December 17, 2024 • 27 mins
The freight market outlook is set to improve next year following two challenging years for surface-transportation providers. In this Talking Transports podcast, Lee Klaskow, Bloomberg Intelligence senior transportation and logistics analyst, shares his 2025 outlook for the truckload, less-than-truckload (LTL) and railroads industries. Mid-single digit contractual rate growth, low-single-digit volume gains and improving utilization rates, could fuel a 67% jump in EPS for BI’s truckload peer group. LTL earnings growth may rebound as well, on the heels of continued pricing power and improved demand. Volume, revenue and earnings growth are poised to accelerate for North American railroads in 2025. Despite the more optimistic outlook, risks abound, especially from the incoming Trump administration’s tariff and immigration threats.
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Episode Transcript
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Speaker 1 (00:07):
Hi everyone, this is Lee Clasgow when We're Talking Transports.
Welcome to Bloomberg Intelligence Talking Transports podcast. I'm your host,
Lee Clasgow, senior Freight transportation and Logistics analysts at Bloomberg Intelligence,
Bloomberg's in house research arm of almost five hundred analysts
and strategists around the world. Before diving in a little
public service announcement, your support is instrumental to keep bringing
(00:30):
great guests in conversations to you, our listeners, and we
need your support. So please, if you enjoy this podcast,
share it, like it, and leave a comment. Also, if
you have any ideas for future episodes or just want
to talk transports, please hit me up on the Bloomberg terminal,
on LinkedIn or on Twitter at Logistics Lee. Now on
to our episode today, we're going to be doing something
(00:52):
a little different. Your guest is going to be me
Lee Klaskow, senior freight transportation and logistics analysts at Bloomberg Intelligence,
and we're going to talk to you today about the
outlook for the trucking market for twenty twenty five, and
we're also going to touch upon the railroad industry as well,
So buckle in. Hopefully this will be insightful and I
(01:13):
look forward to your comments of following the episode. You know,
when we're looking at the freight transportation logistics market at
Bloomberg Intelligence, we take a top down and bottoms up
approach to the markets, and so you know what we
have to do is we have to kind of figure out,
you know, what's going on in the world and you know,
how is that going to impact the demand for freight
(01:34):
in the individual companies that we cover. Well, you know,
it's going to be challenging out there. There's no if
stends or butts about it. You know, we have two
major wars still going on, one in the Middle East
and one in Europe, and intensions in the Middle East
seem to be flaring up, not down. We have a
lot of unknowns with the Due administration coming into the US.
(01:56):
We're not really sure what Trump is going to do
when it comes to immigration and tariffs, which both can
be extremely inflationary. And speaking of inflation, inflation is still
an issue. You know, people are grappling with higher costs.
You know, one of my favorite charts on the Bloomberg
terminal is eggs CPI. That's not a delicious breakfast option.
(02:21):
Really what it at tracks is the cost of eggs,
and they're up thirty seven percent year over a year,
even though they're down nine percent from their twenty twenty
three highs. So you know, costs are a major aspect.
You know, when CPI is expected to moderate next year,
that's the good news. So on the Bloomberg terminal, if
you go to ECFC go or enter for those in
(02:43):
the no what we see here is, you know, consensus
expectations for various macro indices. So with CPI, which is
a gauge for inflation, that's expected to come in two
point nine percent in twenty twenty four. Obviously, that's that's
that's good, though it's relatively high from historical standpoints because
(03:04):
it's down from eight percent in twenty twenty two, and
that that kind of movement of downward is supposed to
continue next year, according to consensus, is going to moderate
to two point four percent in twenty twenty five. GDP
is also expected to moderate, which is not good. This year.
Growth was expected are two point seven percent. Next year,
(03:24):
the consensus is at two point one percent in twenty
twenty five, but there's a lot of uncertainty with that number.
You know my view, you know, even though I'm not
an economist, nor do I play one on TV. You know,
it could go up a lot or it could go
down a lot, depending you know, on the new administration coming,
you know, in the US, because we again we really
don't know what the tarifs are actually going to be
(03:46):
versus the you know, the saber rattling, and we really
don't know what the immigration policy is going to be,
and so those those two things could have positive and
negative implications for economic growth. And then we have industrial production.
