Signs point to a more optimistic outlook for freight industry

Trucking economy

comps are improving, but the impact from the coronavirus and continued
production halts on Boeing’s 737 provide challenges for the freight environment
in 2020, said Jack Atkins, managing director of Stephens Inc.

Atkins, speaking at the Katz, Sapper & Miller 2020 Trucking Owners and Leaders Roundtable on Feb. 4 in Indianapolis, said 2019 was a “return to normal” for carriers but felt like “death valley”  because of the strength of 2018.

“We saw a very robust 2018 that
benefited from the tax cuts and pull forward [of freight due to tariffs],” he
said. “It’s going to feel more normal this year and you have [more favorable] comps.”

Atkins said Stephens is “more optimistic
on how freight will feel” in 2020.

On the demand side, Atkins sees GDP, housing starts (SONAR: SFAM.USA), continued retail sales strength and the inventory-to-sales relationship pushing freight demand. Housing starts “could be the surprise of 2020,” he said. “It’s been stable over the last couple of years, but there is some hope [that they will rise]. There is a lot of freight that moves with housing starts,” Atkins said.

SONAR single family housing starts
Single family housing starts increased as 2019 went on and Stephens’ managing director Jack Atkins said they “could be the surprise of 2020. (SONAR: SFAM.USA)

Challenges remain on the supply
side though. The industrial economy has been in a recession, Atkins said, but
January’s Purchasing Managers’ Index rose for the second straight month to
52.1, giving hope that an industrial turnaround is happening.

The inventory-to-sales ratio stabilized at 1.40x in January (SONAR: TBIS.USA), showing that excess inventories are “burning off” and “should help freight flows,” Atkins said. The burnoff started to occur once “tariff policy began to stabilize.”

SONAR business inventory to sales ratio
The business inventory to sales ratio has started to decline after rising throughout 2018. (SONAR: TBIS.USA)

The strong freight flows in 2018
led to the excess capacity situation that exists today, Atkins said. U.S. total
sales rose 1.8% through November 2019 and inventories were up 1.3% in the same
time frame. While sales have continued to rise, inventories have leveled off.

“Folks in this room can’t control
themselves in a good market,” he said. “They add a truck, add a truck, and
boom, we’ve added 5% capacity.”

Recent Class 8 orders, though,
suggest some attrition taking place, and truck employment has dropped 75 basis
points since July, when it peaked at 1,520,000, Atkins said.

Freight flows are facing concerns
over the coronavirus, Atkins said. “It is certainly stopping and slowing
production in China, which is having the same effect as the inventory glut in
2019,” he said.

In terms of rates, Atkins said
truckload contract rates have firmed up and “we are in a more balanced market
than we were 90 days ago.” Bid season may see rates down just 1% — not the 3%
or 4% many expected — and shippers are expecting rate increases in the second
half of the year.

“We believe shippers are using the
soft market to pull forward bids in an effort to get better rates,” Atkins said.

Spot rate increases are likely
coming as well, with mid- to high-single-digit increases by May.

The banking perspective

As the economics of the industry
change because of the freight environment, so too is the availability of
credit. In a separate panel, top bankers talked about how there is some
improvement in the lending environment but that carriers can expect banks to
remain focused on ensuring they are making good loans.

Michael Letsch, senior vice
president of transportation and logistics for Bank of America (BoA), noted the bank “lost several million dollars” on the Celadon bankruptcy late last year, so BoA will look for strong balance sheets. With
that said, Letsch said carriers should ensure they have varied sources of cash.

“The [more] triggers you can pull,
the flexibility is huge,” he said. “If you are negotiating your equipment leases
… make sure you have sources from different buckets.”

Also, many carriers may be facing
strong headwinds that may make meeting covenants difficult. Letsch said
communication is key.

“If you are having a challenging
year, talk to your bank early, don’t wait until you turn in your financials
because that will make things worse,” he said.

Letsch said with the Federal
Reserve suggesting rates will remain flat this year, carriers can expect rates
to remain flat or perhaps even decline slightly. Pressure on banks to improve
margin, though, is increasing.

Bank competition from
nontraditional lenders is increasing and many are offering more flexible
covenants, Letsch said.

Both Filip Gagovic, senior vice
president of Huntington Bank, and Michael Sabbath, senior vice president of business
development for UMB Bank, echoed
some of Letsch’s thoughts. When it comes to covenants, Sabbath advised looking
at the balance sheet.

“Covenants are predicated on how
your balance sheets look,” he said. “Some products have no covenants whatsoever
and give you more flexibility.”

Communicating about both your
business and your customers’ businesses to your banker and remaining proactive
regarding management of financials are keys that Sabbath looks for in a client.

“If we understand your business and
the shipper’s, we’ll find a way to get [financing] done,” Sabbath said.

Gagovic noted that if you view
something as a risk, the lender will as well.

“If you have something that is
perceived as a risk, find ways to mitigate it,” he said. “If you are 100%
owner-operators, [that may be fine] but explain why you like that model.”

He said to focus on lane density
and revenue per mile as key metrics that can improve the lendability of any