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Trucking Industry Insight | Spring 2020

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This document focuses on a number of topics that affect the trucking industry as a whole, including the role of women in the future of the industry, mounting challenges posed by COVID-19, the potential impact of falling oil prices on the demand for trucks, the shift to online sales, President Trump’s push to pass a $2 trillion bill for infrastructure, and ATA’s prediction for an ugly economy. It also includes a brief summary of trends in used equipment values.

Why Women are Critical to the Future of Trucking: A shortage of drivers continues to be one of the greatest challenges facing the trucking industry today. Based on a 2019 report by the American Trucking Associations (ATA), the industry was short roughly 60,000 drivers in 2018, up nearly 20% from the prior-year estimate. The ATA warns that if current trends hold, the shortage could swell to over 160,000 by 2028. To stem the shortage and accommodate industry growth, the trucking industry will need to hire approximately 1.1 million new drivers over the next decade, representing an average of nearly 110,000 per year. According to the ATA, the need to replace retiring truck drivers will account for approximately 54% of new driver hires, while industry growth will account for about 25%. In order to meet the growing demand for drivers, the industry acknowledges the need to recruit more women who currently make up about 7% of the industry’s driving population.

In 2016, the Women In Trucking Association (WIT) partnered with the National Transportation Institute to create the WIT Index. The purpose of the index is to better quantify the number of women truck drivers and management team members in the trucking industry on a national level. According to the 2018 WIT Index, from 2016 to 2017 only marginal increases occurred in the percentage of female drivers and women in management. However, among companies reporting data, more than a quarter of the carriers confirmed a 28.7% increase in female drivers. In addition, fleet companies reported 19% growth in women drivers in 2017, indicating that more fleets are serious about understanding the gender divide and creating initiatives to improve the gender ratio.

Trucking can pose both opportunities and hurdles for women entering what has traditionally been a male-dominated field. Some of the hurdles are created by the industry and others by the regulatory environment. Cabs, for example, are generally built to fit the larger physical size of a man. In addition, rest stops do not always provide the safest environment for women drivers, and long hours and being away from family for days or weeks at a time can discourage many women from becoming long-haul drivers.Conversely, others enjoy the freedom to work independently and welcome the adventure of the open road. One upside that all women drivers embrace is the opportunity to receive equal pay for their work.

Truckers Face Mounting Challenges in War Against COVID-19: The COVID-19 outbreak has placed a lot of stress on all within the trucking industry. For weeks, America’s 3.5 million truckers have become unsung heroes, finding themselves on the front lines in the war against the coronavirus pandemic, racing to deliver food and critically needed medical supplies to a panic-stricken nation. But truckers are facing increasing challenges as the virus continues to spread from coast to coast. Restaurants, fast food chains and even truck stops are limiting their dining room access, often leaving the impossible-to-maneuver drive-thru as the truckers’ main option for meals. Some drivers are also experiencing long delays in loading and unloading, while others are arriving at their destinations only to find the business closed and nowhere to unload their freight. While their jobs put them at increased risk of contracting the virus through the handling of packages, traveling from place to place and constant interaction with the public, they struggle to find parking spots for sleeping and places to use the restroom or wash their hands. When they finally do get home after days or weeks away, they face the possibility of bringing the virus with them.

There’re no doubt truckers are a vital component of the supply chain, hauling loads that help keep hospitals prepared, manufacturers productive and grocery stores stocked, but the industry is working hard to keep up with the demand for products. Although the U.S. Department of Transportation (DOT) has taken significant steps to efficiently move essential freight across the country, more must be done to alleviate the problems truckers are facing. The top concern appears to be the lack of adequate parking for commercial vehicles. The Owner-Operator Independent Drivers Association has asked that the DOT lift the hours-of-service requirements that restrict the number of hours truckers can drive, with the exception of a 10-hour mandatory rest period between loads. So far, the DOT has waived the requirements only for the shipment of emergency supplies. At the same time, some businesses and law enforcement agencies are starting to step up to show their support. For example, McDonalds recently announced it was offering curbside service for truckers at many of its locations. Through this crisis, more people are coming to realize that without truckers, the world just stops.

