Does Swift's reduced outlook signal trouble for trucking?

William B. Cassidy, Senior Editor | Sep 29, 2015 5:12PM EDT

When Swift Transportation lowered its earnings guidance for 2015 last week, it raised concern in some quarters that the wheels were coming off the truckload market and perhaps even the economic recovery. However, the reduction in earnings at the largest U.S. truckload carrier has more to do with growing pains related to adding capacity and changes in the trucking market than an economic crisis -- even though high inventory levels and slower economic growth have weakened trucking demand and spot pricing.

Swift lowered its EPS forecast for the full year from $1.64-$1.74 per share to $1.43-$1.52 per share, a decline ranging from 7 percent at best to 18 percent at worst. At the same time, the new forecast is still 3.6 percent to 10.1 percent above last year’s earnings of $1.38 per share.

Most of the factors that led to the lower EPS forecast are unique to Swift, starting with an increase in accident and workers compensation claims. Add to that the cost of settling class action lawsuits and the carrying costs of a large volume of tractors delivered late in the second quarter.

One factor that may affect trucking companies more broadly is what Swift referred to as “a reduction in expected volumes of seasonal project business in the fourth quarter of 2015 due to customers’ recent logistical changes.” Jason Bates, Swift’s vice president of investor relations, told The Wall Street Journalthose changes relate to a shift by shippers toward longer-term contracts.

That trend has been well noted as shippers try to lock-down truck capacity in advance of shortages they fear may pinch their supply chains in 2016, 2017 or beyond, even though capacity in the third quarter of 2015 has been described as “adequate.” There’s been a “flight to quality” by shippers, Derek Leathers, president and chief operating officer of Werner Enterprises, the fifth-largest U.S. truckload carrier, said at the FTR Transportation Conference Sept. 16.

“They realize having a stable consistent carrier base that would be there when they need them is worth something,” Leathers said. Shippers are asking carriers for “dedicated capacity,” not necessarily dedicated contract carriage but a guaranteed number of trucks on certain lanes. And they are willing to pay a premium for guaranteed consistency.

Locking in that capacity, however, means those trucks can’t be shifted to the spot market if a surge in peak-season demand drives up spot rates. In other words, trucking companies can have their long-term cake, but not the short-term icing. In any case, that icing may be quite thin this year. Spot rates in the third quarter are significantly lower than last year’s prices.

There are at least two reasons for that spot market drop: One is lower demand, the other is lower fuel prices. Not only is the economy growing more slowly than it did last year, but a strong buildup in inventory during the West Coast port labor dispute and in anticipation of stronger growth this year is dampening demand for truck service. Consumer sales rose 2.2 percent year-over-year in August, which may cut deeper into inventories and spur freight growth in the fourth quarter.

The steep drop in fuel prices gutted fuel surcharges, lowering transportation costs and pushing down spot market rates. The retail cost of diesel hit lows in August not seen since 2009. The DAT Solutions U.S. average dry van spot rate dropped four cents through August to $1.75 per mile.

Are spot rates likely to surge anywhere close to their fall 2014 levels this year? Even if the average dry-van rate rises 10 cents from August through December, as it did last year, it would still be 25 cents below last year’s fall peak of $2.10 per mile, according to DAT data.

For many trucking companies, the fall is “supposed to be” a stronger season than it looks to be this year. It should be no surprise that weaker spot market pricing, more contracted capacity and less seasonal demand are lowering earnings expectations at carriers such as Swift.

At the same time, Swift’s changing forecast underscores another difficulty shared with many carriers: trouble managing costs, especially equipment-related and driver-related costs.

The additional carrying expense associated with the large volume of new tractors received late in the second quarter due to delivery delays, along with the “catch up” through the third quarter, created a backlog of tractors being processed for trade or sale at Swift, the carrier said.

That explanation didn’t mollify Wall Street. Swift should have known about those increased costs and signaled Wall Street analysts and investors in July, John G. Larkin, a managing director of logistics and transportation research at Stifel, said in a Sept. 25 note to investors.

“By then the company knew of the delayed deliveries and could have anticipated that the costs associated with transitioning out old equipment and transitioning in new equipment would be concentrated,” he said. However, he noted that Swift, a core carrier for many leading retailers, didn’t cite “the general softening” in the truckload market as a reason for lowering its guidance.

The late deliveries and additional costs may mean Swift can’t add as much capacity as it hoped this year, BB&T Capital Markets transportation analyst Thomas S. Albrecht said in an investor note. “In taking thousands of trucks in a relatively short time frame, Swift's maintenance shops are fully maxed out,” Albrecht said. “There are overtime costs, lost utilization because equipment is being put into service slower and all the while expenses are being incurred.”

Swift may fall short of its original growth goal of adding 700 to 1,100 trucks this year, Albrecht said. Then again, not all of those trucks may be needed.