capacity crunch, again the panelists had differing views. Broughton said he is seeing an increase in intermodal.

“We are seeing for the first time in history a move to domestic intermodal for capacity,” he said. “Historically, this has been driven by the price of diesel,” but demand is currently above what the price of diesel would suggest it should be. There is also a possibility for more growth in intermodal, Broughton suggested, as railroads can add intermodal railcar capacity quickly.

Larkin, though, disputed that assertion, saying that many intermodal yards are in areas that are geographically constrained, making expansion of the yards difficult. “The urban facilities are really maxed out and because of the drayage shortage, the boxes are not turning as quickly,” he said.

Noting that the supply chain has shifted to a time definite, high-velocity model right now, Larkin said that intermodal may be doing so well simply because of the capacity issues facing over-the-road trucking.

Broughton was asked about driver pay to attract drivers and because he tends to look for leading economic indicators, he suggested that as long as fleets are struggling to find drivers, that is a good sign for economy. “I like it when my trucking companies are reporting they are having trouble finding drivers ….[because] when they have it all figured out, the cycle is over,” he said.

Perhaps the most debated topic of the session was that industry hot-button issue, autonomous vehicles. While none of the panelists fall into the “never going to happen” crowd, they differed on the timeline of their deployment.

“There are a lot of elements along the supply chain that are labor intensive that are a lot easier to automate right now,” Larkin said, noting that the Teamsters, railroads and safety groups will all fight to stop or slow down autonomous commercial trucks.

Shanker, though, is more bullish. “We think the driver shortage will get worse in the coming years as the demographics [work against the industry],” he said. “I think the solution is automation.”

Level 4 trucks operating in platoons are likely by 2020, he said, with Level 5 – fully autonomous with no driver – arriving by 2025. “Shippers will [face a point] where they have to give a driver a 40% pay increase or do they turn to technology that cuts shipping costs 50%?” he asked.

Regulatory burdens may be the main obstacle to the deployment of autonomous vehicles, but Shanker doesn’t think that will materialize. “As a society, I think we had a fairly mature reaction to the Uber crash a few months ago; we didn’t have wholesale calls for bans,” he said. “I would bet that if we don’t have autonomous trucks by 2020, it won’t be because of the regulatory [environment].”

Broughton, though, disagreed, saying it will be regulation and insurance companies that prevent the adoption of the vehicles until a timeframe closer to 2030. The main issue he cited is liability concerns – who will be held responsible when an autonomous vehicle crashes?

When asked about the possibility that Amazon would purchase a carrier, specifically a last-mile carrier, Broughton and Shanker both doubted that would happen. Earlier this year a rumor surfaced that Amazon was considering making a run at XPO Logistics and the company continues to add trailers to its fleet.

“Five years from now Amazon will be one of the largest transportation providers, but they will do it organically,” Shanker opined.

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