For months now we have been writing about the massive collapse of class 8 truck orders. Just a few days ago we pointed out that order declines are coming just as large public trucking companies around the country are being forced to slash fleets amid slumping demand and slack capacity. According to the Wall Street Journal, several U.S. trucking companies, including Swift, Werner and Covenant, have all been forced to cut 1,000s of trucks from their fleets as "overcapacity has driven down pricing." Of course, all this means that class 8 truck manufactures are unlikely to see an uptick in new orders anytime in the near future with Werner promising it won’t add trucks “until they see meaningful improvement in the freight and rate markets.”
“We haven’t seen any difficulty in finding trucks,” said Ken Forster, chief executive of logistics company Sunteck Transport Group, a broker based in Jacksonville, Fla., that finds and books trucks for freight shippers. “It’s clear that overcapacity has driven down pricing.”
In quarterly earnings reports this month, Swift Transportation Co., Werner Enterprises Inc. and Covenant Transportation Group Inc. said they have pulled a combined hundreds of trucks from service since the second quarter.
Idling trucks is a way large fleets can quickly reduce capacity to match demand, which has stagnated this year amid uneven retail imports and sluggish growth for manufacturers.
Swift, the country’s largest truckload carrier, counted 581 fewer trucks in the third quarter than it did this time last year, and plans to cut an additional 200 trucks in the fourth quarter. The company’s fleet tops 19,000 big rigs.
Werner, the fifth-largest U.S. truckload carrier, according to SJ Consulting Group, said it cut its fleet by 240 trucks in the quarter ended Sept. 30 from a year earlier. The company posted a 41% drop in third-quarter net profit, to $18.9 million, and said in its earnings statement that it won’t add trucks “until we see meaningful improvement in the freight and rate markets.”
Warnings like the one above from Werner do seem to be playing out the monthly net class 8 truck order data. Net orders for the month of October 2016 were down 46% compared to last year. In fact, the level of trailing 12-month net orders is the lowest since January 2011 and down 49% from there February peak.
Moreover, monthly truck orders have now declined YoY for 20 consecutive months.
Unfortunately, as BMO's Joel Tiss points out, things are likely to get worse for the class 8 truck OEM's before they get better. With October net orders "much worse than expected" and build rates at 17-18k units, Tiss expects the total backlog to increase to 81-82k units later this month. Moreover, Tiss points out that increasing backlog and softening 2016 orders are likely to put further downward pressure on 2017 and 2018 forecasts for the OEMs.
With October builds probably in the 17–18K range, we expect total backlog of 81–82K units when reported later this month. October is a closely watched month for truck demand—historically accounting for about 9% of full-year intake—as OEMs roll out next year's models, and big fleets set budgets and start placing orders. Based on this, and combined with an average 26% increase from September (13.9K units last month) and where levels have been running this year, October’s tally is much worse than expected.
ACT’s 2016 North American Class-8 outlook calls for a 30% YoY drop in production (227K units vs. 323K in 2015) and 19% lower retail sales (251K vs. 310K in 2015). The 2017 forecast assumes another down year for production and retail sales (-11% and -17%, respectively), with particular weakness in the U.S. For 2018 and 2019, ACT believes the 2017 electronic logging device (ELD) mandate will reduce capacity (5–10% expected) and drive overall industry profits higher, resulting in a solid rebound in truck builds. For 2020, ACT sees a strong pre-buy ahead of the second phase of greenhouse gas (GHG) emissions standards starting in 2021, causing another big drop in production that year (-39% forecast).
With U.S. Class-8-truck demand set to decline another 17% or so in 2017 following a 19% drop this year, we expect to see production cuts that began in 1H16 continue into 2H. Also, we have heard from some large dealers that used-truck inventories remain above optimal levels, weighing on used prices and affecting new trucks as well. The combination of lower production and weaker prices could put more pressure on 2017 and 2018 forecasts.
But, it's probably nothing.