Overcapacity has proven itself a huge cause in the current challenging freight industry of 2019.
David Jackson, CEO of the country’s largest trucking company, Knight-Swift Transportation, is predicting overcapacity to make for a highly difficult next quarter for the industry.
As Knight-Swift gears up to report its earnings for the third quarter of the year, Jackson says he is currently working with the company’s investors to prepare for instability.
“The freight environment is difficult,” he explains. “It has been more difficult than people expect from an earnings standpoint.”
Jackson says the trucking industry is about to hit his leading company’s bottom line, while he also expects truck and rail stocks to experience a similar negative impact.
Knight-Swift has lowered its earnings plan for the rest of 2019–previously, its earnings guidance was between 54 and 57 cents per share now, its forecast falls between 47 and 48 cents.
The trucking company is also expecting to make even less during its fourth quarter, lowering its prediction of earning between 73 and 77 cents per share to between 62 and 65 cents.
According to Jackson, overcapacity is the culprit. Capacity has increased due to big rig orders hitting a record high last year, with both major and independent trucking companies upping capacity in correlation with higher rates. This was caused mostly by the trade war, which led to a change in regular shipping patterns.
Additionally, while the trucking market is working to correct itself, employment rates given by the U.S. Department of Labor indicate a for-hire reduction of 4,200 trucking industry jobs last month–the third month in a row the industry has retracted open employment opportunities.
In August, the trucking industry dropped 5,100 jobs, on top of 300 back in July.
Jackson says these reductions aim to improve the carrier operating environment. “People in the industry and investors are looking for when that inflection point will come. [The] general consensus is, that is happening the second quarter of the year.”
Because capacity will most likely reduce after this challenging period, Jackson expects freight rates to return to stability during the first half of 2020.
Until this upswing, company earnings will continue to reflect the repercussions of overcapacity.
While Knight-Swifts’ overall business is comprised of 90% contract trucking, its revenue per truck declined 3% in the second quarter of 2019. The company’s brokerage revenues–where it uses the spot market to directly connect drivers and customers–decreased by 10%.
“There is going to continue to be near-term pressure on freight rates, but capacity is leaving the space and that is reducing the oversupply problem,” explained Jackson, whose comments come while the American Trucking Associations is also warning the industry of a continuation truck driver shortage.
The American Transportation Research Institute’s list of critical issues shows truck driver shortage leading the industry’s concerns for the third year in a row.
The list comes after the ATRI collects over 2,000 surveys from industry stakeholders, with 51% of responses from trucking companies and another 35% from professional commercial truck drivers.
However, there is a fierce debate regarding the validity of this issue. The ATA has been fighting against a study by the Bureau of Labor Statistics, which finds that the driver shortage is in fact a myth.
In the BLS study, findings show the labor shortage within long-haul trucking would potentially be solved with proper wages that meet truckers’ demands and working conditions.
The Owner Operator Independent Drivers Association (OOIDA) also believes the idea of driver shortage is a farce backed by major carriers refusing to admit to large industry problems–such as those surrounding driver retention and recruitment, poor working conditions, wages not keeping up with inflation, and unsatisfactory employee treatment.
The ATA currently estimates that there is a need for over 60,000 drivers, with a possible shortage of 100,000 drivers over the next five years.
The ATA also says it supports the ‘Drive-Safe Act’ legislation, otherwise known as the Developing Responsible Individuals for a Vibrant Economy Act, which works to allow 18-year-old drivers to have a CDL and contract as regular employees in the industry.
Critics say the driver shortage myth aims to win lawmakers’ support in legislation such as this, which they say will not remedy the industry’s chronically excessive driver turnover rate.