The Transportation Industry Report: Winter 2018-19

As has been the trend throughout the year, November truck and intermodal pricing continues to favor the carriers as limited capacity and a volume rush to beat trade war tariffs keep growth strong, according to the most recent data from the American Trucking Association, FTR TCI, IANA, Cass Information Systems and Broughton Capital.

 Although November’s Cass Information Systems linehaul index didn’t break the new all-time-record set in October (143.4), price increases were up 8.2% annually, coming to rest at 141.6. This continues a year long streak of annual gains that began in November 2017. The report’s author, Donald Broughton, noted that this was “still very impressive given the tougher comparison.”

With 11 out of 12 months of the year reported, the Cass report indicates that the realized contract pricing forecast for 2018 of 6 – 12% is “essentially in the books.”

 The ATA’s seasonally-adjusted For-Hire Truck Tonnage Index tells a similar story as it was up 7.6% annually in November but was down 0.5% from October’s highs.

 “The fact that tonnage rose in November after a strong October is impressive. It was likely due to some continued pull forward of shipments from China due to the threat of higher tariffs, as well as solid retail sales last month,” said ATA Chief Economist Bob Costello in a statement. “With continued strength in November, tonnage growth is on pace to be the best year since 1998.”

 While the Cass report is also optimistic about the market’s strength, it warned that there is still a chance for market uncertainty and volatility as new tariffs loom. Even with those concerns, Broughton notes that with oil prices low ($55 barrel) and no sign of an immediate economic downturn, pricing power should remain on the carriers’ side.

 “Demand is exceeding capacity in most modes of transportation by a material amount,” Broughton wrote. “In turn, pricing power has erupted in those modes to levels that spark overall inflationary concerns in the broader economy. Given the higher price of oil (resulting in higher fuel surcharges), and the strength in rates being experienced in sectors such as flatbed and chemical railroading, it should come as no surprise that the Cass Freight Expenditures Index is reporting such overall strength in transportation spending.”

 According to a report by Logistics Management, Costello explained his outlook for 2019 in a recent conference call hosted by investment firm Stifel earlier this year.

 “2018 is shaping up to be the highest level of production since 2007, and 2019 should be the highest on record.” Costello said. “If we look at year-over-year growth rates, we're going to go essentially no growth in the sector from 2015 and 2016 to 2.8% growth this year and over 3% growth next year.

Cass has also updated their truckload pricing expectations to a lower range of 2 to 4% in 2019.

While both the ATA and Cass saw normalization and steady growth, FTR’s Trucking Conditions Index (TCI) shows October’s TCI at its lowest levels since August 2017. Despite that, the firm does believe that the outlook for trucking conditions remains strong.

“October’s conditions index confirms the general sense that the current cycle has peaked,” said Avery Vise, FTR vice president of trucking, in a statement. “Although we anticipate improved conditions for the remainder of 2018 and much of 2019 compared to October, we appear to be headed gradually toward neutral territory.”

While many early reports blamed ELDs for a decrease in capacity, Broughton sees them as a factor in creating capacity. Or more accurately, in creating capacity for Shippers of Choice who are in good standing with their carrier partners.

“Many blame the current tightness in capacity on the implementation of the ELD rule. We assert that is now only having a minor impact.” Broughton wrote. “We also know that capacity was already very tight before the rule went into effect, and that both the visibility of equipment and the measurement / highlighting of bad shipper behavior has dramatically increased in the last 12 months.”

 Intermodal

A strong truck haul market typically means a robust intermodal market as shippers scramble to create capacity and get their freight moving. The Intermodal Association of North America (IANA) and the Cass Intermodal Index both show impressive YoY growth in volume and rates respectively.

IANA points to elevated container import volumes, heavy e-commerce demand, tight over the road capacity plus elevated rates, driver shortages, and ELD restricted hours-of-service as the reason for a 5.4% YoY increase in total intermodal volumes.

Cass reports a 10.6% increase in total pricing for intermodal carriers with momentum increasing. The report attributes intermodal volume growth to a tight truckload capacity market as shippers are choosing intermodal to “just get the freight moved.”

“Intermodal rates have room to continue posting YoY percentage increases in the coming months,” Broughton predicts, “but if fuel prices continue to decline we expect the nominal rates to be under pressure.”

 The firms reasoning behind this is that there is a pretty clear break-even point where the number of miles freight needs to travel becomes cost-effective to place it on the rail. The higher the cost of diesel, the shorter the distance where such a move makes sense. With fuel prices on the decline, there is much less cost opportunity via intermodal for shorter lengths of haul even with limited trucking capacity bolstering current rates.

 The great unknown of how exactly 25% Chinese trade war tariffs will impact container volumes remains to be seen. Considering that China represents 47% of US container volume, IANA President and CEO Joni Casey, believes that tariffs could have a “significant impact on ISO container volume.”

Read our article on smart ways to save on freight in 2019 here

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