Truck orders are up but it may not all be for capacity expansion

Whether solid Class 8 truck orders are for fleet expansion or replacement remains a big question in trucking circles

 By Jeff Berman, Group News Editor · June 21, 2018

While the general consensus when it comes to sizing up the current state of the trucking market is overwhelmingly positive at the moment, there are some questions out there relating to the capacity imbalance in tandem with a heightened state of demand.

That is made clear when looking at recent data focused on Class 8 truck orders for May issued by FTR, which came in 35,200 units, which it said is the third-highest May on record, coupled with orders averaging more than 40,000 per month over the last six months through May. FTR said that class 8 orders are again topping expectations, with fleets ordering in “huge numbers attempting to keep up with burgeoning freight demand,” and North American Class 8 orders for the 12-month period through May at 386,000 units.

“This is the tightest capacity crunch ever,” said Don Ake, FTR vice president of commercial vehicles. “Long-time veterans in this industry are saying this is the best freight market they have ever seen. Fleets cannot add capacity fast enough and as long as the economy and manufacturing are going great, this capacity crisis will continue.”

Ake is right in addressing the capacity crunch and the strength of the market, too, but, in some instances, there appears to be a disconnect in that while truck orders are at a very healthy level, some industry stakeholders maintain they are for replacing existing capacity instead of adding new capacity.

“Based on what we have heard per CEOs of public truckload carriers, the majority of these new truck orders are for replacement and to address the issues of an aging fleet,” said Mike Regan, chief relationship officer for TranzAct Technologies. “If I take a look at the overall ages of the fleet, the economics are such that a truck is a certain number of years old, the costs of maintaining that truck for the public fleets, makes it more economical for them to buy a new one as opposed to keep investing in existing one.”

Taking that a step further, Regan explained that at the Stifel transportation conference in Florida earlier this year, executives at Knight-Swift noted that in 2017 it ran 1,200 fewer trucks than in 2016 and made $35 million more in profits. When the company was asked why it only ran 1,200 trucks, their reply was simply: “we could not find drivers,” according to Regan.

The difficulties in finding drivers remain intact, despite the elevated state of the freight market. And the biggest problem remains not only finding drivers but also paying them sufficiently.

“Many people refer to this situation as ‘what is the market clearing rate?’ i.e. the rate at which I need to pay drivers in order to attract a sufficient number of drivers based on what the demand numbers look like or are likely to look like,” said Regan.

“Based on various industry estimates, the number is somewhere between $68,000-$72,000.  “But now the average driver median pay scale is in the mid $50,000s for drivers and the narrative that nobody wants to be a driver remains. My point is I can buy all the equipment I want, but if I cannot find drivers then the equipment is for naught and that supports the thesis that FTR and I have said that these class 8 sales cannot robustly expand capacity.  What we are really looking at is replacement capacity, expanding by a single digit percent in the 5%-8% range.

As for what shippers can do, Regan was blunt in saying they need to be looking at their asset-based carrier ratio between contract pricing and spot rates, adding that shippers with more than 50% of their freight in the spot market are getting “crushed.”

Lee Klaskow, senior transportation analyst for Bloomberg Intelligence, agreed with Regan in that the Class 8 order book is really being driven by replacement rather than adding capacity.

“That can be hard to see,” he acknowledged. “Some people may have an easier time than others, but the unemployment rate is south of 4%, and the total labor market is tight. And people with CDLs are able to find alternative employment that might have better work life balance and better pay. Trucking is working on pay increases as a way of countering that and it’s definitely part of the reason for higher rates.”

When asked if the addition of new trucks will loosen up capacity, Klaskow said it’s not likely, explaining that most trucking cycles last two or thee years and the current cycle is still in its first year, adding that minus a major economic shock it seems like this trend has legs into 2019 and probably into 2020.

That was confirmed by Chris Tudtud, senior category manager, procurement-logistics for St. Louis-based Mallinckrodt Pharmaceuticals.

“I think the U.S. freight market will continue to rise due to the positive changes in our economy and political landscape (both domestic and international),” he said. “Rate increases are a result of lower supply and higher demand. Everyone should be allowed to make honest profit for their increased productivity. A converse effect on the above will significantly impact consumer confidence and this could slow down the momentum of the freight market. Another area that is driving the productivity is technology.”