Commentary from management teams in the trucking industry so far through second-quarter earnings season points to a favorable conclusion to 2022. While the spot market has loosened significantly since March and rates have dropped, large carriers with heavy exposure to contractual freight are only seeing modest changes in demand.
Large fleets derive the bulk of their revenue from contractual freight agreements negotiated annually. They opportunistically operate in the spot market to take advantage of favorable rates or to fill otherwise unutilized capacity. With spot market fundamentals in decline, routing guide compliance among carriers has increased as contractual rates remain firm.
“Essentially, the market is transitioning back to pre-pandemic shares of contract versus spot market,” Bob Costello, ATA chief economist, stated in the update. “Second, and perhaps equally important, while economic growth is expected to be soft overall in the second quarter, the goods economy wasn’t as bad as feared.”
“While the current levels are down compared against the unprecedented levels experienced in the later months of 2021, we continue to have significantly more opportunities to haul freight than we are able to cover with our existing fleet and available drivers,” CEO Mike Gerdin said in the report.
He sees the dynamic holding through year-end.
“Given the current operating environment, I view Landstar’s relatively stable revenue per load since May as a positive,” President and CEO Jim Gattoni said in an earnings report.
Cost inflation is now the main driver of contractual rate increases.
During the pandemic, carriers benefited from a large supply-demand imbalance, booking rates significantly above inflation, which pushed margins to record levels. Even though the market has reset and become more balanced, carriers operating under contract appear poised to capture rates high enough to at least offset a multitude of higher expenses — wages, equipment, insurance, operating supplies, uncompensated fuel expense and interest expense, to name a few.
“We feel confident in the different areas of our businesses and how we’re having conversations with our customers,” Simpson continued. “I think our customers are prepared to have a good second half. I haven’t had a lot of feedback on a significant downturn.”
“We talked last quarter about seeing solid momentum in the business and that remains the case today as we continue to onboard new business,” Nick Hobbs, COO and president of contract services, stated on the call.
Retail inventories not the concern originally thought?
Numerous retailers ordered merchandise early and often in the second half of 2021 in attempts to navigate supply chain delays and avoid stockouts. Ultimately, many of those items didn’t arrive in time and retailers now find themselves holding onto merchandise that is out of season or still out of position in the supply chain.
While the dislocation has inflated the inventory metrics for some retailers, other items like furniture, electronics and exercise equipment, which were some of the most difficult to find during the pandemic, are now in a true overstocked position.
“We have had concern from customers on inventory, having the wrong inventory and where it is located, but I’ve not heard any customers tell us that there’s a downturn coming,” Simpson added.
Whether there is a significant inventory overhang or not will likely be answered as the industry works through the 2022 peak season – and retail sales will have a big say.
“June’s numbers show consumers are powering through price pressures, but inflation is eating away at savings built up during the pandemic and is wiping out recent income gains,” Jack Kleinhenz, NRF chief economist, stated in the release. “Inflation remains a challenge to consumers trying to make ends meet and will continue to be an issue even if it cools down in the months ahead. Despite that, consumers are holding up notably well and continuing to spend.”
Oversupply less of a concern on the downside of this cycle?
However, Jackson believes lower spot rates and a higher cost profile will continue to force small, spot market dependent carriers out of business, ultimately correcting any oversupply in short order.
He said the supply side is different this cycle because in past downturns small carriers had the benefit of low fuel prices, and falling used equipment prices allowed them to inexpensively jump into a newer truck and avoid the maintenance expenses associated with running older equipment. Further, prior to the electronic logging device mandate, carriers could run extra miles to make up for revenue shortfalls.
“Well, virtually every one of those factors is not the same this go-around,” Jackson said.
“One thing we do know, that has been consistent from one cycle to the next, is when credit dries up, that brings religion to small carriers in terms of what they do to grow or refresh. And that process is well underway already.”
He said supply appears to be leaving the market at a faster rate than demand is slowing.
“In our industry, we’re much more sensitive to supply than we actually are to demand … and we didn’t go into this one with a huge oversupply like we did in 2018 to 2019 or like we did in 2006 to 2007,” he continued. “So that has us thinking that this could feel a little bit more orderly and less of a drop-off, just because the supply didn’t get nearly as high and is leaving so early.”
He also noted that production headwinds at the manufacturers will mean that new equipment will continue to be allocated on a limited basis throughout 2023, even to the biggest buyers.
“We’re of the belief that there’s definitely going to be resilience like there was in 2019 in the kind of contract business that we’re able to do given size and scale,” Jackson said. “A classic example of that would be, just look at the first half of this year. Look at how our business has performed relative to what it’s been like for the smaller carriers … particularly those that were overly reliant on spot business.”
