May 24, 2023

J.B. Hunt, Schneider still waiting for intermodal demand to turn


Not much has changed on the demand front, heads of some of the nation’s biggest intermodal transportation providers said Tuesday at Wolfe Research’s annual transportation conference. The implication is that commentary provided during first-quarter reports in April remains intact.

“I don’t have any green shoots for you this morning,” Darren Field, president of intermodal at J.B. Hunt Transport Services (NASDAQ: JBHT), told investors in a panel format. “Volumes are steady. … As it relates to 2023, I think everybody has a significant dose of ‘I have no idea.’”

Field said some large retailers appear to have successfully drawn down inventories to desired levels but that there isn’t yet the need to reload distributions centers.  

“As the customers have highlighted inventories coming down, I think that we’re encouraged by the thought that a more normalized transportation cycle is in front of us,” he said.

Intermodal containers moving on the U.S. Class I railroads were down 9% year over year (y/y) in the first quarter of 2023. So far in the second quarter, container movements on the rails are down 12% y/y.

Large declines in imports — down 21% y/y in April at the nation’s top 10 ports, according to The McCown Report — highlight the impact shippers’ order reductions have had on freight flows.

J.B Hunt’s intermodal loads were down just 5% y/y in the first quarter, nearly half the rate of the decline reported by the railroads. Transcontinental loads were down 9% as inbound containers to the West Coast remained depressed and shippers avoided Southern California ports due to labor unrest. The company’s volumes in the East were up 1% but those shipments have a much shorter length of haul.

Field said it could take six to eight weeks following an actual labor agreement before loads start to more meaningfully land in Los Angeles and Long Beach, California. He also cautioned that some of the freight that was lost to Gulf Coast and East Coast ports may never come back.

“It’s been just a few weeks since our public earnings call and not a lot has changed,” said Jim Filter, group president of transportation and logistics at Schneider National (NYSE: SNDR). He said several retail customers have told Schneider that they have made progress on reducing inventories but it’s still “very murky on overall customer demand in the second half.”

He said roughly 15% of Schneider’s 28,000 intermodal containers were in stacks and out of service during the first quarter and that hasn’t really changed since. Field didn’t provide a number, but the company had 17% of its 116,000-unit fleet parked in the first quarter.

Currently, J.B. Hunt’s bid compliance is in the high-50% range, an all-time low. By comparison, intermodal shippers were tendering a high-80% range of contractually committed volumes to the company during the 2018-2019 time frame.

“That just tells me they had no idea how to forecast what their demand would be,” Field said.  

Eighty percent is a good number, he added.

Neither was willing to provide specific details on intermodal pricing but said that roughly two-thirds of new rates agreed to during bid season, which started in October, will be implemented by the end of the second quarter.

Acknowledging the correlation between spot truckload rates and contractual intermodal pricing, as well as double-digit declines being booked in contractual over-the-road TL agreements, Filter said deterioration in intermodal pricing isn’t as bad.

“It’s not as deep on intermodal as it is over-the-road. At the same time, I would say that some of those rates that we’re seeing for truckload really aren’t durable. I don’t expect that they’re going to survive an entire bid season as they go through.”

Truck capacity is leaving the market slowly, which will provide a lift to rates at some point. However, both said that normal sequential operating margin trends from the first to the second quarter will be muted this year.

“Nothing about the current environment from Q1 to Q2 is behaving normally,” Field said.

On the outlook for volume growth, Field believes the industry could return to double-digit growth again. He said consistent rail service is key and that there are ample opportunities to convert road freight to rail, especially in the East.

“[Mexico] is underrepresented — the share between over-the-road and intermodal has the least penetration at this point. … The largest percentage improvement is in Mexico. But local East still has a massive opportunity relative to truck,” Filter said.

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