Management from some of the nation’s largest truckload (TL) carriers are having a tough time distinguishing between peak season and the new normal in a COVID world.
Commenting at the Stephens Annual Investment Conference this week, Werner Enterprises (NASDAQ: WERN) CEO Derek Leathers said peak season ramped sooner than normal this year, starting from a much higher volume base. He noted retailers were “pulling forward everything they could get their hands on” earlier this year, which has created a smoother, “less chaotic” peak. He said capacity constraints were aided by retailers holding multiple Black Friday-type events to try to keep demand more balanced through the season.
Presenting at the same conference, Schneider National (NYSE: SNDR) CEO and President Mark Rourke said it was “hard to tell the difference” between peak conditions as the company’s business hasn’t seen much seasonality since July. He said all regions across the U.S., Mexico and Canada are experiencing a “robust condition,” with record load turndowns every day. He described the overall environment as “very agitated,” referring to the high-demand and tight-capacity dynamic.
Both indicated that there have been no surprises in the second half of 2020 as the prior prognostications for a V-shaped recovery in essential retail have come true. Customers of both carriers previously indicated their capacity needs would be high as the country reopened and the need for inventory replacement would sustain elevated truck demand indefinitely. Leathers still sees “very little risk to the downside” of customers’ lofty expectations.
It’s different this time
Asked if this cycle is different, both companies offered reasons to believe so.
Leathers said the 2017 peak season was strong, which led to a significant amount of capacity reentering the market. That cycle saw changes in tax laws, which increased bonus depreciation, and concerns over the new electronic logging device mandate, both of which provided fleet operators with the confidence to make incremental equipment additions.
However, this go-round, Leathers see a much different setup. Drivers are in short supply due to accelerated retirements over COVID concerns; 100,000 fewer CDLs issued in first six months of the year; nearly 50,000 drivers sidelined by failed drug tests with 90% not starting the return-to-duty process; and driver schools producing graduates at only 60% to 70% the rate they were pre-pandemic.
Add in prohibitive insurance rate increases and delays in original equipment manufacturers delivering trucks to the market, the runway for capacity tightness may be longer than normal.
“There’s really an opportunity for a really extended cycle in my view because the capacity constraints and obstacles are going to be there, and they’re very real,“ Leathers said.
Rourke sees driver issues and the lack of capacity as the biggest difference in this cycle. Driver turnover at Schneider has improved significantly, but when they do have drivers leave there isn’t a replacement option, given low driver schools enrollments. Further, most of Schneider’s customers are operating with “record-low” inventories, which leads Rourke to believe demand may be a little stronger in the current cycle. “We’re just not seeing the recovery of the capacity levels that we saw last cycle.”
Leathers said it’s not as easy as paying the driver more. He believes the driver schools are going to continue to provide a diminished number of graduates even when a vaccine is available. He outlined a scenario wherein widespread distribution is unlikely until at least the middle of next year. That would mean that the schools will continue to produce lower levels of driver candidates “through the predominance of 2021, best case.”
He concluded that the driver employment situation would only deteriorate if the oil and gas industry rebounds or if a national infrastructure plan came to fruition.
Rates up high single digits to low double digits in 2021
Both companies are expecting rates to increase meaningfully in 2021. Schneider is seeing advance contract renewals currently as shippers remain concerned about capacity coverage, with more clients willing to use a Schneider container or trailer and a third party’s power unit.
Rourke said it is a “very constructive rate environment,” potentially yielding rate increases in the high-single-digit to low-double-digit range, although the company will look to diversify its freight portfolio this bid season to produce more resiliency throughout all freight cycles.
Werner is looking to upgrade its freight mix as well. Leathers said it won’t be an exercise of “how high you can press the rate,” meaning the current market will allow them to select the freight that best fits their platform.
Regarding the runway for heightened truck demand, both carriers believe the inventory correction will last multiple quarters. Werner CFO John Steele noted that while inventories at the retailers appear to have bottomed out in the second quarter, there is much work to do.
“They made progress on inventory from where they were at the end of the second [quarter] to third [quarter], but they’re still at least a couple of quarters away, based on the math, from getting back to where they need to be, in part due to their sales being so strong,” Steele said.
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