A frequent topic of conversation in 2018 among U.S. businesses and the financial press has been the rapidly rising level of transportation costs. Companies across multiple economic sectors have been impacted this year as a result of three primary underlying factors:
1) A persistent shortage in the number of truck drivers.
2) The increased Federal regulatory burden from the Electronic Logging Device mandate, which became effective on April 1st, 2018, and curtailed violations of the maximum allowed driving time.
3) An accelerating economy increased the demand for goods and absorbed the available truckload capacity.
The truckload market, otherwise known as “For Hire Truckload,” is estimated to be over $300 billion annually in the United States. This market is highly fragmented and competitive, and typically constitutes the largest portion of the external transportation costs to U.S. shippers, exceeding rail, marine, and parcel combined.
Trucking costs, as measured by the CASS Linehaul Index, have risen significantly in 2018 (as demonstrated by the blue line in the chart below) due to the three supply/demand drivers outlined above. At the same time, growth in the orders of new trucks (as demonstrated by the red line below) has also accelerated rapidly and is currently trending significantly above the long-term average (demonstrated by the gray line below).
Historically, rapidly rising trucking rates have a high correlation with increasing orders for new trucks. This makes intuitive sense because as the prices of transported goods increase, so do the profit margins of trucking companies.
The rising rates incentivize thousands of individual trucking firms to expand their own fleets in order to capitalize on higher profit margins.
Additionally, the higher truckload rates enable these trucking companies to raise wages for truck drivers, which draws more labor into the work force and reduces existing driver turnover.
Despite a commonly held view that rapid transportation cost escalation will continue into 2019 and beyond, we believe that the cost escalation is actually moderating.
The trucking firms are already aggressively responding to the current supply/demand imbalance with significant capacity additions (more trucks and drivers). Given our focus on the bottom-up, fundamental analysis, it's important for us to recognize such short-term economic phenomena for what they are, and to maintain focus on the long term.