12/01/2021 This document focuses on a number of topics that pertain to the trucking industry as a whole, including the recent passage of the Infrastructure Bill, the current workforce shortage, the potentially adverse effects of a vaccine mandate, the high volume of trucking mergers and acquisitions, and the struggle to meet the demand for heavy duty trucks. It also includes a brief summary of trends in used equipment values.
Infrastructure Bill Delivers Much for Trucking: In November, the long-awaited Infrastructure Bill passed the House of Representatives and was signed by President Biden. The $1.2 trillion package includes $550 billion of new funding that will impact the transportation industry. Specific funding components include:
$110 billion to fix roads and bridges,
$66 billion dedicated to freight and passenger rail projects,
$52 billion a year from 2022-2026 to improve safety measures,
$39 billion to improve public transit systems,
$16 billion to improve ports and waterways,
$7.5 billion to build out nationwide electric vehicle chargers and alternative funding,
$1 billion a year for freight and highway projects through 2026, and
$600-$700 million a year to invest in bridges.
In addition, the Bill provides funding for: (1) initiatives to grow the number of people entering and staying in the trucking workforce to address the driver shortage, (2) the recruitment of younger drivers, and (3) a Women in Trucking Advisory Board for the Federal Motor Carrier Safety Administration geared toward attracting more women to the industry. As part of the effort to recruit younger drivers, the Bill also establishes a pilot program based on the DRIVE-Safe Act that authorizes up to 3,000 18-20 year-old drivers at any one time to undergo advanced safety training in order to participate in interstate commerce.
Considering the terrible state of America’s roads and bridges, the Infrastructure Bill has been embraced by trucking industry groups. The Truckload Carriers Association praised the bill, calling it a significant investment in our nation’s roads and bridges that delivers a desperately needed injection into the Highway Trust Fund to keep it solvent. They also praised the bill for exposing a younger demographic to an industry that welcomes them at a time when the driver shortage continues to plague the industry.
Workforce Shortage Tops List of Industry Concerns: According to Chris Spear, President and CEO of the American Trucking Associations (ATA), the trucking industry is currently short about 80,000 drivers, representing a record high. That’s a 30% increase from before the pandemic, when the industry already faced a labor shortage of 61,500 drivers. Many drivers are either retiring or dropping out of the industry. In addition, increased consumer demand, prompting a need for more drivers, also plays a big role in the shortfall. This comes at a time when U.S. ports are backlogged, primarily because there are not enough trucks and drivers to pick up cargo, resulting in a supply chain slowdown. Although President Biden has directed the Ports of Los Angeles and Long Beach to move to 24/7 operations, that’s been difficult because importers don’t have enough drivers to move their cargo at all hours.
Truck drivers move 71% of the U.S. economy’s goods, but represent just 4% of the vehicles on the roads. According to the ATA, if nothing is done, the latest figures put the industry on track for a shortage of 160,000 drivers by 2030, and the need for up to 1,000,000 new drivers over the next ten years. As indicated in the preceding article, the Infrastructure Bill authorizes hundreds of billions of dollars for transportation, including workforce development for the trucking industry. That includes a pilot program geared toward reducing the age required to obtain a commercial driver’s license from 21 to 18. Spear believes younger drivers are the key answer to the labor shortage. “I think that clearly is the most impactful thing that could be done right now to alleviate this problem. So next year, we are not going to be having this conversation because it will alleviate itself because we’re investing,” said Spear.
Vaccine Mandate Could have Disastrous Effect on Trucking Capacity: According to David Heller, Vice-President, Government Affairs, with the Truckload Carriers Association, if the U.S. vaccine mandate takes effect as proposed, that would be a “game changer” with a “disastrous” impact on trucking capacity. The rule would require employers with more than 100 employees to mandate vaccines. Heller said only about 50% of U.S. drivers are currently vaccinated. The mandate could result in a significant number of drivers exiting the industry, or leaving large carriers to work for those with fewer than 100 employees. The mandate could potentially wipe out as much as 37% of the professional driving workforce in the U.S. “If this were to take effect and 37% of the industry leaves, imagine the lines at the gas stations and the local stores,” Heller said of the implications. “Even if we lose 1-2% of drivers in this market because of the vaccine mandate, there are tremendous problems.”
Heller remains hopeful “cooler heads will prevail.” He noted 27 states have filed suit regarding the federal proposal and that other industries outside trucking are pushing back. He also said U.S. Secretary of Labor Marty Walsh has suggested, that “solo” truck drivers would be exempt. Another unknown is how the rule would affect Canadian cross-border truckers. Heller believes that if truckers are exempted from the U.S. vaccine mandate, then the Department of Homeland Security will likely reverse vaccine mandates for truckers crossing the border. However, U.S. legislators are not likely to create an environment where Canadian truckers have easier access to the U.S. market than Americans do.
