In its September industry forecast, Chattanooga, Tennessee-based truckload (TL) carrier U.S. Xpress (NYSE: USX) identified three primary catalysts – higher driver turnover, declining TL capacity and “overwhelming” volumes – that will place upward pressure on rates through 2021.
“Each of these three themes will greatly influence trucking rates over the next four to six quarters. It’s becoming increasingly clear that high tide conditions will persist for a long while, so shippers and carriers will have to plan – and act – accordingly,” stated President and CEO Eric Fuller in the report.
The report cited an “ongoing series of dialogues with shippers and key partners” regarding capacity concerns and other tailwinds – a sustained period of carrier failures, a 30%-plus GDP forecast in the third quarter, an improvement in jobless claims and unemployment, an increase in personal savings throughout the pandemic, weakness in Class 8 truck orders and a surge in spot market activity – as reasons for higher rates in the quarters to come.
Also, a firming in the industrial sector, as evidenced by four consecutive months of improvement in the Purchasing Managers’ Index (PMI), a gauge of manufacturing activity, and a surge in the Logistics Managers’ Index (LMI), a survey of leading logistics executives, were offered as support of the company’s bullish outlook. The July LMI showed transportation capacity was nearing two-year lows.
“The entire trucking industry is scrambling to rise to the occasion,” the report stated.
A lack of drivers is becoming an issue
Driver turnover as reported by the Truckload Carriers Association (TCA) saw the largest one-month climb in July, increasing to 76% from 62% during the month of June. The headwinds to the driver pool are abundant – increasing driver age and retirements, the Drug & Alcohol Clearinghouse, fear of contracting or spreading COVID-19, low driver school enrollment due to social distancing restrictions and available employment in the construction market – and have hampered the available number of CDL drivers.
U.S. Xpress is calling for the driver pool to be down 200,000 drivers by the close of 2020. The company believes driver wage increases “as high as 15%” this year may be required to combat the industry’s driver issue. “When freight volumes erupt, drivers are a precious commodity,” the report stated.
Earlier this week, Schneider National (NYSE: SNDR) announced a large initiative to expand its team driver fleet. The carrier said new drivers can now earn up to 61 cents per mile, noting “many Schneider Team drivers each earn over $90,000 per year.” The hiring program provides sign-up bonuses of up to $20,000 per team and referral bonuses of $10,000 for a team as long as both drivers have more than one year of experience.
The U.S. Xpress report said, “A rapid acceleration in Class 8 orders must occur in order to keep pace with current freight volumes,” noting 20 months of soft truck orders and a fourfold increase in bankruptcies year-over-year in 2019. Persistently high insurance premiums were also called out as a headwind to truck supply.
New truck orders have rebounded in the last two months, nearly doubling in June and up 74% in July, according to ACT Research. However, monthly orders have only hit the 20,000-unit threshold three times since December. The report pointed out that replacement demand of at least 23,000 units per month was needed to keep the industry fleet from contracting.
Outbound tender rejects (SONAR: OTRI.USA), a measure of the number of tendered loads carriers are rejecting, remain elevated at more than 25%, hovering around all-time highs.
Demand to remain elevated and contract rates to move higher
U.S. Xpress doesn’t expect “overwhelming load volumes” to “settle down anytime soon.” Changes from COVID spending habits away from experiences and services to hard goods that require shipping have resulted in a volume surge that appears to have legs. Many retail and consumer packaged goods (CPG) companies are racing to keep items in stock. In addition to inventory replacement, some have speculated that many shippers will look to add as much as 5% to 10% of just-in-case inventory to avoid future supply shocks.
U.S. Xpress sees these catalysts as driving spot rates higher and pulling contract rates upward as well. “If heavy freight volumes remain over the coming months and quarters, spot rates will likely surpass the heights seen in 2018 (absent considerable gains in truckload capacity),” the report said.
The report also noted a recent trend echoed by other carriers. The expectation is that out-of-cycle contract negotiations, or mini bids, are likely to occur over the next couple of months to address contracts that were priced earlier in the year and aren’t reflective of the current capacity tightness.