September 20, 2017

FTR Transportation Conference 2017

DAI GR, DDAIF, HTLD, JBHT, NAV, PCAR, R, VOLVB SS, Volvo AB (ADR)
By Lydia Norton
Attendees at FTR’s Transportation Conference were mostly upbeat about trucking/shipping trends for the remainder of 2017 and 2018, but technology-related changes stimulated the most conversation.

Industry Positive for 2017 and 2018 Truck Builds
On a positive note for trucking, several economists and industry speakers presented slightly different views for the near-term future but all baked in modest GDP growth for the rest of 2017 and 2018, pointing to a series of positive economic indicators. Freight loadings are showing healthy growth, according to conference speakers. Class-8 orders have been at equilibrium (with most orders for replacement), but order rates are starting to move above that. FTR predicts orders will ratchet up above current levels of about 20,000 trucks per month, hitting 50,000 units in early 2018; build forecasts peak at 300,000 in 2018, before falling slightly in 2019. There is also an expectation of better fleet profitability driving purchases in 2018.

Higher Truckload Spot and Contract Rates
As 2017 loads are improving and forecast to exceed 2006 peak levels and as truck availability shows tightening capacity, spot rates ex fuel are up 19% yy currently, according to a conference presenter. Contract rates are starting to climb yy and are expected to continue to rise throughout 2018 -- reaching 5%-plus yy increases by 4Q18 by FTR’s estimation. This is in line with findings in OTR Global’s Sept. 8 TL/LTL Shipping report. A major shipper who renegotiated a majority of his contracts in early August said he benefited from that timing but had seen upward pricing pressure on contracts negotiated in the past four to six weeks. Speakers noted that shippers were willing to pay to lock in capacity and hope to avoid using the spot market. “Three percent now could insulate from three times that or more in the spot market,” one said.

ELD Impact Still Being Debated
Speakers said most large fleets were at least 95% compliant, although a YRC Worldwide Inc. representative said his fleet still had a ways to go but planned compliance by the December deadline. Fleets and brokerages said they were seeing driver compliance. However, it was noted that there are 190,000 companies with fewer than 20 drivers. Several large fleet attendees who had adopted the technology already said they had experienced a drop in productivity after adoption and expected that would also hit those putting off adoption until the last minute. Some attendees said compliant fleets were placing truck orders to expand their capacity to capture market share under that scenario. Expectations for capacity tightening fell between 2.5%-4.5%. FTR expects the crunch to be fully felt later in 2018 and into 2019 as penalties for non-compliance take effect.

The industry hires 250,000-300,000 drivers per quarter. ELD needs may create the need for an additional 60,000-80,000 hires per quarter. Speakers said driver shortages would likely remain an impetus for the uptake of new technology.

Used Truck Pricing Stabilizing in 2017, Likely Pressured in 2018
Fleet capacity utilization for big fleets has returned to solid levels (around 87.5%) after dipping to 85% in 2015, according to a used truck sales executive. He expects it to continue to rise to 90%. He said most dealers and fleets have worked through their inventories and residual issues. This has resulted in stabilizing pricing. He also commented that big swings in used truck pricing were unusual and considered up or down 2% more normal. In 2018, trucks sold in 2014 and 2015 should start to come back to the market for the first time as a result of large fleet trade cycles. He presented two scenarios: freight stays the same and prices will decrease, or freight levels go up and pricing will hold. He also cited potential ELD outcomes -- the accelerated exodus of older drivers and likely lower productivity per driver -- that could increase supply and apply downward pressure on pricing. After years of manual transmission commanding the highest premiums, trucks with automated transmissions from Volvo AB and Mack and Daimler AG's Freightliner are "hot" in the market now.

First Electric Truck Adoption Likely in Short Haul
The conference was abuzz about electric trucks. Attendees acknowledged that the technology is on a fast track. Most think these trucks will be adopted first in metropolitan urban areas, primarily for last-mile delivery. “Things are happening fast. Battery technology is evolving quickly, and that could drive things to be quicker. Also, mandates will drive it to the shorter end [of five to 10 years]. Urban areas will mandate clean trucks -- L.A., New York -- just like in Europe,” an axle supplier said. In fact, on Thursday, Sept. 14 in New York, Daimler rolled out Fuso eCanter, a short-range electric truck, with United Parcel Service Inc. as its first commercial partner. Range limitations as well as the still-unknown upfront cost of the truck and infrastructure, maintenance needs and residual values were cited as uptake limiters for some fleets. “We have not placed an order yet. We are waiting to see what pricing will be. We're not going to do it if a truck costs $300,000, but $100,000 plus a reasonable battery or fuel plan could work. The OEMs are baking in less cost of fuel and less maintenance over the life of the truck. We also have to see battery life. If you run a truck for five years and then want to sell it but have to make a major investment in a battery before selling, that would be discouraging,” one fleet executive said. Component suppliers acknowledged redesigning product for electric trucks. “We have to relook at space. Batteries take up space where the suspension would normally go,” one said.

