Thom is Managing Director, Transportation Equity Research for BB&T Capital Markets. These thoughts are from BB&T’s January 13, 2016 Surface Transportation Report. Thom and his team do a fantastic job covering transportation for BB&T.
At the beginning of each year it’s fun to throw some thoughts out on what the year might look like.
Consistent with the last decade and in deference to one of our favorite sports writers, Peter King,
we offer the following thoughts about trucking, intermodal and freight flows during 2016. For those
desiring a read of last year’s note, contact your BB&T sales rep.
1) Truckload dry van shipments are likely to shrink after 2.5 years of growth. Prior to 2013, dry
van shipments had shrunk 8 of the prior 10 years (even in good years like 2004 and 2005), but grew
1.1% and 2.4% in 2013 and 2014. The 2013 growth was solely in the second half, up 4.2% as the second
half of 2012 saw dry van shipments shrink 3.04%. Election year concerns and the so-called “fiscal
cliff” led to a slump in economic activity. Looking ahead, the ongoing slump in industrial production,
improved rail service, consolidation in brick and mortar stores, growth in online sales (more of a
relative help to parcel and LTL than to van TL) and other factors are likely to cause van shipments to
shrink. And even if economic activity accelerates in 2017, van shrinkage could occur again. Through
November dry van shipments were flat yr/yr, but were trending poorly, down 1.7% yr/yr since July.
2) Transportation M&A will shift back to more mergers and acquisitions within trucking and a
bit less activity in the non-asset world as companies in the latter segment digest their 2015 deals.
Our belief that trucking M&A will rise is premised upon disappointing profits and an increasingly
challenging operating environment hurt by new trucking regulations and weak volumes, forcing many
carriers to put out “for sale” signs.
3) Driver pay raises will be muted in 2016 and will act as a capacity governor by this fall. There
is some wiggle room to not raise pay for awhile with the average pay up industry-wide ~17% since
mid-2014. Ironically, in this bottom-line world, it is easy for shippers to forget how successful their rate
increases were as fleets raised pay, seated more trucks and in many cases added trucks. So shippers
got more capacity as they granted rate hikes, but in 2016, when rate increases will be muted, the seeds
will be sown for the next round of driver problems, even if 9 to 12 months away.
4) It will be an aggressive rate environment in 2016 for trucking and intermodal with shippers
taking advantage of loose capacity. Since there is no such thing as “average rate increases”, we won’t
attempt to put a number on the rate, but suffice to say some shippers will reduce rates (exc. fuel
surcharges), some will be flat and others will grant modest increases. Often lost to Wall Street is that a
shipper may have a flat transport budget, but still give critical carriers rate increases. There are lots of
arrows in the proverbial quiver as smaller carriers may see negative rates; there may be mix changes
(more intermodal, increased spot exposure, etc.); and there may be inefficiencies to drive out tied to
stale rates, an acquisition a shipper did, changes to DC locations, etc.
5) While freight rate negotiations will be tough, there has been some wiggle room created by the
rapid fall in diesel fuel prices during Q4’15 and into 2016, similar to what happened in late 2014 and
early 2015. In addition, we believe the developing ELD story, which won’t immediately alter capacity,
has caused a number of shippers to at least pause and contemplate their rate strategies. The trick is
always getting their VPs of Finance and Supply Chain in sync with all the consequences.
6) The war between “click and mortar” will continue, with online retail continuing to gain share
at the expense of traditional stores. Some holiday shopping snippets gleaned from press releases
and our own research: a) Amazon accounted for 43% of all online sales compared to 24.7% for the
next top 10 online retailers combined; b) In the last week before Christmas, Amazon Prime signed up
3 million new users alone; c) Despite that, Amazon Prime won’t have half the population signed up
7) In terms of brick and mortar stores, experts we speak to believe the number of malls that will be shut
down or converted into non-retail usage such as data centers could be up to 15% of all malls before 2025. This
will change distribution flows and also require different DCs than what were built until recently.
8) In terms of new distribution centers, two real estate logistics professionals have told us that e-commerce
retailers require up to 3x more the logistics space to support each $1 billion in revenue compared to
traditional retailers. In square footage, roughly 350,000 to 375,000 SF are needed for logistics centers to
support brick and mortar stores compared to 950,000 to 1.0M SF for online retail.
9) The rush to “uberize” truck brokerage will be fascinating to watch and we look forward to the panel
discussion at our February 10-11 conference in Florida. That said, we have a couple of early observations.
First, unlike the taxi cab industry we anticipate larger brokers to embrace the challenge rather than fight it,
rolling out apps for drivers and shippers. Second, an early loser might be asset-based fleets that use owneroperators
for 5% to 10% of capacity. Should those O-Os find the load selection more appealing from these
start-up companies, then perhaps they will leave some of these carriers. But like anything, there is more than
meets the eye. Most of the owner-operators at asset carriers lease their services to them; to decide to get all
their freight from apps would require them to gain their own operating authority, something that has been
in decline for a number of years.
10) Intermodal could be a positive stealth performer in 2016. By this we mean service is poised to
improve after two years of heavy capital spending; rail traffic is off creating opportunities for increased
network velocity; and with the ELD mandate established, shippers willingness to consider intermodal will
probably gain momentum, especially later in the year. What could go wrong with our stealth thesis? First,
and this might not occur until 2017, once railcar volumes recover the railroads could be caught short of crews,
creating future service problems. Second, medium and long-haul trucking capacity, more commonly handled
by small and mid-sized carriers, could be so loose that the highway conversion merits won’t carry much weight
until capacity actually tightens.
11) Two macro developments worth watching will be balance sheet carnage in the energy industry
and overall employment trends. On the former, energy bankruptcies and even M&A (similar to 1999 when
numerous big oil companies merged) could by a symbolic bottom for oil prices, while on the latter, if job growth
falters or layoffs rise, then that could signal that the woes in the industrial world, already in a recession, are
spreading to the consumer part of the economy. In December, the US added a surprisingly strong 292,000 jobs.
12) The stock market won’t go down every day in 2016, yet alone every day in January!