Saturday, June 11, 2016

BAD NEWS FOR TRUCKLOAD CARRIERS

How serious is the financial impact?




Freight Rates Push Lower as Truck Capacity Outweighs Demand

As one major operator parks more trucks, a new report shows cheaper pricing in the spot market is driving the trucking business



Swift says it has parked 300 trucks this spring “and will continue to make adjustments” to a weak market for freight demand. ENLARGE
Swift says it has parked 300 trucks this spring “and will continue to make adjustments” to a weak market for freight demand. Photo: Bloomberg News
Shippers are using greater leverage in a weak U.S. trucking market to drive down freight rates.
A report published Tuesday by Cowen and Co. and Chainalytics said the spot market, where shipping prices currently are cheaper, is taking a bigger role in truck transportation as companies look to take advantage of plentiful capacity on the roads.
The report said the difference between spot and longer-term contract rates expanded in April, a sign that low demand is giving retailers and manufacturers more bargaining power. The difference in rates for dry vans, the most common type of big rigs, widened in April to 4.5% from almost even a month earlier, the report said, and spot rates for refrigerated loads were 6% to 9% below contract rates.
Early reports show demand was still week by the end of May, the report said.
The analysis underscores how excess truck capacity has driven prices down and squeezed companies heavily dependent on contracted over-the-road business. Swift Transportation Co. SWFT -1.32 % —the largest operator of truckload service, where companies contract for full trucks, typically on long distances—said on a conference call Tuesday that it is shifting some of its trucks to the spot market.

Top Logistics News

  • Get the latest logistics and supply chain news and analysis via an email newsletter. Sign up here.
“Although we have historically had minimal participation in the spot market due to the lack of available freight in certain markets, our spot market participation has increased somewhat,” said Richard Stocking, Swift’s president. The move will help keep more of the company’s trucks on the road, he said, but will reduce revenue for the quarter because of depressed rates.
Mr. Stocking said Swift had parked 300 of its trucks this spring and “will continue to make adjustments to the fleet as necessary in June and beyond.”
Meanwhile, freight brokers such as C.H. Robinson, Echo Global Logistics Inc. ECHO -2.01 % and XPO Logistics Inc., XPO -3.30 % that hire trucks on an as-needed basis stand to fare better in a soft market because they can adjust more easily without costly assets on their books, analysts say.
A brokerage business gives companies “a way to tap into that other side of the market,” said Matt Harding, vice president at supply chain consultancy Chainalytics. “There’s a portfolio-effect when they broaden [their services]…They’re not so much beholden to a down market.”
Carriers with longer-term, dedicated contracts that allocate a guaranteed number of trucks to shippers also are protected. “The more exposure you have to brokerage and dedicated truckload, the better you’re doing,” said Jason Seidl, analyst at Cowen. “Diversification benefits carriers right now.”
More trucking companies are looking for some of this leverage. Knight Transportation Inc., KNX -0.90 % USA Truck Inc., USAK -5.48 % Covenant Transportation Group, CVTI -1.96 % Werner Enterprises Inc. WERN -1.36 % and others have moved to offer freight brokerage and dedicated truckload services to their customers.
Mr. Seidl said prices are so low they could be nearing an “an un-investable rate,” and carriers are already pulling back their fleets.
“It’s incredibly hard to predict the actual bottom,” he said. But shippers are “crazy if you don’t try to lock in the rates now. They’re just going to go higher, unless we hit a massive economic downturn.”
Write to Loretta Chao at loretta.chao@wsj.com