Several truckload carriers have indicated that the bottom of the business cycle has probably already passed. However, they acknowledge that any significant improvement in market conditions is unlikely until sometime in 2024.
This suggests that we can expect another relatively subdued peak season this year.
Speaking at a Morgan Stanley investor conference in Dana Point, California, Schneider National's CFO, Steve Bruffett, expressed his views on the situation. He anticipates some signs of seasonal activity in September, October, and November, setting the stage for a more favorable start to 2024. He prefers not to describe it as robust but rather as a more balanced and stable setup compared to the past four years.
Bruffett observed that after a prolonged period of sluggish freight activity marked by customers adjusting their inventories, there is currently some restocking of merchandise taking place. He mentioned an improvement in demand during the back-to-school shopping season and noted that Halloween-related products are performing better than expected. However, he doesn't expect these categories to have a significant impact on the carrier's results.
Schneider had previously revised down its earnings guidance for 2023 in early August. They anticipate the third quarter to be the low point of the earnings cycle due to the full impact of contractual bid season affecting their entire customer base.
At the same event, management from Werner Enterprises shared a similar outlook. Derek Leathers, the company's chairman and CEO, stated that the "overcapacity marketplace coupled with overstocked inventories" is now in the past. Werner's major customers, including discount stores specializing in household essentials, are in a favorable position with their inventory levels. Leathers expects restocking to occur during the peak season but anticipates that customers will be more cautious this year to avoid the inventory excesses of the previous year.
Werner's largest customer, Dollar General, recently announced plans to implement promotional markdowns to optimize their inventories, which is expected to impact operating income negatively in the second half of the year.
Despite their optimism, Leathers emphasized that the industry is still facing day-to-day challenges. While Werner expects to see some form of peak season this year, it faces a tough comparison to the previous year when it benefited from a substantial amount of project freight.
Leathers noted that the market is only now starting to achieve some balance, with truckload capacity gradually leaving the market. This trend is particularly noticeable among smaller carriers that primarily handle spot-market freight.
Spot rates have been on a decline for over a year, only recently showing signs of improvement after hitting a low point in May. It's widely recognized in the industry that smaller fleets have used up the cash reserves they accumulated during the freight boom. Additionally, they now face the highest interest rates in two decades and widespread cost inflation, including a 20% increase in diesel prices since early July.
Bruffett also observed capacity exiting the market and noted an increase in the availability of qualified drivers. Schneider's leasing business has seen more returned equipment, and their brokerage unit has witnessed a decline in the number of carriers renewing their authorities.
While it's still too early to predict contract rate renewals for next year, Jim Filter, Schneider's group president of transportation and logistics, believes that a decline is unlikely. He believes that the current contract rates are at a level that customers understand and are unlikely to drop below.