Falling Oil Prices May Stem Demand for Trucks: Some experts believe the rapid plunge in oil prices could cut into sales of both tractors and liquid tank trailers as well as the trucks that haul fossil fuel extraction equipment. With West Texas crude already trading around $20 a barrel, some analysts say a slump to $10 is possible. The oil price crash is a result of rapidly declining demand as parts of the U.S. and other industrial nations employ lockdowns to control the coronavirus pandemic. Further, the bitter price war between oil producers in Saudi Arabia and Russia serves to compound the problem. “This $20-a-barrel area could hold assuming that the market gets optimistic that there is an end game to the crisis, if the financial package that the government is pushing through kicks in, and there is a truce to the Russia-Saudi price war,” said Phil Flynn, an analyst with The Price Futures Group in Chicago. “But if the virus keeps the economy shut down for long, it could easily go to $10.”

According to a March 19 report issued by S&P Global Ratings, a corporate credit rating service, the oil markets are heading into the second quarter with a severe supply-demand imbalance and the acute oversupply threatens to test the limits of crude and product storage as earlier as May. Big producers such as Chevron and ExxonMobil, as well as some smaller companies are reducing their capital expenditures by billions of dollars. That will slash demand for new oil field trucks and, if companies fail, worsen an already weak market for used equipment. “From an economics perspective, if we see less investment in energy-related business we are not going to need a lot of trucks to move equipment around,” said Beth Ann Bovino, U.S. chief economist at S&P Global. Analysts believe the pain will be felt most by truck dealers regionally, including Texas, New Mexico, the Gulf States and North Dakota. According to Steve Tam, vice president of ACT Research, about 3% of the U.S. truck fleet is used for fossil fuel extraction and production and that does not include the tankers that deliver fuel to gas stations and distribution centers. There’s really no place for much of the equipment to go because if the energy producers don’t need the vehicles there won’t be ready buyers. ACT is already forecasting a 50% reduction in the new tank trailer market this year. About 60% of new tank trailer sales are for the oil and refined product market.

Truck Auctions Shifting to Online (Digital) Sales: The big auction houses are increasingly turning to digital sales to move used heavy-duty trucks. In fact, remote online buyers made up more than three-quarters of the bidders at a Manheim truck auction in Indianapolis in January. Even buyers who traveled to the auction in person had to submit bids online. At Ritchie Bros.’ February auction in Orlando, Fla., the company recorded $237 million in sales of trucks and heavy equipment items, with 53% going to online buyers. Purchases through the company’s mobile application doubled compared with the same auction a year earlier. The auction drew more than 14,000 online bidders, who made up almost 80% of all registered buyers.

Motor carriers also are seeing the transformation of equipment auctions. “Anything data and digital is changing the sector,” said John Wilbur, CEO of Phoenix-based Roadmaster Group. Digital bidding wasn’t common five years ago but is now a major component of truck auctions, Wilbur said. It saves you a flight or travel to the auction. But you need to be able to rely on the representations of the vehicle condition,” he said. The auction companies are providing detailed information about the trucks for sale and they have to be accurate or else they lose credibility. Ritchie Bros., for example, provides an oil sample analysis, videos of the engine running and hundreds of photos for the vehicles it auctions online. Approximately 66% of the winning bids at their fourth-quarter auctions were placed online. Although some of those bids came from shoppers at the auction site, Ritchie believes a high percentage of bids came remotely. Digital auctions appear to be the way of the future since they provide an opportunity for the buyer to shop so many different regions.

Although the auction industry is moving to a digital approach, traditional auctions still provide certain benefits. With the amount of technology in today’s trucks, and the fact that each is being driven by a different driver and maintained differently, the chance to see a truck lined up side by side with similar trucks at a live auction gives the buyer a good gauge of why a particular truck sells for a particular price. Live public auctions are still the best method for sellers to turn an asset into cash and provide buyers to have a chance to inspect their potential purchases.

Trump Urges $2 Trillion for Infrastructure to Bolster Economy: To advance one of his longest-standing priorities, President Trump wants federal lawmakers to pass a $2 trillion bill that would renovate the nation’s roads, bridges and airports as part of the next stimulus bill Congress seeks to pass amid the coronavirus pandemic. He said low interest rates would allow the country to borrow cheaply to finance spending on infrastructure and added that none of the funds should go toward environmental initiatives called for in the Democrats’ Green Deal.

Infrastructure spending could help mitigate the surge in unemployment and business failures expected to result from the coronavirus pandemic and economic shutdown. The number of Americans filing for unemployment totaled 3.28 million during the last week of March. The darkest predictions are for that figure to almost double, the result of business closures and government efforts to keep people at home to prevent spreading the virus. The American Society of Civil Engineers has said more than $2 trillion in additional funding is needed for U.S. infrastructure by 2025 alone. The World Economic Forum this year ranked the U.S. 13th in matters of infrastructure, according to its global competitiveness report.

