Twelve months ago, it was quite clear shippers would battle with tight capacity and rapidly rising rates in 2018. This time the 2019 outlook is murky about where US truckload and intermodal rates will go and whether new capacity will provide relief to shippers.
The electronic logging device (ELD) craze has passed, and the trucking industry has found a new normal. On the rails, intermodal volume has grown each week year over year — except week one — and analysts expect this to continue into 2019. Service will be a key question and another is whether plans to install precision scheduled railroad (PSR) at Union Pacific Railroad and Norfolk Southern Railway will be smooth or bumpy like with CSX Transportation.
Here are three things to watch in the truckload and intermodal space in 2019:
Contract rates will rise for a second-consecutive year, but by how much?
It’s a topic of intense debate within trucking circles. Shippers will pay more per mile on truckload contracts in 2019 than this year. Bullish analysts such as Stifel, Nicolaus & Co. predict rates will rise 5 percent to 8 percent. Bearish analysts such as Cowen and Co. believe it will be 0 percent to 3 percent. Others meet in the middle of 3 percent to 5 percent.
Donald Broughton, founder of Broughton Capital, advises stakeholders to watch the spot market in early 2019.
“This year spot prices shot up above contract before falling back below. As spot prices find a floor, and where they find a floor, this will tell us much about where contract prices are headed in 2019,” he said in an interview with Arrive Logistics.
FTR Transportation Intelligence forecasts upper single digits until April, then a deceleration below 5 percent. Contract rates could eventually recede by the end of 2019.
“A lot of the bid packages were put in place fairly late this year as shippers were looking to time the market. So I think there will be some carryover on rates into the first quarter, but they will continue to decelerate below 5 percent [in the second quarter],” said Avery Vise, FTR’s vice president of trucking and research.
One reason spot rates have slipped is that more freight is being tendered directly to core carriers. Spot pricing recovered between October and the final work week before Thanksgiving, but it remains flat to down versus one year ago. However, volumes continue to exceed capacity, Broughton said.
“I think [it’s] because we are transitioning from 105-degree weather [Fahrenheit] to still warm [75 degrees],” he told Arrive Logistics.
Truck utilization remains high but should taper off in 2019
FTR reports that there has been 100 percent utilization of trucks for most of 2018. The statistic measures trucks in use against seated trucks available. This utilization number means that if there is a driver, freight is available to fill the trailer. Drivers are not twiddling their thumbs, sitting in an empty truck with nothing to haul. The last time truck utilization was 100 percent was 2004.
In 2019, however, the percentage is expected to dip back towards 94 percent, a trajectory that would indicate similar conditions to 2015. In that situation, motor carriers ordered scores of new trucks to capitalize on the strong market in 2014. By 2016 an industrial recession left carriers with new trucks and nothing to put in them.
Class 8 truck orders are higher than any time in the last 10 years, FTR reports. August was an all-time high of nearly 50,000 orders. The monthly numbers have dropped in recent months only because manufacturers already have taken all the orders they can handle for the next several months. For shippers, more trucks and lower utilization is a good thing because it’s easier to find capacity.
No longer do they have to wait for a truck or pay a repositioning fee to secure immediate capacity. New supply is being injected into the system and catching up with demand.
Carriers order more new trucks because turning down shippers is a lost opportunity. Trucking CEOs would prefer to add a tractor-trailer and a driver rather than say ‘no’ to profitable freight.
Will intermodal become more or less competitive with trucking in 2019?
The answer depends on where the shipper is located, what is the destination, service levels, and PSR.
Among US railroads, NS and UP trains have been slower and dwell times longer than a year ago. UP CEO Lance Fritz acknowledged it wasn’t meeting customer expectations in September.
Will the foray into PSR help UP and NS achieve better train speeds and shorter dwells, like CSX?
UP and NS will take a first step towards PSR principles by eliminating interline service on hundreds of routes in January and February. CSX made similar changes in September. If a shipper uses one of these origin-and-destination pairs, their costs through Chicago will skyrocket, which makes intermodal less competitive in 2019.
Remember also that CSX’s transition under the late E. Hunter Harrison to PSR was rocky, at best, prompting a contentious meeting before the Surface Transportation Board in 2017 about service problems.
CSX has been able to overcome the hiccups this year. Train speeds are faster and terminal dwell times are lower even though volumes are higher. It’s the only Class I railroad to achieve such a result.
Will the same initial bumpiness happen with NS and UP? If so, intermodal service will deteriorate in 2019 and rebound in 2020. NS’s management, however, told Cowen and Co. analyst Jason Seidl that it plans a gradual transition to PSR, not sudden as was the case with CSX.
FTR’s forecast calls for intermodal to become more competitive in 2019. The research firm’s Intermodal Competitive Index peaked in April 2018 before reaching neutral conditions in October. Next year the index is expected to turn positive once again, but not as strong as 2018.
“Folks will continue to see intermodal volumes grow going forward. For shippers, the question is where are you getting your equipment from? For railroads, how are you going to handle those increasing volumes efficiently?” said Todd Tranausky, FTR’s vice president of rail and intermodal.
Hub Group, which partners with UP and NS, believes intermodal pricing should rise by mid-single digits in 2019.
“Overall, Hub has found rail service to be a little better but still not great and believes that next year should continue to show progress. Hub’s expectations for early 2019 are still strong, with the early Chinese New Year in January likely a boost to help offset difficult year-over-year comparisons. In addition, management noted that they didn’t have any negative impact from a pull-forward ahead of the tariffs,” Seidl wrote in an investors note.