Trucking Mergers & Acquisitions Running at a Fast Pace: Industry experts believe the current flood of trucking mergers and acquisitions will continue as long as low interest rates, the driver shortage, and favorable economic conditions for carriers continue. The deal market in the trucking industry is heating up as buyers and sellers look to make moves amid a convergence of factors that are driving activity. “I would say it’s one of the most active markets within transportation and logistics that I’ve ever seen,” said Gaurang Shastri, managing director at investment banking firm Lincoln International. I think it is a function of essentially a perfect storm of events.” Among those events are high valuations for motor carriers, deals that have piled up during the pandemic, and concerns over potential changes to capital gains taxes.
Some of the more recent deals that have taken place through early October are as follows:
• Cheema Freightlines acquired the assets and operations of Missoula, Montana-based Walker Logistics.
• Andlauer Healthcare Group announced that it had entered into a definitive agreement to acquire T.F. Boyle Transportation located in Billerica, Mass. Boyle provides specialized transportation services to clients in the life sciences, government and defense sectors.
• ArcBest, one of the largest for-hire carriers in North America, announced that it has entered into a definitive agreement to acquire Chicago-based truckload freight broker MoLo Solutions.
• Pilot Freight Services acquired franchise stations in the Pacific Northwest and Oklahoma.
“What’s really causing this flurry of activity is the fact that you had a number of deals go on hold during the early days of COVID,” Shastri said. “Then the other dynamic is you’ve had deals that would have come to market potentially in 2022 or beyond that were accelerated, given concerns over a potential change in the tax code.” Current conditions present a unique window in which high valuations and concerns about potential tax law changes are hitting simultaneously. While business conditions for some carriers have been difficult during the pandemic, the increased activity has made their businesses more attractive to potential buyers, driving them to consider selling.
Heavy Duty Truck Production Curtailed by Chip Shortage: Heavy-duty truck makers are struggling to keep up with demand as shortages of semiconductors (chips) and other parts curb production. The semiconductor shortage is short-circuiting heavy-duty truck production as supply-chain disruptions hamper efforts to meet string demand for new rigs. North American production of Class 8 trucks, the big vehicles that haul most domestic freight, sank last summer to its lowest level since May 2020, when the coronavirus shut down much of the U.S. economy. According to ACT Research, 14,920 Class 8 trucks were built in July, while the backlog of trucks ordered but not built nearly tripled to 262,100 from the same month one year ago.
Production problems began earlier this year and have persisted for months, driving up the cost of used heavy-duty trucks and straining supply lines ahead of the fall, when fleets typically place big orders for new equipment. North American trucking companies, pushing to expand capacity to meet strong freight demand, ordered 36,900 heavy-duty trucks in August, the highest level in five months and up 90% from the same month last year, according to preliminary figures from ACT. “Everything you want to see for Class 8 demand is there in spades,” said ACT President and Senior Analyst Kenny Vieth. “What’s missing are parts.” To compensate, some equipment makers are moving semiconductors from smaller medium-duty trucks to Class 8 production to maximize the value of the chips.
Raw materials shortages and global shipping bottlenecks are also crimping availability of other components like wiring harnesses, truck mirrors and parts made of plastic. Some truck makers aren’t yet booking orders for next year because component costs are so high right now that it’s difficult for them to quote a good price where it’s profitable for the company but not excessive for the customer. The tight labor market is also affecting domestic suppliers that make everything from small components to truck trailers. In the end, most automotive analysts agree that the level of demand for trucks will still continue as the lack of supply may drag on for years.
Trends in Used Equipment Values
Prices for late model, low mileage commercial vehicles continue to soar due to limited inventories, the thriving construction industry, and buyers who continue to look for quality, rather than quantity. According to a recent report issued by Sandhills Global, an information processing company headquartered in Lincoln, Nebraska, used sleeper and day cab trucks posted nearly a 62% year-over-year auction value increase to $44,000 in September from $27,000 in September 2020. Asking values also continued to trend upward with a 42% increase to $55,000, up from $39,000 one year ago. More recently, both auction and asking values for sleeper trucks rose about $3,000 from August to September of this year. That growth was driven by vehicles in the 0- to 5-year age group, which posted a $7,000, or 7%, increase.
At the same time, the demand for new commercial vehicles continues to be strong, but both production and sales continue to be restricted by COVID-affected labor availability, finding enough semiconductors, supplier-level constraints, the climbing freight cost of bringing parts into the plants, and rising prices for key raw materials. As a result, Class 8 truck production is currently running about 100,000 units short of demand. For further insight into the factors affecting the production of new vehicles, see the above section of this commentary.