Q&A – Assessing Trucking’s Recovery

By | September 17, 2020

Following Assessing Trucking’s Recovery, the second session of the FTR Engage virtual speaking series, we sat down with the FTR Experts to answer listener questions beyond what was covered during the Q&A within the presentation.

Listen to the full discussion on the State of Freight Podcast (also included at the bottom of this post) or read below for the fully transcribed Q&A.

Table of Contents:

  • Q1: Capacity on the Supply Side
  • Q2: Capacity & Drivers
  • Q3: Supply-Demand Environment into 2021
  • Q4: Remaining Volatility From COVID-19
  • Q5: Risks From Another Shutdown
  • Q6: Long-Term Effects of Disruptions
  • Q7: Rebound in Truck & Trailer Orders
  • Q8: Capacity Issues in the Near Term Peak Season
  • Q9: Truck Capacity’s Effect on Railroad Market Share
  • Q10: Does Rail Bypass Short Term Recovery Surging?
  • Q11: Consolidation Concerns
  • Q12: Emerging Trends

DISCLAIMER: This text was automatically transcribed from an audio recording and may include typographic, grammatical, and contextual errors that differ from the speaker’s intention.

Question 1: Capacity on the Supply Side

Jonathan Starks: Capacity seems to be a primary issue and trying to understand what the supply of capacity looks like is really front and center on a lot of people’s minds. We’ve got parked trucks, we’ve got good orders for new trucks, we got sales and production of trucks still continuing. How do you see the essentials of the capacity environment playing out at the moment?

Eric Starks: So there’s so much going on with that question. We have multiple things happening. One in total, if you look at capacity, capacity is relatively balanced and we’re in fact, we see a little bit of excess capacity and so we have that normalized completely. But when we look at things that are happening in the spot market, Avery will be able to talk about this a little bit more. But and we did touch on it in the webinar really going to happen in the spot market. It’s really, things have been tightening up and so we have a disconnect between the different markets. But overall, we still have a fair amount of trucks parked against the fence and so the need to buy a substantial amount of equipment isn’t there yet. We’ve seen some rebounds in orders for trucks and trailers, and that’s been good. That’s a positive sign, but that’s fairly normal. That’s not we always have a replacement cycle as part of that. So we are seeing where the market could get really tight as we go over the next several months. But I think that that’s somewhat short-lived and we’re going to have to kind of see how that plays out. I’d love to get Avery’s take as we move to this discussion.

Question 2: Capacity & Drivers

Jonathan Starks: So, Avery, let me sort of start there, and then also add in the issue of getting drivers into the system. That’s always been a traditional sticking point. How is that affecting the marketplace right now?

Avery Vise: Sure, so to Eric’s point, you know, a lot of people get confused when they look just at the spot market, they say, you know what, capacity is extremely tight. Well, one of the reasons that the spot market acts the way it does is that a number of carriers have not seen the need necessarily to return drivers to the full complement that’s creating disruptions in the market. And so the spot market always seems to overplay what’s really happening, especially on the upside, if it always looks hotter than it really is. And certainly, the market is strengthening that there’s no question about that. And you don’t have those extremes in the spot market unless there’s pressure. But the pressure is very concentrated, and we may talk about that later. But it’s very highly concentrated in the consumer sector and highly concentrated, even more specifically related to inventories going into the question of like where are we going to get the drivers? You know, one of the questions that were posed during the Engage session was where are the new drivers going to come from and how good will they be, you know? We always seem to find them, I know that’s not a great answer, but they come from all different places and they always arrive eventually. And I mean, I think over time we will certainly see some changes, one of which is that I suspect within the next decade or less, we will allow drivers younger than 21 to drive, subject to various conditions, including use of certain technologies. That’s one place. But that’s not an immediate solution. The second issue of how good they’re going to be is, you know, I think my glib answer is, well, there aren’t going to be any better than the drivers that we have been getting. But I do think that we’re seeing increasing adoption of advanced driver safety assistance systems, collision warning, adaptive cruise lane departure, so on. And if we look at that question about how good will they be, if we’re talking strictly in terms of driving skills, then I do think we are seeing a transition in a fairly rapid one to an environment where the vehicle and the driver or partners in the driving. A vehicle is not just something that the driver steers, but the driver the vehicle itself is part of the equation. And I think in the near term, that’s where autonomous really pays off, not in driverless trucks, but in this sort of partnership.  I would note, going back to my earlier point about younger drivers, that those technologies are along with speed limiters among those that the federal Motor Carriers Safety Administration is requiring younger drivers to have if they’re going to drive interstate.

