• ITVI.USA
    17,113.070
    186.890
    1.1%
  • OTRI.USA
    28.200
    0.000
    0%
  • OTVI.USA
    17,079.400
    184.170
    1.1%
  • TLT.USA
    3.090
    0.190
    6.6%
  • TSTOPVRPM.ATLPHL
    2.630
    0.060
    2.3%
  • TSTOPVRPM.CHIATL
    3.080
    -0.090
    -2.8%
  • TSTOPVRPM.DALLAX
    1.180
    -0.060
    -4.8%
  • TSTOPVRPM.LAXDAL
    3.210
    -0.070
    -2.1%
  • TSTOPVRPM.PHLCHI
    1.630
    -0.090
    -5.2%
  • TSTOPVRPM.LAXSEA
    3.360
    0.070
    2.1%
  • WAIT.USA
    121.000
    1.000
    0.8%
  • ITVI.USA
    17,113.070
    186.890
    1.1%
  • OTRI.USA
    28.200
    0.000
    0%
  • OTVI.USA
    17,079.400
    184.170
    1.1%
  • TLT.USA
    3.090
    0.190
    6.6%
  • TSTOPVRPM.ATLPHL
    2.630
    0.060
    2.3%
  • TSTOPVRPM.CHIATL
    3.080
    -0.090
    -2.8%
  • TSTOPVRPM.DALLAX
    1.180
    -0.060
    -4.8%
  • TSTOPVRPM.LAXDAL
    3.210
    -0.070
    -2.1%
  • TSTOPVRPM.PHLCHI
    1.630
    -0.090
    -5.2%
  • TSTOPVRPM.LAXSEA
    3.360
    0.070
    2.1%
  • WAIT.USA
    121.000
    1.000
    0.8%
Driver issuesIntermodalNewsRailTrucking

Replenishing inventory will keep freight markets strong into 2021: J.B. Hunt

The replenishment of inventories will be a key driver of trucking and intermodal markets as 2020 slips into history and 2021 begins, according to two key executives from J.B. Hunt.

Presenting to the virtual Stephens Annual Investment Conference, Darren Field, the executive vice president of intermodal, and Eric McGee, the executive vice president for highway services, both discussed the need to put products back on the shelves as likely drivers of a strong freight market into the first part of next year. 

“We are facing inventory levels that are consistently lower than they need to be,” McGee said. He added that it will take at least the first three to four months of next year to replenish them.

McGee added that an unknown in his calculations would be the size of any stimulus check coming from Washington and how that might impact consumer demand. The speed at which a vaccine begins to impact economic activity is another unknown.

“So we have to stay very nimble,” McGee said. But regardless of all the outcomes, the market itself will “remain tight and rates have to go up for all the costs,” he said. The level of that increase? “It would be more on the significant side.” 

As a result of that strong market, Field said he expected J.B. Hunt to be communicating with its customers soon on the pricing outlook. “We don’t send letters all the time because we don’t want to be highlighting every little thing,” he said. “We try to do that when we believe it’s material and we think customers respect that.”

And he made clear that the time is near. Referring to Hunt’s Chief Commercial Officer Shelley Simpson, Field said of the letter, “Shelley fully expects to do that sometime in the next few weeks.” And the level of price increases discussed in the letter, he added, will “certainly be more on the significant level.”

“I would fully expect rates to continue to be under pressure and we will be asking our customers for rate increases because everything is costing us more,” Field said. 

Field heads Hunt’s extensive intermodal operations. He did not see much difference in what intermodal rates would need to move in reaction to the market compared to any increase in truckload prices. “I would think intermodal prices have to be sustained or at least move similar to what truckload prices have been,” he said, adding that the rate of increase might not be the same; for example, a 12% increase for truckload to cover cost increases might dollarwise be the same as a 7% to 8% increase for intermodal, given the longer average length of haul. 

He added that there might be “pockets” of intermodal service where rates would have to go up by a particularly large market. He cited Southern California as an example.

The situation in SoCal can’t just be alleviated by higher rates, Field said. It may take investment in more equipment that can be purchased and stored for surge times, “and I think our customers are going to be looking for us to help solve capacity challenges in the future. We are going to have to talk about what’s involved to do that.”

Intermodal’s margins have been under pressure, and the group’s operating ratio in the third quarter was 91.1%, a drop of 170 basis points from the third quarter of 2019. Merrill Lynch summed up the intermodal performance after the earnings came out by observing, “The miss versus our targets was driven by higher rail purchased transportation costs, including costs to reposition empty containers, lower overall revenue per load and higher dray costs stemming from dislocations in rail capacity and a tight labor and truck capacity environment.”

Field conceded that the company’s margins have been a disappointment to investors. J.B. Hunt’s in the last three months, according to Barchart, is down 4.43%, a period that would have included the disclosure of third-quarter earnings. 

But Field, in an answer to a question, said margin is not the same as return on assets. The company is targeting margins of 11% to 13%. But he also said it is possible that the return on capital for the investments it is making in the equipment side of the business might not translate to a margin that high. But if the return on capital is at an acceptable level, the lack of meeting that margin is not necessarily a disastrous outcome. It may just require that Hunt study that market and determine why “we’re not there yet,” Field said.

On another issue, Brad Delco, the company’s vice president of finance, discussed the conundrum that the growing Hunt Dedicated business comes with a significant pile of startup costs when new companies are brought on. 

In the third quarter, Dedicated revenue was up just 1% from the third quarter of 2019 and operating income was up 5%. One of the ways the company grew that operating income out of a small increase in revenue was “fewer startup costs,” according to the Hunt earnings presentation. 

But the outlays “internally are actually viewed positively,” Delco said. “You make the investment, you fine-tune that book of business and then you see margins expand,” he said. “You see the returns on what you built out. So you make the investment and then you see the wave.”

Delco said he expects the Dedicated division to get back on track with 800 to 1,000 truck sales per year. And when the book of business is bigger, he added, “the dilutive effect of startups is not as great as it once was.” 

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.

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