For many Canadian trucking companies, 2016 was a year to forget. An anemic economy and sluggish freight growth had too many trucks chasing too few skids. And a hoped-for manufacturing resurgence resulting from the low value of the Canadian dollar never materialized. Opportunistic shippers put pressure on rates, squeezing carriers’ margins.
But as the calendar flips to 2017, there’s a general feeling that rates have bottomed out and that the year ahead could see a rebalancing of supply and demand and a much-needed pricing correction.
Reasons for optimism
Fleet executives we spoke to pointed to two primary reasons capacity should rebalance in 2017: Class 8 order activity and impending legislation that will require fleets operating in the US to deploy electronic logging devices (ELDs) to monitor driver hours-of-service. Class 8 orders have been down sharply this year, well below replacement levels. The implication is that fleets aren’t even ordering enough trucks to replace the ones they’re retiring from service, resulting in a shrinking of capacity.
“Fleets are not ordering enough to replace what they’re getting out, they’re shrinking,” explained Jonathan Wahba, chief operating officer of Kriska Transportation Group. “We have shrunk a little this year and many of our large competitors have also shrunk. At some point in time, that shrinking of the total fleet will result in equilibrium with demand, or maybe even below it.”
This observation was shared by Paul Will, chairman and CEO of Celadon Group.
“I think in general, when you see new truck builds go down for 12-18 months, you will start to see some pickup (in trucking rates) because capacity starts coming out,” he said.
And truck manufacturers aren’t expecting orders to pick up anytime soon. Volvo recently downgraded its expectations for 2017, projecting North American Class 8 orders of 215,000 units, down sharply from this year’s total of a projected 240,000 units and roughly 300,000 in 2015.
Couple an anticipated shrinking of the North American fleet size with impending regulations that could reduce productivity, and it’s a recipe for rising trucking rates.
“When you have fewer trucks on the highway and we add on the ELD mandate, those two things when they come together, we think we’re going to get back to 2014-2015 conditions where there was more demand than supply,” Wahba said.
The ELD mandate, on schedule for implementation in December 2017, is expected to chase 5-6% of US capacity from the market. That’s because there’s a sentiment that about half of US carriers currently use paper logs and a good number of them will be unwilling or unable to comply with the standard.
Rob Penner, president and chief operating officer of Bison Transport, predicted the industry should begin feeling the effects of the ELD mandate by mid-year as fleets that were using paper logs to circumvent HOS rules “turn on” their ELDs and see productivity fall into line with what compliant carriers are seeing.
“We have always been proud of our utilization, we’re at around 12,000 miles per truck on e-logs and doing the right thing,” Penner said. “When you talk to the unsophisticated guys, they’re around 13,000 miles per month routinely. That’s not possible. There is going to be a capacity crunch. There just has to be.”
Celadon’s Will agreed the ELD mandate will create opportunities.
“I think 2016 could be a watershed year going into 2017, and I see 2017 picking up and with the regulatory changes coming in at the end of the year, the sky’s the limit for trucking,” said Will.
That theory, coming from a trucking executive, may sound like wishful thinking, but a leading industry forecaster agrees. FTR reports there’s a 60% chance there’ll be a shortage of equipment and drivers by the end of 2017 and that rates will go up more than expected.
“In 2017, rate increases are going to exceed expectations and this will continue into 2018,” Noel Perry, truck and transportation expert with FTR said during a recent State of Freight webinar. “I fully expect 2018 to be a difficult year for pricing if you’re a shipper and 2017 will be a surprisingly difficult one. Not because it’s going to be spectacular, but because people expect 0-2% (increases) and may get 4%.”
Forward-thinking shippers are looking to lock in one- or two-year contracts, Wahba said, while others continue to try to take advantage of the down market. Those shippers could struggle to find trucks if capacity tightens as expected, he warned.
“When you are the cheapest today, the money you are saving today may be offset by the premium you pay in the future,” he explained. “If you have a longer-term view of cost, shippers are going to end up paying less in the future and have a better level of service.”