Question 3: Supply-Demand Environment into 2021

Jonathan Starks: So with where we are right now, what does it take to get the US back into, say, a more balanced supply-demand environment? Are we there or are we getting there? Are there going to be continued pressures? How do you see that playing out as we kind of finish this year and then start preparing for 2021?

Avery Vise: Yeah, as you know, as Eric pointed out, we’re not as much out of balance as you would think. And in fact, if you were to look at the entire truck market, you know, we still are in a, you know, relatively soft utilization. You know, certainly nothing like what we had in 2017, 2018. But when we think of it in terms of, let’s say, over the road truckload, which I think is where everybody focuses on when they ask that question. You know, I do think that we did see in August 2000 payroll workers come back, a majority of whom are probably drivers. We haven’t seen a whole lot of exiting the market by small carriers and other operators. They may have been idled, but they haven’t failed. And so I would anticipate that this hiring that we saw in August will remain at least as strong for the next few months because all the indicators are we’re going to need them and that we will continue to stabilize, really, especially once we get beyond September, maybe October, because we obviously have a real challenge ahead of us, which is we were way behind on stocking shelves. We still are way behind and stocking shelves. We’re just now getting really in the last month or so imports back to where they were or where they would need to be in order to meet the holiday demand. And so there is quite a near-term challenge. But I do think that once we get past October, certainly once we get to, you know, Black Friday or Cyber Monday, if such things still exist this year, we’ll be in a much more normal environment, I think.

Jonathan Starks: Eric, do you have something to add to that?

Eric Starks: Yeah, so Avery, I agree 100 percent with what you were talking about and I’m going to just kind of highlight one item that he was talking through. So we talked during the session about inventories. And in fact, Avery has done some good work and looking at even more timely information on inventories. And they are tight in the sense of there’s just not a whole lot of inventory in the system. And it’s not just now retail. We’re starting to see that on the wholesale sector a little bit, too. And so that basically puts a fair amount of pressure on transportation in the short term. And that we were wondering if that would start to abate a little bit as we moved into September, October. But it looks like it’s going to continue to be there, at least for the next several months as we start moving in towards the holiday season. So I do think you could have more of a bubble now where things move a lot of freight and then that they start to soften a tad bit at the beginning of the year. But it’s hard to say right now. I mean, freight is the driving force behind all of this. If we see the freight market picking up, then that carries a lot of the ills out there. So we’re going to keep an eye on that.

Question 4: Remaining Volatility From COVID-19

Jonathan Starks: All right, thanks, Eric. Now let’s go on the Wayback Machine and let’s think back to early March of 2020. And we were continuously sort of revising and updating our forecast and what the environment was looking to be as we went through that sort of early time in the pandemic. As we now go from where we were then to where we are now, are we able to get a better sense of what market reality is and what our expectations are? Or is there still a lot of volatility built into what those assumptions are about what the market is going to look like as we go forward?

Eric Starks: So there it’s really interesting off of that one because there is the answer is relatively complex. Right? So we think we know more now today than we did when things started. And that’s true. We do. We know a lot more. But the underlying premise of why things went crazy was because of the coronavirus and that is a chameleon in the sense that it’s ever-changing. And we’re trying to understand what that impact looks like. So some of the volatility that we had early on, I think has dissipated somewhat. But that doesn’t mean that the risks, by and large, have significantly changed. And so ultimately, our expectation is that we get back to some bit of normalcy and that the economy behaves in a way that we have traditionally understood it to behave. But when we had the economic Engage session just about a month ago, we talked about the demand destruction that was happening out there and that we don’t get back to the previous levels in the forecast that we had before. So there will be still some volatility in this. So if people expect that we’re not going to have the volatility, I think you’re crazy. There’s still going to be volatility and our best estimates right now are trying to get towards that trend type of growth environment. And you’re going to see stuff at any given point in time above it and below it. We’re just trying to even that out.

