The plus-5% placeholder suggested as the starting point for contractual truckload negotiations in 2022 may prove too light according to trucking executives.
Appearing at a Morgan Stanley (NYSE: MS) investor conference, heads from some of the nation’s largest fleets said rates will likely be materially higher again next year, following a mid-teen percentage increase this year. Difficulties finding drivers, other capacity constraints and rising costs are the catalysts.
Up 5% would be ‘disappointing’
Asked if he would be disappointed with a 5% increase next year, Schneider National (NYSE: SNDR) President and CEO Mark Rourke said, “I’d put that on the disappointing side of the equation.”
He said that every metric Schneider uses to gauge fleet performance remains “strong” and that it is hard to observe traditional seasonal patterns as demand has been in peak mode for more than a year now.
A lack of drivers, trailing equipment strewn throughout the supply chain, and port and rail congestion are just some of the headwinds constraining capacity currently. Throw in a consumer that is still buying at a high level alongside retailers still chasing inventory and the supply-demand imbalance remains historically skewed.
Eric Fuller, president and CEO at U.S. Xpress (NYSE: USX), said the situation is likely to remain in place well into 2022. “Over the next six to 12 months, we have very little reason to believe that demand will pull back.”
He believes the combination of supply and demand factors, and the need to cover wage and other cost inflation through rate increases, equates to contract rates up by mid- to high-single digits next year.
Spot rates have continued to establish new highs, and contract rates, which lag the spot market, are following that cadence.
Chart: Blue shaded area shows spot rates. (SONAR: TSTOPVRPM.USA) is a seven-day average of rates per mile including fuel. The green line is the initial reporting of contract rates. (SONAR: VCRPM1.USA) is a seven-day moving average of dry van base rates under contract excluding fuel. Initial reporting is on a two-week lag.
Fuller said a change in consumer spending from goods to services didn’t happen as anticipated this year and that the emergence of the delta variant is only pushing the likelihood of that happening further out. He said most shippers are operating on inventories that are still five to six months behind, which provides a bit of a tail for freight demand if consumer spending were to let up.
He has concerns that capacity will be even tougher to come by if an infrastructure bill is approved. The trucking industry is already competing for labor within most construction markets and an actual infrastructure plan could stiffen the competition. Also, if a workplace vaccine mandate does not exempt truckers, the situation likely becomes dire.
Drivers not getting vaccine presents another hurdle
“We have heard anecdotally from a number of drivers that if they are required to vaccinate or even get tested on a regular basis, they may look for alternative work,” Fuller continued. He believes that more than 50% of drivers are not vaccinated currently and noted that “a fair amount have said that they will not be vaccinated under any circumstances.”
Derek Leathers, chairman, president and CEO of Werner Enterprises (NYSE: WERN), believes that significantly fewer than half of drivers across the industry have been vaccinated.
“It’s a group that’s independent natured, independent thinkers,” Leathers said. “They chose to be truck drivers for a reason. They don’t generally like a lot of interaction or intervention from others. That’s why they chose to be out over the road in a truck by themselves.”
He said Werner continues to be pro-vaccine and is encouraging drivers to get the shot. He also questioned the arbitrary 100-employee threshold for the mandate, noting that the bulk of TL fleets wouldn’t be subjected to the current rule.
“Last time I checked, COVID does not focus on demographics or focus on size of company,” Leathers added.
When asked about the 5% mark for rates next year, Leathers said, “I would take it and be disappointed.
“If you look at the pressures, the disruptions we’re dealing with right now – everything from delta variant to equipment supply to inflationary pressures up and down the P&L – I don’t at this point believe 5% is going to get that done,” Leathers said.
Werner’s current guidance for the back half of 2021 calls for revenue per total mile in its one-way TL segment to increase 16% to 19% year-over-year.
“It’s a very good time to be a trucker from a demand perspective but we are also juggling an awful lot of balls right now and that’s going to have to be respected if we’re going to be able to provide that service,” Leathers said.
Survey says rates up again in 2022; ‘at least 5%’ is the consensus
A recent Morgan Stanley survey showed that almost all of the 300 shippers, carriers and brokers polled expect trucking rates to be “at least flat, if not up” next year. Fifty-nine percent said rates will be up at least 5%, with 11% saying rates will increase by double digits again.
Carriers were the most bullish, with 75% expecting at least a 5% increase while only 50% of shippers queried said rates would increase that much.
“We have believed that this cycle could go far higher and longer than traditional wisdom would suggest given several sticky (if not structural) supply constraints that would see this cycle deprived of the typical surge in capacity that has historically plagued the industry,” Ravi Shanker, Morgan Stanley equity analyst, said in the report.
“The cycle will end at some point, of course, but we believe it will be at the hands of demand rolling over, not supply rushing in.”
TL relief valve – intermodal – can’t fill the void
Intermodal would typically be taking share from truck in this type of market. Uber tight truck capacity, nosebleed TL rates and high fuel prices are usually the catalysts needed to force shippers to make the conversion.
However, the mode is losing share. Intermodal volumes are down 2% year-over-year on the U.S. Class I railroads so far in the third quarter.
Heavy inbound container flows at U.S. ports, which are experiencing a shortfall of drayage capacity, is just part of the issue. Rail networks are beyond stretched, and the lack of chassis availability has led to slower train speeds and service suspensions. More equipment is required for the rails to overcome the hurdles but labor headwinds staffing the docks at shipper facilities is tying up boxes longer than normal.
“We would have typically expected in this environment to see more truck to rail conversion, versus, in some markets, actually seeing the opposite of that,” Rourke said. “I would characterize that, in the short term as disappointing, but in the long term as an opportunity that will return once fluidity and this whole congestion issue starts to get behind us.”
Chart: (SONAR: IMCSIF.USA). The intermodal cost savings index shows the cost difference between truck and rail remains high. The blue shaded area represents final reporting (eight-week lag). The orange line (SONAR: IMCSI1.USA) displays initial reporting (two-week lag).
Schneider plans to take delivery of roughly 3,000 containers by year end and J.B. Hunt (NASDAQ: JBHT) is adding 12,000 containers in total, 3,000 to 4,000 in the third quarter alone. However, the additions are unlikely to change market dynamics in the near term.
“Our customer unloading activity continues to be a significant challenge for us and that has ultimately caused sort of a loss of container capacity,” said Darren Field, J.B. Hunt’s intermodal president.
He said rail velocity hasn’t gotten any better in the last couple of months and that it is probably being pressured a little more of late.