The White House and Congress have begun circling the idea of a fourth round of stimulus to combat economic fallout from the coronavirus outbreak. Both Trump and House Speaker Nancy Pelosi have begun floating ideas for such a measure, just days after Trump signed a $2 trillion virus-related bill. Trump pledged in his 2016 campaign to seek $1 trillion in infrastructure spending and called on Congress in his 2018 State of the Union address to dedicate $1.5 trillion in new investment. But the plan Trump proposed in 2018 went nowhere because of disagreement over how much federal funding would be included. Speaker Pelosi says she wants the House to be ready as soon as it returns to approve a fourth bill boosting the economy and strengthening the response to the virus. In a recent interview, she specifically mentioned broadband and water projects as examples of infrastructure works that would be relevant to the coronavirus response.

ATA Economist Predicts an Ugly Economy Ahead: Bob Costello, Chief Economist and Senior Vice President of International Trade Policy and Cross-border Operations for the ATA says the U.S. economy is going to “get ugly.” “We’re in a recession. The longest economic expansion in our nation’s history is over,” said Costello. On an annualized basis, he expects second-quarter GDP to decline by up to 20%. By comparison, during the financial crisis the worst quarter for GDP was the fourth quarter of 2008 which saw an 8.4% reduction.

“Uncertainty is skyrocketing. Forecasting is difficult enough to begin with, let alone when we’re in unprecedented times,” he said. “One thing we do know, though, is we’re in a recession, the second quarter is going to be terrible.” However, Costello also believes that if the coronavirus crisis subsides and we can start to get back to some normalcy in June or July, we can possibly experience a V-shaped recovery. A V-shaped recovery is one in which factory production, freight moves and consumer spending would quickly rebound to precoronavirus levels. In the meantime, there will be “winners and losers” during the economic crisis. “The vast majority of businesses are going to hurt and hurt badly,” he continued, singling out restaurants as the big losers. “The job market is deteriorating quickly. Just over 10 million people filed for unemployment in a two-week period — just nothing even close to that in history. That all is going to have a major impact on shippers.”

Through this current upheaval, Mr. Costello believes that online businesses will grab market share and retain much of it even after restaurants and brick-and-mortar stores reopen. He also noted that freight demand is shrinking and that will likely result in a lot of trucking failures. Moreover, even with SBA loans a lot of fleets will end up failing if they don’t get paid in time. The lack of demand will also force fleets to lay off drivers. Shippers need to be cognizant of this since without sufficient drivers their supply chains will break down. For the time being, truck drivers are heroes of the highway and should be appreciated for the risks they take in continuing to provide the services our nation relies upon.

Trends in Used Equipment Values
For more than a year, the used truck market has been struggling as both prices and sales of used Class 8 trucks have dropped significantly. Some analysts have attributed this in part to a higher level of bankruptcies in the trucking industry as weaker motor carriers continue to fail. As a result, more inventory is flushing into the secondary market, thereby contributing to the downward movement in pricing. In addition, COVID-19 has contributed to a dismal near-term forecast for new truck builds and the virus-fueled anxiety will likely find its way into the used truck market.

According to J.D. Power, the volume of 4-7-year-old trucks sold at auction in February was the highest in more than two years, but truck pricing was weak. During the first two months of 2020, pricing averaged 28.2% lower than the same period of 2019, and that’s without the economic headwind caused by COVID-19. In March, in-person auctions were scaled back in favor of those online, which limited sales volume during the first two weeks of the month and indicated the potential for a 50% drop in monthly sales. Fortunately, a subsequent bounce back in sales numbers gave rise to optimism that March could end up similar to February in terms of auction sales volume. In March there were still buyers out there, but depreciation was higher than in the first two months of the year.

Pricing in the first two weeks of March was better than it could have been, but still down roughly 10%. Consumer stockpiling could continue longer than expected, which would support the demand for trucks and keep pricing from dropping more dramatically. However, Chris Visser, J.D. Power Senior Analyst and Product Manager of Commercial Vehicles, believes that once the short-term spike in consumer stockpiling recedes, the shift in freight demand combined with the oversupply of used trucks will create a difficult pricing environment. The trucking industry will probably fare better than most over the next few months, but widespread quarantines, business closures, and unemployment are serious hits to the economy and should cause freight volumes to pull back considerably in the second and third quarters.