Avery Vise: Yeah,and I would add to that and I did make this point during the Engage session that I think it’s worth reiterating is that when it comes to the demand side, we are definitely getting more stability in our forecast. So we haven’t seen a big shift really. There have been some interest inter-segment shifts that are somewhat significant. But in the overall loadings forecast, for example, you know, we’ve been between 6 and 7 percent or 6 and certainly 6 and 8 percent for several months now. And it’s moving a little bit. But it is certainly stopped those wild swings. It’s on the rate side where things of things are, I think, are still quite volatile. And that’s because obviously there are so many more inputs into rate because you have all of the inputs to go into freight and then you have all the inputs that go into capacity. And you also have sort of a psychological and, you know, negotiating element. And it is a more volatile situation than even we had in 17 or 18 where everything was, you know, was pretty incremental. It was a pretty steep incremental. But it was incremental, and you didn’t have a lot of downward swings. It was almost all upward swing. So it is getting a little more stable, especially on the demand side.

Question 5: Risks From Another Shutdown

Jonathan Starks: So, Eric, if we’re getting at least some sense of stability that’s beginning to creep in. What happens if we have another shutdown environment? Does that put us back into the kind of quandary we were early in this? Or do we have more information now that we can better assess what that impact will be?

Eric Starks: It’s a scenario that I don’t think many people want to see, but it’s not implausible if the coronavirus that does some things that we don’t anticipate. But, yes, I think we have a better sense of what that looks like because now we can at least size that up in a better way to be able to say, OK, if a shutdown happens over here. This was the impact that we saw early on. And so I think we could do a better job of trying to understand, what does that look like? I did have a recent question from somebody say, well, can we quantify, for example, what’s happening within the different states and the county by county when you have different ordinances for masks and shutdowns and just everything? Right. The whole gamut of it and the answer is no, you really can’t. So what we have to do is we have to put a broad brushstroke over everything to try to understand what does that look like? And I think we do have a good brush. So if we do get into an environment where we have to see another shutdown, hopefully, no, that doesn’t become the case. But I do think we have a better job and we can actually help the industry understand what those implications look like.

Question 6: Long-Term Effects of Disruptions

Jonathan Starks: So, Avery, if we now try to sort of shift from those near term disruptions, you know, all the things that are happening with inventories of all those pieces and try to understand. What portions of this disruption have more staying power, how does that sort of change your assessment of what transportation might look like going forward?

Avery Vise: Sure. Well, I think  I would have to start with e-commerce, which during the pandemic went from amazing growth to inconceivable growth. And that, yes, some of that is clearly short term. But I think especially after people have been buying stuff online, more so than usual for almost six months now, it’s going to stick. And so I think the already strong trajectory on e-commerce has now ratcheted up a bit. Now, how that actually ends up playing out in terms of truckload versus final mile is still it’s still not clear. And the reason is, that you know, a lot of people think of e-commerce as being direct to consumer distribution, but there’s also been a huge increase in curbside pickup, in-store pick up the use of brick and mortar retailers as distribution points by non-store retailers. I think we all know those examples know. So Omni channel complicates things and frankly, it means more purchasing and means more truckload, too, because, you know, even goods that are distributed directly to consumers from distribution centers, those goods have to get to the distribution center somehow. So it’s a big one. It’s still working itself out. The other one I would point to is I think it’s going to or has led to a much greater awareness of acceptance of digital free matching tools because you had such a such an incredible amount of disruption that is definitely required both carriers and brokers looking for capacity in places that they did not already have relationships and already have the capacity. And that naturally leads you to put a lot more focus on having that routine connection the way you do when you have such extreme, you know, when there are such extreme disruptions in route guides and supply chains. Hard to get hard numbers on that. But, you know, it’s part of the discussion that Shelly and I had as well, that when we had a period where in April carriers had no freight and in August the brokers had no carriers. It definitely leads to a desire to figure out a way to make capacity and demand much more visible to a larger group of players.

