A nearly 20 percent increase in the number of new heavy trucks and tractors hitting US highways in early 2019 is another sign that truckload pricing power is shifting away from operators to shippers as capacity and demand seek a new balance.
The acceleration in registrations of new Class 8 commercial vehicles in the first two months of 2019 comes after they rose about 40 percent in the second half of 2018, according to data from IHS Markit, parent company of JOC.com. Those new trucks helped loosen capacity for US shippers and helped push spot market truckload pricing down by double digits.
Absent an economic jolt, the capacity being added to the truck market is likely to tamp down price increases or even lower rates for US truckload shippers in 2019, despite expectations for a moderate increase in overall freight demand. During the first quarter, for-hire truck tonnage rose 3.8 percent year over year, the American Trucking Associations (ATA) said Tuesday.
On a sequential basis, however, the ATA’s truck tonnage index dropped 2.3 percent in March after falling 1.5 percent in February. “It is likely that tonnage will improve in the second quarter, although year-over-year gains will be significantly below the 2018 annual increase of 6.7 percent,” ATA chief economist Bob Costello said.
A sustained surge
The IHS Markit data show Class 8 straight truck and tractor registrations in the United States rose 12.4 percent year over year in January and 27.3 percent in February, although registrations dropped 11.7 percent on a sequential basis in what is typically one of the slowest months for trucking activity in the year. Tractors accounted for 78 percent of the Class 8 total.
The 18.8 percent jump in registrations in the first two months of the year does not mean total truck capacity rose by that percentage. Some older Class 8 vehicles were resold and reregistered, while others likely dropped out of the commercial freight pool. But as a directional indicator, the registration numbers point to an expansion in capacity shippers have seen from their docks this year.
Class 7 and 8 tractors also increased their share of new registrations in the first two months of the year compared with straight trucks, cab chassis, and smaller vehicles, according to IHS Markit data, from 21.7 percent a year ago to 28 percent. Altogether, Classes 7 and 8 accounted for 43.2 percent of truck registrations.
The data point to a sustained surge in Class 8 truck registrations following a tsunami of heavy truck orders that lasted from late 2017 through mid-2018. Orders for new trucks hit the 52,000-unit mark last July and August, according to data from FTR Transportation Intelligence, amid optimism that the hot freight demand truckers enjoyed in the first half would last through the second half.
It didn’t last, however, partly thanks to the front-loading of Chinese imports to avoid US tariffs that took effect last summer and autumn. As new trucks rolled off production lines and made their way to fleets, the tight truck capacity shippers experienced through much of 2018 began to ease. That injection of additional capacity has kept a thumb on truckload spot rates even as freight demand rises.
In March, spot market truckload volume rose 8.7 percent, but truck capacity on the spot market jumped 16.1 percent from a year ago, according to load-board operator DAT Solutions. The average US dry van spot rate, including fuel surcharges, for the month dropped four cents to $1.85 per mile, while the average dry van contract rate fell three cents to $2.26 per mile.
Dry van spot rates continued to drop in April, with DAT’s US average rate for the week that ended Easter Sunday dropping to $1.83 per mile. Even the arrival of produce season in southern markets in early April failed to absorb the additional capacity DAT said has entered the market. Spot prices were lower on 76 of the top 100 dry van lanes in the week that ended April 13.
‘Setting themselves up’
From July through December last year, heavy truck registrations in the US climbed past the cumulative 112,000-unit mark, IHS Markit data show. Those higher registrations primarily represent heavy trucks ordered from the autumn of 2017 and early 2018. The high mark for Class 8 tractors and straight trucks was October, with 25,463 total Class 8 registrations.
The second surge in heavy truck orders, which peaked last summer, should translate into an increase in registrations in the first half of 2019. Truck orders, meanwhile, have fallen below 20,000 per month for three consecutive months. FTR Transportation Intelligence and ACT Research put preliminary Class 8 orders for March between 15,200 and 15,700 units.
After towering over the baseline of registration numbers for a year and a half, FTR’s estimated number of Class 8 orders fell below IHS Markit’s registration numbers in January and February. In part, that’s because truck original equipment manufacturers (OEMs) hit production capacity limits, with “build slots” for new tractors and trucks booked through the end of 2019.
Although some trucking operators may cancel orders if freight demand drops too far or too fast, many will accept delivery of new trucks and fight to seat them with drivers. After all, trucks are purchased by individual companies that expect they can secure more freight and expand. “They may be setting themselves up,” Satish Jindel, president of SJ Consulting Group, told JOC.com.
Long a critic of trucking companies’ habit of adding capacity when rates and freight demand rise, only to be left with excess capacity when demand softens, Jindel says trucking companies of all sizes should invest in technology, rather than buying more “big iron” rigs.
“If they don’t, they may wake up and find they’re like Sears — defeated by the internet 100 years after they founded the mail-order business,” he said, pointing to the efforts of brokers and logistics companies to use technology to create virtual, digital fleets for shippers.