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2016 Q1 and Q2 Logistics Review

Posted - July 28, 2016

2016 Q1 and Q2 Logistics Review By: Tom Sanderson, CEO, Transplace The first and second quarters of 2016 have flown by. As we’re moving into mid-summer, I want to review some the most significant ups and downs in the transportation and logistics industry. In my year-end blog, I shared insights on capacity, housing, auto and legislature. Below you’ll find key highlights from the first six months of 2016, and what to watch out for in the rest of the year. Retail and Auto Assemblies Strong Seasonally adjusted retail and food service sales increased 1.6% over 2015 to $190.5 billion in June, while nominal (unadjusted for inflation) sales totaled $457 billion, up 2.7% over prior year. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures, and these results were above consensus expectations. Annualized U. S. Sales of autos and light trucks fell 4.5% to 16.6 million units in June (seasonally adjusted), and were down 2.0% from June 2015. June was only the second month in the last 12 where annualized auto sales were less than 17 million units. The auto industry could still set a new sales record this year, but will likely be very close to 2015 sales as YTD sales are up only 1.3%. Diesel Fuel Prices See Fluctuations, Currently on the Rise In February, diesel prices reached their lowest level since January 2005, dropping below the recessionary trough. On March 8, the Energy Information Administration (EIA) dropped its pricing forecast by 10 cents to a $2.12 per gallon average for 2016. Since then, diesel has been slowly climbing, reaching $2.414 per gallon on July 11. On July 12, the EIA increased its forecast to $2.36 for the balance of 2016 and 2.71 per gallon for 2017. Capacity More Readily Available Capacity was readily available in Q1 and Q2 of 2016. There are three factors driving this overall excess capacity:

  • Weaker freight
  • Hours-of-service rollback
  • Actual capacity additions

Overall, capacity is currently much more readily available than last year at this time. While there were seasonal regional shortages of capacity early in 2015, in general capacity became more readily available in the second half of the year. I don’t expect capacity to tighten in 2016 unless the economy regains steam. The Largest TL Carriers Are Growing Faster Than Others The largest TL carriers continue to add capacity at a faster rate than the next tier of carriers, taking advantage of a more favorable pricing and truck utilization market and low interest rates. Data from Avondale Partners indicates that from 2008-2012, the four largest TL carriers (Hunt, Schneider, Swift and Werner) reduced capacity more quickly than the next 7 largest carriers during the recession and then added capacity more slowly through the tepid post-recession recovery. However, that changed in 2013, with the largest carriers adding capacity at a significantly faster pace (10.2%) than the second-tier group (3.3%). That pattern continued in the first quarter of this year. Despite the addition of trucks, the largest TL carriers collectively have 5% fewer trucks on the road today than they did at the end of 2007. The second tier have added 3% to their collective capacity over that time frame, but have not added as many trucks as the largest carriers have cut. The biggest carriers may have behaved more conservatively during the contraction and the slow-growth recovery, but they may become more aggressive if stronger expansion occurs as they have the financial ability to add trucks. New truck orders plummeted in Q2 as freight volumes remained soft and TL prices remained under pressure. Freight volumes should continue to steadily grow over the next few years and pricing power will return to the carriers as capacity tightens in 2017 or 2018. The lack of growth among the second-tier carriers is likely a result of the recent stagnation of TL rates and uncertainty over the effects of federal regulations like the Hours-of-Service rules. The largest carriers are the most capable of absorbing regulatory shocks and the associated increased pressure on margins. Despite the recent large carrier capacity additions, shippers must continue to develop strong relationships with the second-tier of asset-based carriers because they will grow quickly once they gain more confidence that the pricing environment has tipped in their favor. Shippers should also be using one or two large 3PLs or brokers to gain access to the tens of thousands of small carriers that are always seeking to gain market share, but lack the sales resources and name recognition to do so directly. FMCSA Admits CSA/SMS Fix is Two Years Away Transportation Secretary Anthony Foxx has testified in Congress that it would take two years for FMCSA to complete its review of CSA as mandated by the FAST Act. The law required that FMCSA remove SMS online scores until the review was completed. After immediately removing SMS percentile scores and alerts from the Web, FMCSA exploited a loophole in the law by posting raw SMS scores without percentiles or alerts. FMCSA then doubled down by communicating its proposed new Safety Fitness Determination rule that is based, in part, on the flawed CSA/SMS program. So, even though FMCSA admits it will take two years to remedy the flaws in the SMS system that have been pointed out by the General Accounting Office, Inspector General and others, it still intends to utilize the system to put some unlucky carriers out of business with an “unfit” safety rating. The commentary period is now closed, but numerous industry participants have strongly objected to the proposed rule and Congress is considering legislative action that will prevent the rule from being implemented. I believe there is enough opposition to prevent this harmful rule from being implemented. Time will tell. For more updates on current trends and industry forecasts, visit my blog or follow me on Twitter: @TomSandersonCEO. Did the first and second quarters of 2016 meet your expectations? What stood out to you?