The road transport crisis in the United States

At the end of the pandemic, certain sectors of the economy are unable to cope with the increase in demand. This is the case for road transport in the United States. Who are the winners and losers from this shortage of supply?

Par Charles-Henry Monchau, CFA, CMT, CAIA – FlowBank CIO

The economic recovery is indeed taking place. It is accompanied by a rise in prices reaching levels rarely observed since the great financial crisis of 2008. Indeed, the consumer price index in April rose by more than 4.2% over 12 rolling months. . Part of this increase can be explained by favorable comparison effects, April 2020 corresponding to the total closure of the economy. But inflationary pressures also stem from the inability of certain sectors to meet increased demand. This is particularly the case for road transport in the United States.

A lack of qualified labor, a low capacity of available trucks and multiple disruptions in the supply chain limit the available freight supply even though the demand for transport is increasing sharply due to the reopening. economy. Consequence: a sharp rise in prices in the road freight sector (cf. graphic below).

Are road transport companies able to pass the price increase on to consumers? Is this rise in freight rates part of “transient” inflation as described by the US Federal Reserve? Conversely, is it a structural increase that could have longer-term repercussions on US inflation?

Cyclical and structural factors impact the road freight sector

The main factors impacting the freight sector are as follows.

In terms of demand, we first observe a boom in global trade generated by the reopening of the economy. The acceleration of freight orders means that more transport supply is needed to meet demand. But the offer does not follow.

Indeed, it would seem that around 25% of the available fleet of trucks is currently at a standstill simply because of a lack of qualified drivers to run them.

Before the pandemic, the US economy was already crippled by a shortage of truck drivers. Already in 2018, it was estimated that the United States would need a million new truckers over the next fifteen years. This workforce deficit is due in particular to demographic aging, a high turnover and the much lower attractiveness of the sector. In this period of reopening of the economy, the crisis is worsening, with the labor shortage reaching its highest level in three years.

This labor shortage results in delays in deliveries and exerts upward pressure on prices.

It should be noted that even in the event of an adjustment in the supply of labor, an increase in the fleet of trucks would also pose problems. Indeed, the shortage of electronic components considerably slows down the production lines of new vehicles.
Other disruptions weigh on supply chains: port congestion and a shortage of containers make it more difficult to transport goods.

In an ideal scenario, the demand shock observed at the end of the pandemic should be accompanied by an adjustment in the supply of trucks and labor. While some adjustment in supply is possible in the medium term, certain factors – for example the labor shortage – seem to be structural and could therefore exert a lasting inflation of road freight prices.

The consumer will have to “foot the bill”

The inability of road freight to meet demand has inflationary repercussions on several levels.

First example: the rise in the price of fuel at the pump. This increase is not due to a shortage of gasoline, but to delivery delays due to the shortage of truck drivers. Consequence: Gas stations are raising their prices, which is good news for companies like Chevron, Exxon and Shell, but bad news for consumers.

Another example: the increase in the wages of truck drivers. As the labor shortage continues to worsen and the demand for drivers increases, truckers’ wages soar. This increase is reflected in freight rates.

Transport companies are not content to pass on only wage increases. In a context of strong demand and limited supply, it is all the easier for freight companies to increase their prices.

This situation is favorable for professionals in the sector but less so for the consumer who must absorb these inflationary pressures. It will also be interesting to study the behavior of a company like Amazon, which has so far covered the delivery costs of “Prime” members.

Can transport tickets benefit from it?

The main industry leaders seem to stand to benefit from this situation.

JB Hunt Transport Services (JBHT) forecasts growth in earnings per share of 37% in 2021 and 14% in 2022. The stock is up nearly 30% since the start of the year and is traded on a generous price / earnings multiple (last 12 months) over 33x.

Knight-Swift Transportation Holdings (KNX) benefit directly from the rise in the price of freight transport. They operate the largest fleet of trailer trucks in the United States and contract with third-party equipment suppliers. Two weeks ago, they posted profits up 88% year-on-year. The title is up more than 2% since the start of the year.

Schneider National (SNDR) revised upwards its earnings per share forecast for 2021 after seeing its net income increase by 30% in 2020.

The fleet ofUS Xpress Enterprises (USX) comprises approximately 6,900 trailer trucks and approximately 15,500 trailers, of which approximately 2,000 trucks are supplied by independent contractors. The title has risen sharply since the start of the year (+ 60%).

Werner Enterprises (WERN), one of the largest transportation and logistics companies in the United States, reported record operating profit for the first quarter.

XPO Logistics (XPO), heavily involved in supply chains, posted quarterly revenue of $ 4.8 billion, the highest ever recorded by the company.

The strong outperformance of the sector also demonstrates the change in “leadership” within the equity market. While technology stocks and other growth sectors have significantly outperformed major indexes in recent years, it is now so-called “cyclical” companies that are able to pass higher prices on to consumers who are benefiting most from the recovery. economic.

The whole question is to know if these price increases are “transitory” (to use the expression of the Federal Reserve) or if this inflation could be perpetuated.