Hurricanes and Storm Effects
Hurricane Harvey and subsequent flooding caused freight disruptions, but presenters said truckload rates, while still higher than pre-storm levels, were already headed back down after spiking in the aftermath of the storm. When asked if anyone had an estimate of the number of trucks potentially lost in Texas as a result of the storm, a speaker pointed out that about 1.5% of the trucking capacity was in the area of the storms, comprising 30,000 trucks that move in and out of the area and 20,000 trucks stationed there. Some presenters made early comments on Hurricane Irma's effects on freight movement. “We saw a 30% reduction in freight in Florida and up the coasts into Georgia and South Carolina. It’s hard to run trucks in when you can’t run them out. I think we will recover fairly quickly,” one fleet speaker said. A Home Depot Inc. speaker said all of the company's distribution centers in Florida and Georgia were up and running. Down the road, speakers and attendees see an increase in building product freight as rebuilding begins but also perhaps a boost in auto sales because of new automotive electronics not being fixable after flooding.

Buzz on Potential Disruptors

Heard

  • “Ten years from now, 90% of you won’t be in this room.” Conference presenter commenting on potential changes resulting from technology disruptors to freight markets
  • About one-half of attendees in the main conference hall appeared to be in their 50s, which lead one attendee to comment, “I will retire by then. Someone else can deal with these changes.”

On Autonomous Trucks

  • Levels of autonomous vehicles: no automation (level zero), function-specific automation (level one), combined-function automation (level two), limited self-driving automation (level three), full self-driving automation (level four), and autonomous driverless (level five). Drivers are involved through level four. FTR predicts fully autonomous trucking by 2035, while others gave forecasts that ranged from 2025 to 2050.
  • “We are at level one [of five], checking out level two. It will be five years of education before we get to the next level.” Fleet
  • “The technologies will keep coming. We had ABS brakes in 1996, adaptive cruise control in 2009, radar cameras in 2015, etc. We’ll have driver-assisted platooning in 2018 as connectivity from vehicle to vehicle is installed.” Conference speaker

On Trade and Regulation

  • “OEs have made heavy investments in North America, and component suppliers follow OEs. We are supportive of trade, and NAFTA has been good to freight.” Component supplier
  • “On automated vehicle regulations, the U.S. DOT is way behind the curve. I think the states will stay ahead.” Regulatory consultant

On the Internet of Things

  • “There are 4 billion connected devices. Some expect this to grow to 50 billion over the next 20 years. Drone deliveries are five years out. Autonomous trucking is more than five years away. 3D printing is more than five. There will be field maintenance being done via wearables in two to five years. Shared warehouse capacity will have a big impact over the next two years.”

On Ecommerce and the Amazon effect

  • “The era of free labor and freight is ending as retail stores close and ecommerce grows.” Industry consultant
  • Amazon[.com Inc.] is forcing smarter supply chains. They are taking a ton of miles out of the economy. Today, they can cover the U.S. with 30 inventory holding points for next-morning delivery, six holding points for 24-hour delivery and just three for two-day delivery. By 2035, that will be reduced to six, three and one respectively.” FTR economist

On “Uber-ization” of Freight

  • “We compared spot pricing to contract rates for a shipper that had 20 loads a week. Broker No. 1 had a 138% premium, Broker No. 2, 78%; Truckload 70% and the new market offer 53%.” Consultant
  • “Five years out, the biggest brokerages are in the best position. They’ve got the freight and the carriers.” Transportation management consultant

EVENT DETAILS
What:
 FTR Transportation Conference 2017
When:
 Sept. 12-14
Where:
 Indianapolis, IN
Who:
 431 executives involved in transportation (trucking, rail and water)

OTR Global’s read on PCAR remains positive; NAV and VOLVY remain mixed, as in the July 12 report. The next Heavy Duty Trucks and Engines report is scheduled to release Oct. 12.