Transport concerns adapt to lower freight volumes in “challenging” freight environment

YRC Worldwide CEO Darren Hawkins calls 2019 “a challenging trade environment,” and that’s putting it mildly.

The combination of a slumping U.S. manufacturing economy, a nervous trade war between the world’s two largest economies, a 40-day labor strike that shut down General Motors Corp., and a general economic malaise nervously settling in over much of the nation is causing transport executives and shippers to nervously change their economic game plans for 2020.

This matters to shippers because instead of planning major capital expenditures for 2020 and beyond, many large transportation concerns are reflecting the nervousness of their customers by scaling back those plans – or scrapping them entirely.

And that’s around the world—not just in the United States, officials say.

“Trade tensions are now taking a toll on business confidence and investment,” International Monetary Fund Director Kristalina Georgieva said recently in her opening remarks to finance officials from 189 nations at a recent IMF-World Bank annual meeting in Washington.

There’s no shortage of pessimism if one purely looks at the numbers from the most recent Gross Domestic Product (GDP) figures coming out of Washington.

Economic activity in the U.S. grew at an annualized rate of 1.9% in the third quarter, down slightly from the 2% pace in the second quarter. That 1.9% figure only looks good if one considers economists polled by Dow Jones had expected the first look at third-quarter growth to come in at 1.6%.

The better-than-expected data was the result of continued consumer spending as well as government expenditures, the Commerce Department says. But that is not the manufacturing segment of the economy that trucks and rails depend on for the bulk of their freight.

But strangely, shippers should not be expecting rampant discounting of rates that has been the hallmark of previous pricing wars. Especially in the occupant-limited LTL sector, where the top 25 carriers enjoy about a 75 percent market share, LTL executives say pricing is holding up especially strong especially considering the negative tonnage environment of the past 12 months.

YRC’s Hawkins says he feels “good” about the pricing environment even while tonnage is trending negative. In fact, most of trucking has seen negative tonnage environment for 12 months now.

“I think the longer that continues, we see pressure in this area, but from an LTL perspective, it appears to me very stable,” he recently told analysts. “Our focus is on pricing for profit and using internal costs controls to weather the storm until we get back into a more normalized tonnage environment.”

And it’s not just motor carriers feeling the declining volumes. Rail carloads are off  4.3% in a year-over-year comparison of carloads carried by U.S. railroads through the first 46 weeks of 2019, according to the Association of American Railroads.

 “For manufacturers, the biggest challenges remain finding skilled labor and trade uncertainties, which make it difficult to hire and expand business operations,” Chad Moutray, chief economist at the National Association of Manufacturers, recently said.

So what is behind those trade uncertainties?

In a recent editorial, the Wall Street Journal recently said there is “strong evidence” that U.S. trade policy under President Donald Trump “is the main growth culprit.” American manufacturing, despite the president’s claims, has slumped and slower growth in China from the trade war has reduced demand for U.S. exports in the agricultural and other sectors.

 In a recent survey by the National Association for Business Economics, 53% of respondents said U.S. trade policy was the major downside risk heading into 2020.

And U.S. manufacturers, transportation companies, intermediaries and third party logistics companies are paying the price even if Trump’s tariffs are missing their mark. Several economists have noted Trump’s tariffs have not benefited U.S. producers—or even hurt China. Instead, they have just shifted the source of those imports to other intermediary countries such as Vietnam.

When C.H. Robinson, the world’s largest 3PL with $14.8 billion in gross logistics revenue in the most recent full year on record, suffered a miss in its most recent quarterly revenue, analysts barely contained their emotions.

“So bad, it’s bad,” Deutsche Bank analyst Amit Mehrotra wrote in a note to investors. UBS analyst Thomas Wadewitz said it was “meaningfully worse than expected.” complained. “The magnitude of the miss and the weakness of the October guide will still come as a significant surprise,” Morgan Stanley analyst Ravi Shanker wrote.

But CHR is hardly the only transport-related concern suffering down numbers. Even Old Dominion Freight Line, the perennial leader in revenue growth and operating efficiency, saw revenue dip in the third quarter. ODFL’s revenue for the third quarter of 2019 was $1.0 billion, which was a 0.9% decrease from the prior year. And this year’s third quarter included one extra workday, so the decrease on a per-day basis was 2.5%. Still, ODFL posted an eye-popping operating ratio of 79.3%.

ODFL’s LTL tons per day and LTL shipments per day were both below normal seasonality in the third quarter. Compared to the second quarter of 2019, LTL tons per day decreased 1.2% as compared to the 10-year average increase of 1.9%, and LTL shipments per day were down 0.6% as compared to the 10-year average increase of 3%, ODFL said. As of press time, ODFL’s October revenue per day was trending down 1.5% to 2%

At YRC Freight, the fourth-largest LTL concern, LTL tonnage-only in July was down 3.3%. August was down 3.6%. September was down 5.3%. And then October was down 4.1%. For the YRC Regionals (Holland, New Penn and Reddaway), LTL tonnage in July was down 1.5%. August was down 4.4%. September was down 4.5%. And then October is down 6.2%.

The 40-day General Motors strike in the third quarter, coupled with slowing automotive sales, and the overall manufacturing malaise probably didn’t help Holland either, according to analysts and YRC officials.

“The toughest part of the freight economy that we've seen is in the Midwest that was even before the automotive labor disruption that we experienced the last two weeks of the quarter and then the majority of the month of October,” YRC CEO Hawkins said on a recent analysts’ conference call.

“So I do expect a slight improvement in the Midwest, but overall, the Midwest was overall down more than any area of the country for us. So that'll continue to be something we keep an eye on,” Hawkins added.

The Intermodal Association of North America (IANA) says “more normalized” conditions may not occur until the second quarter of 2020. Total intermodal volumes dropped 3.7 percent year-over-year in the third quarter of 2019, according to IANA. International shipments nudged down 0.8 percent from 2018, while domestic containers and trailers fell 4.9 percent and 17.6 percent, respectively.

IANA President and CEO Joni Casey cited “looser trucking capacity, continuing uncertainty about Chinese tariffs” as primary factors driving intermodal’s malaise.