Asked to make a bold prediction for 2017, Bison’s Penner was confident pricing will improve.
“By the end of Q3 2017, carriers will have the opportunity to push price. If they have a truck and a driver and are doing things the right way, they’ll be able to push price,” Penner said.
But not everyone is optimistic of a reduction in capacity.
Ted Daniel, CEO of Titanium Transportation, said during a recent conference call to discuss Q3 earnings, “I’m not seeing any improvements in terms of the overcapacity issue in this economy.” He added he doesn’t think the oversupply of capacity will resolve itself in 2017.
Mergers & acquisitions
Aside from TransForce’s blockbuster acquisition of XPO Logistics’ truckload division, there has been little activity in the way of mergers and acquisitions in 2016. Wahba says this is likely because business owners wanting to maximize the value of their companies are holding off until conditions – and their balance sheets – improve.
“What we found in 2016 was, a lot of owners who may have thought about selling their business decided not to, because the results of their business have been poor because of (market) conditions,” he explained. “Those poor results translate into a lower selling price. I think they are waiting for the pop in the market to drive better results, and those results will translate into a better selling price for company owners.”
Wahba thinks the industry will see more consolidation as business conditions improve and as some small fleet owners opt to walk away from trucking rather than invest the time and money into complying with the ELD mandate.
“We may see people getting out in the first half of 2017 if they decide all the work putting in ELDs is not something they want to do. Maybe they don’t have a strong IT staff or training staff and they may feel their business is in better hands of a large organization that has expertise in those areas,” Wahba says.
Titanium, which has publicly said it is targeting two acquisitions per year, has been able to close just one in 2016 due to a business environment that makes closing deals difficult.
“These conditions, with the overcapacity, makes it harder to do a deal for both parties,” Daniel said. “On one hand, you’re looking at a company that wants to get as high a price as they can, but at the same time, it’s not that we want to get the lowest possible price, but we’re also dealing with the fact, mathematically sometimes we’re working under a certain framework and it’s tough to be able to please everybody. The environment itself is making it a little tougher.”
Doug Nix, vice chairman of Corporate Finance Associates, said there is no shortage of buyers – especially for non-asset based transportation companies.
“What we saw in 2016, was XPO Logistics withdrew from the (acquisitions) market, so that took some pressure off. Our understanding is they and a couple other large buyers are moving back into the market in 2017 and we think that is going to increase demand for quality companies,” Nix said. “But having said that, in all candor, if somebody has got a quality company there is strong demand for it, no matter what the market is like.”
Mike McCarron, president of Left Lane Associates, says there are currently more buyers than sellers but that could change as incoming legislation chases carriers out of the market.
“There’s a ton of buyers,” McCarron said. “Very few people are ready to sell.” He too thinks that could change with an onslaught of new regulations.
Will the driver shortage re-emerge?
A weak economy and slow freight growth have in 2016 masked one of the industry’s biggest concerns: the struggle to find quality drivers. However, Wahba predicts that issue will come to the forefront once again in 2017.
“If everything plays out the way we think it will, my biggest concern comes back to labor and having enough drivers,” he said. “This year the driver shortage has been masked by the softness in the market but if you look at the underlying fundamentals of our labor market – an aging demographic of drivers, the introduction of mandatory entry-level training, the rising cost of insurance – all these factors are going to continue to put pressure on our labor market and if the market tightens, all of a sudden those pressures are going to bubble up to the surface again.”
But Bison’s Penner has a different take on the issue. He sees 2017 as the year well-run carriers that already have tight controls on HOS will see drivers come flocking.
“All carriers that don’t run ELDs are not unsafe and not cheaters,” Penner said. “But there are a significant percentage of them. And unless they’re prepared to pay drivers the same amount of money to put on less miles, there will be a financial impact to those drivers. I think the competition for drivers will heat up and carriers that have made the investments already and have discipline in their operating practices and hold shippers accountable for their time, I think those carriers win the competition for drivers at the end of the day. Fleets that have allowed drivers to manage their documentation and allowed them to earn above their opportunities in the first place, those fleets will be punished more than anyone else.”