Please see the attached two articles from today’s JOC and FreightWaves.
The Journal of Commerce article provides an overview on how the loss of drivers is affecting capacity and costs. It provides multiple theories on why the shortage continues. I highlighted a few key points in the article. What’s worrisome is that demand is outpacing the hiring of additional drivers.
The FreightWaves article is an update on YRC’s deteriorating business levels and an overview of their strategy for using the $700 million government loan provided via the CARES Act.
Loss of US truck drivers tightening capacity, raising rates
William B. Cassidy, Senior Editor | Sep 09, 2020 5:50PM EDT
Shippers at times have accused US trucking companies of crying wolf when it comes to driver shortages, but identifying trucking’s labor gap in this recession is as easy as counting sheep. Despite several months of high volumes, trucking has not recovered all of the jobs lost to the COVID-19 pandemic and resulting recession, and that is keeping upward pressure on truck rates.
From February through April, unadjusted trucking employment numbers fell by 92,800 jobs, according to US Bureau of Labor Statistics (BLS) data released last Friday. For-hire trucking companies have recovered 52,200 jobs since April, but the unadjusted August payroll numbers were still about 36,600 jobs short of this year’s peak of just over 1.5 million employees in February.
What is more, the unadjusted trucking employment figure for last month was 1.45 million, 85,800 jobs below year-ago employment in for-hire trucking. That translates to a 5.5 percent year-over-year decline in trucking employment, a gap that is contributing to the capacity shortfall shippers are suffering and rapidly rising spot truck rates.
“One large company I talk with that typically handles 300 to 400 loads a week is handling 1,000 a week right now, and could handle more if it could get the capacity,” Mike Regan, advocacy chair for shipper group NASSTRAC, told JOC.com. “Another large truckload carrier couldn’t add three trucks a night from Phoenix to Los Angeles for a big shipper. That’s how tight it is,” he added.
On the spot market, the average dry van rate broke records in August, as shippers and brokers paid more to move freight ahead of the Labor Day weekend, DAT Solutions said Wednesday. DAT said its average national dry van rate, excluding fuel surcharges, rose from $1.81 per mile in June to $2.22 per mile in August, and $2.40 per mile to date in September.
The labor gap is not the only factor pushing truck rates and shipping costs higher. The COVID-19 pandemic warped the US transportation landscape, redrawing freight lanes and supply lines in ways that are still evolving months later. “Tremendous dislocation is causing all these spot price increases,” Frank McGuigan, CEO of logistics provider Transplace, told JOC.com.
Truck drivers are caught in that dislocation. Some are running long hours hauling personal protective equipment and essential goods. Others are busy delivering goods to restock retail inventories. And some, the BLS employment numbers suggest, were among the 13.6 million unemployed in August, or are doing different work than driving a long-haul truck.
Trucking companies have complained of driver shortages in every period of high demand for decades, and even in periods of slow demand, with one of the earliest reported shortages dating to 1914. Debates have raged over whether the shortages are caused by an actual lack of drivers or whether there is a sufficient pool of workers who are simply turned off by what they view as insufficient pay The current shortfall, however, is a direct result of the recession.
Trucking’s deep dive
Simply put, there are fewer drivers on the road than there were in April, despite the increase in trucking demand, especially from the retail sector. The year-over-year gap is narrowing, falling by 17,900 jobs from its peak of 103,700 workers in May, but is still significant. Trucking employment first passed 1.5 million in June 2018 and peaked at 1.56 million in July 2019.
The number of workers employed by for-hire trucking firms began to decline long before the recession, as the softer trucking market of 2019 led to some bankruptcies, but also more drivers looking for better paying and more regular, predictable work elsewhere. From July through December last year, 28,400 trucking employees left the business, the BLS data show.
For all of 2019, trucking had a net gain of 24,200 jobs, compared with 77,900 jobs gained in 2018, 48,400 in 2017, and 22,200 in 2016, according to the BLS data. The current job numbers for for-hire trucking published by the BLS are the lowest since early 2018. That is a measurable contributing factor to rising truckload and less-than-truckload (LTL) rates in the third quarter.
A comparison by Michigan State University of North American Industry Classification System (NAICS) industry data for truck transportation and the American Trucking Associations’s (ATA’s) For-Hire Truck Tonnage Index shows truck tonnage — i.e., demand — has outpaced trucking employment and capacity — i.e., supply — since the US economic recovery began in May.
That supply shortfall helps explain the strength of the spot market. Shippers are turning to spot when they cannot get trucks from contract carriers.
“It’s been interesting to see how slow capacity has been to come back,” said Jason Miller, associate professor of logistics at Michigan State University and creator of the ATA indices. “I think the issue is that so much capacity is really regional. If you specialize in the Upper Midwest, you may still have core shippers there with depressed volumes, so you’re not able to hire.”
Where are the truck drivers?
An unanswered question is where have those drivers gone in the past year, or in the past six months, since the trucking market cratered along with the US economy? Some trucking executives believe a large number of drivers are “sitting out” this early stage of the recovery, supported by expanded unemployment benefits and Payroll Protection Program (PPP) loans.
If that is the case, however, those drivers, especially owner-operators or those working for small carriers that depend on the spot market, are missing out on the hottest spot market in a decade, with spot truckload pricing already exceeding the high rates of 2018. The spot market has flipped from five months ago, when truckers were complaining of “cheap rates”.
The spot market pricing spike puts pressure on contract rates, but those rates are slower to increase, usually trailing the spot market by up to six months. That could mean some larger truckload carriers that operate under contract with shippers and logistics companies have not yet been able to bring back all the drivers who were furloughed or laid off in March and April.