Question 7: Rebound in Truck & Trailer Orders

Jonathan Starks: Absolutely does. Thank you, Avery. I’ve got a couple more questions on capacity that will kind of get through. And, Eric, we’re going to start with you. We’ve talked sort of in bits and pieces, but we’ll address it head-on right here if we’ve got 15 percent or more of the fleet that’s idled or underutilized, why have we seen a rebound in orders for trucks and trailers?

Eric Starks: That’s a great question because a lot of people like I don’t understand why would anybody buy a truck if there’s excess capacity sitting out there? Well, it really comes down to replacement. If you are a fleet, you typically have trucks that are specked directly for your fleet. We also have specialty equipment that’s in there and then you also have things that are in either a private fleet to doesn’t have to be for hire and potentially some city type of application. So it’s all over the board. We look at what those numbers are and fundamental replacement order behavior for North American numbers would be somewhere in between the 17 to 20 thousand per month range and that’s kind of where we’re sitting right now. We’re sitting right at that high end of replacement and also, just to put that in perspective, too, if you are just looking at the replacement of the fleet, when we say replacements, just you’re replacing pieces of equipment that are either aged out or you have more miles on them and you want to then put them into the secondary market, that’s usually but maybe 5percent of the overall population of trucks. It’s not a huge number on an annual basis. So really, you’re swapping out the full fleet over a long period of time, it doesn’t happen overnight, and that’s why we would look at the data and that’s why we try to understand. Is it because there’s expansion happening because of freight growth or is it just replacement right now? It just replacement.

Question 8: Capacity Issues in the Near Term Peak Season

Jonathan Starks: All right. Thank you, Eric. Avery, we talk about being, you know, a significant piece of the pie, as is idle equipment. But if we’re looking at just the equipment that is active out in the marketplace where we’re expecting to see a higher utilization and that portion of the marketplace, and if we’re having trouble with perhaps getting additional drivers back into the system and we’re coming up on the traditional fall peak season, is there going to be a struggle to meet some of that demand and potential capacity crunches as we look sort of in the near term?

Avery Vise: Yes, I mean, the next couple of months, you know, perhaps right up through Black Friday and Cyber Monday, as I mentioned earlier, are probably going to be quite crazy. We might have peaked out in terms of the ratio of loads to trucks in the Truckstop.com system, but quite possibly not. You know, we’ve seen record volumes in both driving and in refrigerated, you know, heading into the Labor Day holiday that it dissipated somewhat because of the holiday. You know, it’s not going to be easy. It all eventually gets done. It’s going to probably yield a lot of very high spot rates and it’s probably going to lead to a lot of sign-on bonuses and things like that. Some of the things we were seeing right after the implementation of the old mandate, you know, there’s no single solution to this. And other than say that it’s going to get done, I will say that you know, we have things going on in the supply chain that are not making it any easier. For example, on time in full, for example, from some of the major retailers who, you know, so there’s a competitive element to this as well because everyone’s trying to get market share. So while we have these very low inventories to sales ratios in retail, we’re potentially heaping more stress on the system by requiring faster turnarounds. You know, there’s nothing that can be done about that. I don’t see the President of the United States coming in and telling people they can’t do that. But I guess the short answer, which is too late, is this going to be a really pretty messy couple of more months, I think.

Question 9: Truck Capacity’s Effect on Railroad Market Share

Jonathan Starks: All right, Eric, obviously. But we’ve been focused on the truck environment for all these questions and then the Engage session last week. But we are in a multi-modal transportation environment and when we look at the railroads, we seem pretty sluggish growth outside of Intermodal. So the traditional carload marketplace is recovering, but much more slowly. So as you look at the truck capacity, environment, and the railroad environment, is there a point in time in which capacity tightens up enough that railroads are able to gain some market share?

