In The News
Look for slow but steady economic headway; some loss of ground on rates, analyst says
LAS VEGAS — The global economy is not hitting on all eight cylinders and the trickle-down impact is likely to affect the trucking industry, John Larkin, managing director and head of transportation capital markets research at Stifel, Nicolaus and Co., told delegates to the Truckload Carriers Association Annual Convention here Tuesday.
He also said an increase in liability insurance might be a good thing and said the reason that the Owner-Operator Independent Drivers Association opposes most all federal trucking regulations is that the regulations could put more independent contractors out of business.
"There is a relatively strong likelihood that the most likely economic scenario is continued slow steady growth," Larkin said after he shared data on numerous economic indicators ranging from population demographics to the housing market to the size of the freight market. "It doesn't appear to be a catalyst to push us off the cliff into a recession barring a terrorist event or some type of external issue like that. It does appear that if we're patient, the truckload supply and demand dynamic will be merged and will be more persistent because of the underlying regulations that are making it difficult to be productive and make it difficult to recruit and retain compliant drivers. I would guess this is going to kick in during late 2017 and be a big issue in 2018 provided the economy continues to grow at a slow pace."
Larkin said all other logistic sectors would benefit from the truckload capacity shortage.
"More shippers will be reaching out to 3PLs to help them source capacity and to optimize their networks," he said. "The LTL carriers will benefit from some truckload overflow freight. Intermodal will also benefit from some of those long-haul high density lanes. Usually in collaboration with the intermodal market, a truckload carrier will partner with a railroad to save those precious drivers and expensive power units in order to serve those markets that are intermodal compatible, which by the way is most of the markets."
But collaboration is shrinking, which is the reverse of what should be happening, according to Larkin.
"We heard about collaboration a lot in 2014 when capacity was tight," he said. "Everyone was perking together. And when capacity loosened up, I don't believe I've heard the word collaboration in three or four months, but I have heard of a return to Neanderthal pricing strategies both on the part of some 20 percent of shippers. It's very disruptive when people are demanding price reductions when carriers are trying to stabilize their workforce and invest in the most efficient rolling stock in the future."
The 3PLs will be a bigger factor in the future, Larkin said.
"It's probably useful to figure out how to work with the 3PLs rather than to fight them," he said. "Not all are looking for the lowest price. Some are helping their shippers find the right fit out there and to optimize their supply chains. LTL carriers have found a way to work in a harmonious fashion with a lot of the very good 3PLs and I would suggest some of the bigger truckload carriers are just now beginning to take a look at that. It's a way to access a much larger customer base and in many ways can be cheaper than having a salesman out there running around in a company car with an expense account."
There are still non-compliant 3PLs in the marketplace.
"I had one person tell me one of the most reputable 3PLs took a load and moved it from Dallas to Chicago, a distance of 2,050 miles, in one day with a solo driver. We know that driver was not compliant and this particular shipper says he sees that all the time when dealing with supposedly reputable brokers. If you look at the number of situations where the carrier veil has been penetrated and the 3PL has been found liable for an accident, it's a very small number. I think the liability lies with the trucker unless somehow the broker has made an awful mistake. I don't think there's going to be much of a litigation risk to the 3PLs. I think there is some possibility of a higher insurance limit being pushed out onto the trucking industry. They are trying to get that minimum pushed up in Congress from $750,000 per carrier per occurrence to $4-4.5 million.
"That might be a sensible thing to do given the way these settlements are going and given that the cost of insurance is going to be rising."
Larkin said he'd also heard that the number of insurance carriers who'll be offering liability insurance in the future will be shrinking and that insurance companies will become more diligent in choosing which carriers they will insure.
Federal regulations will impact capacity in the future, Larkin believes.
"There's no question when the whole litany of Federal Motor Carrier Safety Administration regulations are implemented — speed limiters, ELDs, more rigorous medical check-ups — all of these changes are going to shrink the number of compliant carriers, shrink the number of potentially compliant drivers and reduce the productivity across the industry," Larkin said. "The cheaters won't be able to cheat any more. There's a reason that OOIDA fights nearly every one of these regulations because the small members can't compete economically if they have to follow the rules on a level playing field. They are at a disadvantage because they pay more for their trucks, they don't get as much in trade for their used trucks, they pay more for fuel, the trucks are older, they are not as fuel-efficient, they don't have information systems to balance their networks, they are reliant on brokers who skim off as much of the revenue as they can for their own."
Larkin also said:
- The 4.9 percent unemployment rate is somewhat misleading. More reflective of the current economic environment is the 9.7 U6 rate, which counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts "marginally attached workers and those working part-time for economic reasons."
- People are living longer and working longer. With a declining fertility rate, there soon won't be enough 20-to-30-year olds to take care of those who've reached 70 or 80, which brings into question the viability of Social Security, and
- The driver shortage is huge problem and it's not going away.
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