Echo CEO says truck rates to continue rising in 2018 as capacity stays tight

The chairman and CEO of freight broker and third party logistics (3PL) provider Echo Global Logistics Inc. said today that 2018 will bring higher rates for users of truck transportation as a truck driver shortage keeps capacity tight, and compliance with federal regulations requiring Electronic Logging Devices (ELD) in virtually all cabs takes a much bigger-than-expected bite out of carrier miles and productivity.

In what could be framed as a good news-bad news story, Doug Waggoner said freight demand should continue to strengthen as the U.S. economy finally shows real signs of life following nine years of a mostly anemic and uneven recovery. However, the growing volumes will put additional pressure on truck supply, which unlike past cycles, is not expanding to meet firmer traffic trends, Waggoner said in a phone interview. This, in turn, will drive up freight rates, he said.

Any uptick in "Class 8," or heavy duty truck, orders will mostly be for replacement trucks rather than fleet additions, Waggoner said. The reason is that there aren't enough qualified drivers to fill the seats of existing trucks, let alone new cabs, Waggoner said. "The driver shortage is real," said Waggoner, whose Chicago-based company is on track to generate a bit under $1.9 billion in gross revenue—revenue before the costs of purchased transportation—in 2017. Echo owns no transport assets.

Another factor is that fleets have become much more cautious after being burned in the past by adding capacity only to find that there wasn't enough demand to adequately fill the trailers, Waggoner said. "There is far more discipline on the part of the carriers," he said.

The ELD mandate, which takes effect Dec. 18, will be more disruptive than most people think, Waggoner said. That's because such a large block of drivers, most of which are owner-operators and micro fleets that compose much of the country's truck supply, are waiting until the very last minute to comply, he said.

ELD compliance is expected to reduce driver miles as drivers who in the past used paper logs to hide the fact that they worked or drove beyond their legally mandated hourly limits will now be forced to abide strictly by the law. The estimated hit on productivity ranges from low to mid-single digits to low double-digit percentages.

The cyclical changes in industry fundamentals, combined with the disruptive impact of Hurricanes Harvey and Irma on the nation's trucking network, has kept non-contract, or "spot," rates sharply elevated all year. Shippers are weighing whether to renegotiate their carrier contracts, most of which are one-year in duration, in order to assure themselves of capacity and price assurances rather than being exposed to the volatile spot market. However, Waggoner said many shippers have adopted a wait-and-see approach where they will agree to some form of surge pricing in the short term, but will hold off on contractual commitments until they get more clarity in 2018 on the direction of spot rates, which lead contract rates by 3 to 6 months.

Waggoner stressed that truckers need higher prices in order to re-invest in equipment, and attract and retain drivers while ensuring that increasing volumes of freight gets delivered. In real, or inflation-adjusted, terms, freight rates excluding fuel have been flat for 15 years, he said.

Echo moves about 10 percent of its customers' business via rail, Waggoner said. The company would consider using more rail service if customers needs require it, Waggoner said. However, a shortage of container equipment currently hamstrings that effort, he added.