Eric Starks: Sure, but that time is I have not a clue. I love having too much fun with this. So we really don’t know the exact timing, but what we do know is that the trajectory for the recovery for railroads has definitely slow. And like you mentioned, Jon, you have the distinction between what’s happening, the car loan market and what’s happened in intermodal and intermodal is it’s definitely starting to see some strength. But the cartload market is actually behaving right in line with how we thought the recovery would go. So it’s this kind of slow, and steady and it’s going to continue to follow what’s happening with manufacturing. So we’re really not anticipating a noticeable capacity crunch for this particular cycle, but for the railroads now, you’ll see it for some type of specific equipment. But overall, it’s going to be very limited in what that looks like. So it wouldn’t really be until 2022 before we start seeing some real competition from the railroads and some market share shifting in a lot of cases. But it’s going to really depend on what the freight is. Who can move that? I guess not who, what type of freight is actually moving in the system because that’s going to dictate where you move the freight and who moves it. You don’t have a whole lot of opportunities for modal share shift.

Question 10: Does Rail Bypass Short Term Recovery Surging?

Jonathan Starks: So if it’s true that we’re in sort of an inventory push environment right now, railroads clearly are not a winner outside of intermodal in that segment, you know, it’s a slower, larger move. And if you’re trying to move inventory, you’re trying to move it fast. So does that mean for the near term, railroad essentially bypasses sort of this short term recovery surge?

Eric Starks: I don’t think that they bypass it directly, because in some I guess in some instances, yes, because if it’s a retail situation. But as we start moving into wholesale, and manufacturing then they participated in that. So it’s pretty clear that they will continue to see some benefits as we move forward. But as you know, like I said, it’s really going to be more dependent upon the type of commodities that are getting moved and this is going to be just a slow and steady increase.  That’s kind of how we have our forecast as we go forward with the industrial sector and that’s just part of the carload business.

Question 11: Consolidation Concerns

Jonathan Starks: All right. Thank you, Eric. Avery, we’ve seen lots of sorts of periods of highs and lows for carrier consolidation over the last couple of decades. Do you see COVID or specifically it once we get through COVID, this post-COVID time frame as a potential to intensify the amount of consolidation or do you think it merely sorts of passes through, and then the market gets back to where it was before?

Avery Vise: Sure, I think the answer to that almost completely depends on what the next 3, 6 months look like. We talked in the Engage session quite a bit. We haven’t really talked about it today about the risks and the need potentially for more stimulus or my mind is not potentially a look at the unemployment situation, I don’t know how we get how we keep things moving if we do not augment 28 million people’s income. But, you know, if we were to assume that we are now back to the normal recovery and that that we do not have that risk of things getting much softer because of lack of stimulus, or obviously, as we talked about earlier, a third wave of infections or something like that, then? I don’t think so. I don’t think there’s any impetus for consolidation any more than there normally is. We’ve had quite a bit of money thrown at carriers through Paycheck Protection Program and other forms of assistance. Obviously, the period of time in which things were really bleak was quite short, you know, roughly 6 weeks, maybe 2 months. And then even in the industrial sector, things started to recover. So I don’t see it happening. I think the risk is, you know, we do have a more of a W than a whatever this is, it’s not a V, but it certainly is not right now training to be a W, but if we have a W, yes, I think we do see some pressure and we do see some consolidation.

Question 12: Emerging Trends

Jonathan Starks: All right. Thank you, Avery.  All right, we’re going to end on our last question today, Eric. As you sort of look at the big picture trends that are out there, especially those that have been accelerated by this COVID environment, what do you see emerging as we get out of this particular environment, we’re in right now?

Eric Starks: I hope growth. It is such a weird time. Do we get back to normal? No, I don’t think we do. There are so many things at play when we look at the global growth in general that has been very slow. We need to see some upticks on that and ultimately, you know, if we can get what I would like to see, I think I’m going to go with this or I’d like to see is more stability, the slow growth type of economy that is predictable, having large swings are very unpredictable.  It’s going to be interesting to see how the market, the marketplace plays out, but that’s what we have, the model. That’s why we have our models to help us assess what does that look like? So we have been very diligent about following and trying to understand where the risks are in that model. And that continues to show that we don’t get back to pre-pandemic levels until the middle of next year at the earliest. So it’s going to be a slow and steady type of race.

Jonathan Starks: All right, Eric, thank you. Avery, thank you. You guys have a wonderful day and we’ll look forward to doing another one of these podcast questionnaires again.

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