Airlines are betting on the rest of 2022, hoping for market normalization in 23

Major carriers have given up any significant improvement in freight demand for the remainder of the year. However, some are already calling for normal seasonality in 2023 with a narrowing of the market from the middle of the year.

No wonder there is no high season

At Baird’s annual global industry conference in Chicago, JB Hunt (NASDAQ:JBHT) management said an inventory correction would continue to impact the entire customer book. An existing backlog of goods was exacerbated when some shippers frontloaded orders earlier this year to avoid last year’s supply chain bottlenecks.

“2022 is so far … the most subdued version of the high season I can remember in my career. We just don’t have an appreciable increase in demand,” said Darren Field, who heads the company’s intermodal segment.

Schneider National (NYSE: SNDR) CFO Steve Bruffett said volumes have been hovering sideways for several weeks without a normal seasonal surge. He said Schneider accepts the majority of the loads that are put out to him every day, compared to an acceptance rate of just 50% this time a year ago.

The company is planning more of these for the remainder of the year with the expectation that more normal seasonal patterns will take hold in early 2023. Bruffett believes conditions will improve in the second half of the year and is waiting for a favorable turning point as early as spring.

Chart: (SONAR: OTRI.USA) A proxy for truck capacity, the Outbound Tender Reject Index shows the number of loads rejected by carriers. The index has fallen to just 4.3% compared to last year, when fleets rejected nearly 20% of contracted loads. To learn more about FreightWave’s SONAR, click here.

Given the difficult year-to-year (Y/Y) comparisons in the fourth and first quarters, the head of Werner Enterprises (NASDAQ:WERN) also expects more typical seasonal trends over the next year.

“Peak is certainly muted at the moment compared to what we’ve seen in previous years. There’s no real debate on that right now,” Derek Leathers, Werner’s chairman, president and CEO, told investors on Wednesday.

Leathers said normal peak and project opportunities are down 70% compared to 2021. However, demand for its dedicated and other contract business is holding up well. The company has high exposure to freight traffic in the discount retail, home improvement, and food & beverage sectors, which tend to remain resilient during downturns.

Cost inflation is rapidly driving capacity to a halt

“From my perspective, it’s a very painful time to be a small trucking company,” Leathers said.

Spot market-dependent airlines have seen prices fall 40% (excluding fuel) from a February peak. At the same time, most items of expenditure have continued to rise.

“In recent years [small carriers] gone out and overpaid for their equipment at a time when interest rates are rising, at a time when fuel is at an all time high and the efficiency of their equipment isn’t really competitive due to age,” Leathers drove away. “The insurance industry isn’t getting any better, and they’ve been doing all of this to track the spot market.”

Chart: (SONAR:NTIL.USA). The National Truckload Index (Linehaul Only – NTIL) is based on an average of booked spot dry truck loads of 250,000 lanes and 10,000 daily spot market transactions. The NTIL is a 7-day moving average of spot rates for non-fuel scheduled services.

He pointed to more than 10,000 net operator deactivations in the past five weeks as evidence that cost inflation is rapidly putting airlines out of business. He also said the company’s power-only referral offering has seen increased driver interest over the same period.

Bruffett said he sees some airlines exiting the market, but nothing significant just yet.

“I wouldn’t call it overwhelming evidence that small launcher capacity is being abandoned,” he said. But Bruffett noted that some airlines are trying to “hold it out” through year-end, waiting for signs of potential market improvement before making a decision.

He, too, sees cost inflation next year, but likely at a more muted pace.

This downturn may prove to be shorter as the industry has been unable to oversupply capacity like in previous downturns. Manufacturing headwinds at OEMs limited heavy truck shipments and lengthened trade cycles throughout the pandemic. Leathers said 2023 is likely to be another year of sub-replacement-level builds due to parts and component shortages, as well as Europe’s struggles to source energy to power vendor manufacturing facilities.

Werner CFO John Steele highlighted the impact higher fuel costs are having on capacity this cycle. Diesel was $2.30 a gallon during the 2015-16 downturn and $3 a gallon in the 2018-19 cycle. The last weekly selling price was $5.33, according to the Energy Information Administration.

“When you’re little, you have to pay for the fuel when you pump it…at that moment,” Steele said. “So it’s a big financial challenge for them.”

Bruffett doesn’t think 2023 will be a “golden opportunity,” but said it doesn’t represent a “gloomy situation” either.

“Both capacities are quickly lost and that supports the spot price[s] and that is good for the contract area or the spot price[s] up and that’s good,” he said.

Leathers believes the truckload market could be “back in balance, if not tight,” by mid-2023.

“It won’t be an easy year,” he said. “We still have a lot to do, but we have our sights on the ball and we know what needs to be done.”

Intermodal battle lines redrawn

Field said JB Hunt is positioned to capitalize on any dislocation in the intermodal market as Schneider switches rail service provider from BNSF (NYSE:BRK.B) to Union Pacific (NYSE:UNP) at the end of the year. The departure leaves JB Hunt as the last remaining full TL provider on the BNSF line.

An abundance of available rail space, plans to expand its container fleet by nearly 40% and other investments have JB Hunt poised to grow its intermodal unit by double-digit percentages over the next decade, according to Field.

Additionally, improved rail service and fluidity across the network will allow JB Hunt to improve cornering. Field said increased device storage times at customer sites were due to a lack of space to store the goods and were no longer tied to work restrictions, which has been the case throughout the pandemic.

As device utilization improves, the company can reduce costs while sharing the savings with customers. Field said a reduced cost structure would allow JB Hunt to lower intermodal fares while maintaining margins.

“As we take the cost out of the system, I expect we’ll pass that benefit on to the customer,” Field said.

Currently, only 20% of Schneider’s intermodal volume moves on the UP line.

“It’s a big task,” says Bruffett about the change. “It’s not going to happen in a day or a week. Many containers and chassis have to be moved and drivers have to be repositioned. Everyone involved has a vested interest in ensuring that things go well.”

The move to UP doesn’t change the company’s long-term goals of 10% to 14% for operating margin, but Bruffett said it gives them a better growth path.

“For us, it’s about an opportunity for growth and a way to differentiate ourselves, which we’re excited about,” he said. “I think we will increase our revenue by maintaining these solid margins and increasing volume and revenue.”

During the third quarter, Schneider’s intermodal operating rate (inverse of operating margin) deteriorated 620 basis points year-on-year to 90.7%. Duplicate spending related to ongoing operations on both railroads and higher cartage costs were the culprits.

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