As the industry continues to work through the bottlenecks of a very chaotic supply chain, which is meaningfully starved of transportation capacity, the duration of the disruption remains up for debate. However, a consensus is forming that the current boom cycle could carry well into 2022.
“Definitely stronger for longer,” Derek Leathers, chairman, president and CEO at Werner Enterprises (NASDAQ: WERN), told investors at Baird’s global industrial conference on Wednesday. He said since the summer of 2020, volumes “have mimicked what a traditional peak season has looked like” more often than not.
Leathers said he sees the current environment lingering longer. “In my personal opinion, I think this goes through ’22.”
Bohn Crain, Radiant Logistics (NYSE: RLGT) founder and CEO, had similar sentiments on a call discussing the company’s record quarterly results Tuesday. “I think everybody sees this going deep into next year, deep into calendar ’22,” Crain said. “There’s no immediate end in sight.”
The third-party logistics provider is seeing strong demand from every vertical it serves, with the cruise line industry being the only exception.
Appearing at the same conference, Nick Hobbs, J.B. Hunt’s (NASDAQ: JBHT) COO and head of contract services, sees the situation continuing. “Overall consumer demand is very strong and customers are needing product on the shelves.”
Leathers echoed the thoughts. He said it’s both supply and demand that will likely prolong this cycle. Limited production at the original equipment manufacturers due to parts and semiconductor shortages is keeping a lid on truck capacity.
“Truckers have been undisciplined traditionally and went out and overbought capacity, overbought trucks. That’s not an option right now,” Leathers added. “Most people can’t even get near their replacement level trucks they need.”
He said the demand side of the equation appears sound as people are reentering the workforce, GDP and consumer savings are tailwinds, the newly approved infrastructure package provides a form of stimulus and retail inventories remain historically low.
Have we seen the worst of it?
Expanded port hours and increases on container fees and accessorial charges are all aimed at shaking capacity loose and improving fluidity throughout the ports and on the railroads. But the improvements have been modest.
Stacey Griffin, SVP of intermodal pricing strategy at J.B. Hunt, noted “little points of relief that we’re starting to see” at the ports. She said customer demand for intermodal service has been stronger than the industry can accommodate for the last year and that it’s still too early to call an end to the disruption.
“Those improvements are pretty gradual,” Griffin added. “Certainly, very important given the time of year but gradual.”
Leathers said, “I’m not prepared to say we’re past the worst of it yet. I’d like to believe that’s true. We see light at the end of the tunnel.”
He pointed to widespread shortages of everything from semiconductors to goods in most consumer categories. Leathers said consumers overbuying certain items is understandable but a hindrance. He doesn’t see the potential for “sustainable improvement” until at least the third quarter, which “may be optimistic.”
Delays at customer facilities are a primary culprit
Labor shortages at customer warehouses remain a challenge. A lack of dockworkers has caused significant delays in the time it takes to unload containers and trailers. J.B. Hunt started being more earnest in its enforcement of accessorial charges for excessive equipment delays during the summer. However, the actions haven’t really moved the needle all that much.
“The overall unloading pace has not materially improved. Some facilities have, some customers have, but it’s still a bit of a balancing act,” said Griffin.
J.B. Hunt took delivery of nearly 3,000 intermodal containers in the third quarter. It plans to add 12,000 units in total, 8,000 to 9,000 of which will be added in 2021. Griffin said the company is awarding incremental capacity to its customers that are best managing their docks and equipment turn times.
Shippers continue to flock to more dependable dedicated service
J.B. Hunt has identified the total addressable dedicated market as roughly $55 billion throughout industries like timber, agriculture, medical, retail and industrial.
“We’ve really seen the demand; it continues to grow,” Hobbs said. “Our limiting factor really, it’s always a challenge to have drivers.” In the past, the speed at which J.B. Hunt hired drivers determined how quickly a dedicated contract could ramp. But now it includes “how fast can we get the equipment, how fast can we get management.”
Werner has added 16 fleets to its dedicated segment in the past year. In the third quarter, the average number of dedicated trucks it had running daily was up 11% year-over-year. Management believes that’s a fair growth rate to use as a placeholder going forward, with the one caveat being its ability to take delivery of equipment.
“The pipeline is very strong,” Leathers said. “It’s as strong today as it’s been at any point. We’ve said that for several quarters but it basically continues to strengthen.”
JBHT is targeting nonunion private fleets and both companies are not letting capacity fleets, or operators looking for a short-term capacity fix, into the network.
Both companies also said that the normal time for a dedicated contract to ramp to normalization and profitability has been pushed out by roughly 30 days from the standard three- to four-month window. Difficulties sourcing drivers, management and equipment are the reasons.
2022 intermodal price expectations too soon to call
Management from J.B. Hunt wasn’t ready to commit to benchmarks for intermodal pricing in 2022 yet. However, they expect cost headwinds — increased driver wages and railroad costs as well as lower equipment utilization — to be absorbed through price increases. The company is using accessorials to manage through what are expected to be transitory cost increases with core rate increases covering more structural expense hikes.
Management noted that it’s all about returns on invested capital. The speed at which a customer turns its equipment impacts that calculation and J.B. hunt plans to account for this when pricing future contracts.. The accessorial charges will be removed when the near-term cost challenges abate.
“To the extent that those inefficiencies go away, so will that revenue stream,” added Brad Delco, VP of finance and investor relations at J.B. Hunt. “We will be in a lot better place, with a lot more capacity to serve our customers’ needs.”