Chart of the Week: Outbound Tender Rejection Index – USA, ACT Research Dry Van Trailer Orders, Class 8 Vehicle Orders SONAR: OTRI.USA, ORDERS.VAN, ORDERS.CL8
Tender rejection rates continue to hover around all-time highs as carriers struggle to cover the recent freight boom, driving rates and revenues higher. The last time this occurred carriers rushed to purchase record amounts of equipment in 2018. But this time around, trailers are the equipment of choice over tractors.
This past Monday Alan Adler reported that preliminary trailer orders for September look to be the third-highest month in history, exploding to 52,000 units. This is part of a five-month trend of increasing dry van trailer orders that began in May of this year.
Class 8 tractor orders have also been on the rise but stalled in August as they dropped 4% off July numbers, still 75% higher than the previous year. Preliminary reports have September tractor orders back on the rise again at around 32,000 units, which would be the highest amount since October 2019. The interesting aspect of this is just how fast trailer orders are growing in relation to tractors.
There are several large differences between the 2017-18 environment that inspired the jump in equipment investment and subsequently the oversupplied market in 2019. That transportation boom was more directly tied to traditional economic expansion with a lot more confidence behind it. There was also the absence of a worldwide global pandemic, which helped people believe that the current environment would persist into the following year.
There was also a tax incentive to invest in new equipment along with the booming economy, which ironically fed into one another. With businesses now able to defer depreciation, they were incentivized to invest in more capital expenditures like machinery and equipment leading to more durable goods needing transported. This led to higher demand for transportation, which led to carrier investment in equipment, a self-perpetuating cycle of spending.
Unlike 2018, most of the transportation demand has been derived from a society transitioning to what many believe will be a temporary state of being, leading to an uncertain future. Many of the traditional macro-economic indicators like unemployment have failed to accurately represent the true state of the economy, with the government stepping in to provide unprecedented amounts of relief to individuals who lost their jobs.
Nearly eight months into the pandemic there is still no definitive end to many states’ restrictions, and it is still unclear what the real damage to the economy has been. Trucking companies are having to adapt like many other businesses to an environment filled with questions about the near future. Investing in trailers over tractors is a far safer bet due to lower costs and the fact they do not have to hire a driver to utilize them.
The growth in trailers over tractors suggests carriers are more willing to drop empty and loaded trailers at shippers and their consignees instead of waiting at their facilities. Normally, the carrier would pick up a loaded trailer after placing the empty one — called a drop and hook. It is a more efficient operational practice if the carrier has the trailers to spare as it leads to less wait times that drain driver productivity. This is also good for social distancing, which may also be contributing to the trailer pool growth.
Trucking companies have also been dealing with recruiting issues over the past several months. Driver schools were shut down earlier in the year and new regulations around checking for drug and alcohol violations by the FMCSA were put in place, making it harder to find qualified drivers as demand rose rapidly throughout the summer. If carriers can manage their trailer pools effectively and shippers have the space to manage large trailer staging areas, they will be able to manage more freight with less personnel.
2021 may still have many questions that need answers but the current equipment order trends suggest that carriers are not expanding their fleets in the same manner they did two years ago that led to an extremely soft 2019.