“The expanded unemployment benefits had to be a factor in that, at least through July,” when the $600 a week benefit ended, said Dean Croke, principal analyst at DAT iQ, the freight data and analysis operation of DAT. Croke sees a division between those who drive trucks professionally, as their career, and those who drive trucks “in between other jobs”.
However, Miller does not think this is a driver shortage in the traditional sense of the term. Rather than a lack of available workers, this shortage is “a paralysis at carriers who do not want to add drivers because of uncertainty”, he said. “They don’t know if this high level of demand is going to stay with them moving forward. They don’t want to bring on a lot of people and then have to lay them off in a few months if demand drops.”
Managing capacity, profitability
Some shippers have questioned whether trucking companies are taking lessons from ocean container lines and better managing their capacity in this recession. In past recoveries, trucking firms, especially truckload carriers, were known to buy new trucks and higher new drivers as soon as demand improved, eventually leading to oversupply and lost pricing power.
It is likely that US trucking companies, having learned how quickly markets can turn in recent years, are doing a better job of managing their own capacity, both trucks, and drivers. However, with hundreds of thousands of motor carriers competing for the same customers and freight, it is not possible for any single carrier to control the capacity levers well enough to affect market pricing.
What trucking companies can do is better control their own profitability, and that may mean some carriers will be reluctant to hire, even when they can, without rate increases needed to support higher wages and maintain a bottom line that allows them to reinvest in the business.
“It’s a complex situation that has few things working simultaneously,” Croke said. When demand spiked in May and June, carriers willingly added capacity, he said. Now, however, “we’ve reached an equilibrium in the market. Earlier this spring we thought the pandemic might soon be over. Now we realize we’re in this for the long haul. There’s still so much unknown.”
YRC Q3 update bucks improving industry trends
Weak midquarter update comes amid restructuring progress
Todd MaidenWednesday, September 9, 2020
The trend of year-over-year tonnage improvement from the less-than-truckload (LTL) carriers in August ends with YRC Worldwide’s (NASDAQ: YRCW) midquarter report. In a press release issued after the market closed on Wednesday, the company reported that tonnage declines actually accelerated during the quarter, down 6.4% in August, following a 4.3% decline in July.
The report was worse than the updates from competitors Old Dominion Freight Line (NASDAQ: ODFL) and SAIA (NASDAQ: SAIA), which reported August tonnage increases of 2.4% and 0.5%, respectively. Before the market opened on Wednesday, ArcBest Corp. (NASDAQ: ARCB) reported a total tonnage-per-day increase of 3.5% for August, with LTL tonnage up by a high-single-digit percentage. For the first two months of the third quarter, YRC’s shipments per day were down 7.6%, which was partially offset by a 2.4% increase in weight per shipment compared to the same period of 2019. Revenue per hundredweight, or yield, is down 4.9% quarter-to-date.
The implied revenue decline quarter-to-date is in excess of 10% year-over-year, worsening as the quarter progressed. The carrier’s peers reported flat to slightly better revenue for the month of August.
The results for the quarter may not matter all that much to investors as the carrier advances its turnaround, following a $700 million lending package from the federal government.
Terminal consolidation moves forward
Recent posts on truckingboards.com show change-of-operations notifications have been issued at a couple of YRC’s facilities.
In an Aug. 25 letter to Teamsters National Freight Director Ernie Soehl, the carrier said it was formally filing for a change of operations under the national master freight agreement to make the distribution center in Memphis, Tennessee, a containerization location. The letter stated that rail freight at the facility will need to be placed into containers as procedure changes at Class I railroad BNSF Railway (Berkshire Hathaway, NYSE: BRK.B) will no longer allow the shipment of trailers on railcars.
YRC said it had already purchased 640 containers so far and plans to add 340 more in the “very near future” to accommodate the change. The operation is expected to handle 500 shipments daily. The message boards also showed notifications that YRC Freight terminals in Des Moines, Iowa, and Lexington, Kentucky, will be merged into existing Holland service centers in those respective markets. No indication as to the number of employees impacted by the changes was provided. In an email to FreightWaves, YRC said, “we do not comment on pending change of operations.”
Overhaul taking shape
The announcements advance the carrier’s corporate overhaul, which is designed to market all five of its brands under one umbrella, operating on one network. The facility rationalization will also eliminate redundancy, improve density, cut costs and free up capital. In the past, it wasn’t uncommon for the carrier to have two of its companies operating independently out of the same facility. However, the ratification of its new labor agreement a year ago has provided the company with more flexibility around operations and work rules.
YRC started the year with 351 facilities, shuttering 16 by the close of the second quarter. Those consolidations complemented similar efforts made last year, which resulted in the elimination of approximately 25 terminals. On their Aug.3 second-quarter call, management said they plan to trim a few more by year-end, bringing the total network to roughly 325 service centers.
Another key cog in the turnaround is the second tranche of the $700 million packages it received from a lending program set up under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The $400 million allocations provides YRC the capital needed to update its older tractors and trailers, which have been a cost headwind.
Management said they expect to see cost savings of roughly $10,000 per replaced tractor annually as the cost profile for expense lines like maintenance, fuel and insurance improves. Additionally, the savings in owning versus leasing, and improved vehicle uptime are expected to be tailwinds to operating results. While the company has moved forward with deploying funds from the first tranche of the loan package, which was allotted for the repayment of deferred health, welfare and pension payments, the second tranche hadn’t been accessed as of the company’s second-quarter report.
The loan to the carrier, which was identified as “critical to maintaining national security,” still has some lawmakers questioning the rationale behind the deal. The congressional commission overseeing the distribution of federal funds allotted by the CARES Act still has several questions out to the Treasury and Defense departments.