This is a number you know, we look at closely
when we're looking at the less than truckload market, the
(04:06):
LTL market. You know, that was down or expected to
be down zero point one percent this year, and we're
expected growth next year one point three percent. So that
is good news. You know, that's good news for LTL carriers,
and it's also a good news for good news for
a large part of rail demand as well. And just
sticking on ltls for a little bit, you know, another
(04:27):
macro index that we use to kind of gauge demand
is the ISM index, and it's you know, we've again
we've views it a major proxy for LTL demand. You know,
that's been in contraction territory for twenty four of the
last twenty five months. So you know what that's telling
us is the next three months is probably not going
(04:48):
to be great for LTL demand. You know, we've seen
demand quote unquote not being great for a lot of
the carriers that report monthly data. In November more or
less it was in align with expectations. But you know,
it's just the backdrop is tough there for for the
lt L carriers because you know, they don't no longer
(05:09):
have the they have more difficult comps coming off of
the Yellow bankruptcy of last year. So you know, that's
kind of the macro setup and how we're looking at
the overall trucking market, you know, and so when when
we're looking at the the the various modes of transportation,
you know we're going to first, I guess, you know,
(05:31):
for this conversation, start with the truckload market. Uh. You know.
And one of the great things about Bloomberg the Terminal,
at least from an analyst standpoint and someone that follows
the freight markets, is we have so much third party data.
I'm only going to touch upon a few of the contributors.
You know that that we use, uh, you know one
(05:53):
of those is is FTR. You know what we use
is a couple of their data points when we're looking
at the markets. They have a truck utilization index and
it's still well below historical levels, but it's been steadily
improving since bottoming in the second quarter of twenty twenty three.
As excess capacity slowly exits the spot truckload market. FTR
(06:17):
is forecasting average utilization rates to reach ninety three percent
by the end of this year from about eighty nine
percent from that trough. So you know, it's slowly increasing
and then reaching ninety five point two by the end
of next year, and this will be above the current
twenty year average of ninety one point one. So you
(06:41):
know that's that's really really good news because rates tend
to do much better when that index is ninety five
percent or higher. And so you know what that's telling
us is that capacity will be tightening. We don't know
if it's going to be necessarily tight capacity, but it's
(07:04):
definitely going to be It looks like it's going to
be better where from where we are, again, a lot
of uncertainty that can change a lot depending on you know,
what the Trump Administration's policies actually end up looking for
once they get they implemented. And you know, when we're
looking at demand, you know, while we use FTR kind
of like as maybe a benchmark, you know, we do
(07:28):
do our own work on expectations. You know, they're you know,
expecting truckload volume to rise point four percent in twenty
twenty four and accelerate to one point six percent in
twenty twenty five, and then to two percent in twenty
twenty six. My crystal ball in twenty twenty six is
(07:49):
a little foggy, but you know, if we're looking at
next year, how I'm going to frame it is, you know,
I'm really going to look just a GDP and probably
model and number somewhere there. And you know, as we
mentioned earlier, GDP is expected to be around two point
one percent next year, So that's kind of like our
base case for for demand on the truckload market. The
(08:10):
good news is, you know, when we're looking at demand,
looking at the GDP, you know, the Fed does appear
to have orchestrated a soft landing, with the probability of
a US recession reduced to about twenty five percent from
a high of sixty five percent in July, and that's
again based on consensus on the Bloomberg terminal. So it
(08:31):
looks like we're kind of out of the woods in
terms of recession and next year. So that's good news.
And again we don't know that growth low single digits,
it's going to be a little higher than that, or
is it going to be a little lower than that,
And again that's really going to be debated or dependent
on you know, where we see, you know, the policies
(08:53):
from the new administration heading out. So you know, that
looks like trucking condition should be more favorable next year,
which is of course great news. Uh. You know, we
look at FTRS Truck Condition Index and that is expected
to term positive next year. So that is a net
(09:16):
positive for the overall markets. And so you know, what
is that going to do? So we have it seems
like a better supply and demand market and that should
bode well for rates, it should bode well for earnings,
and it should bode well for revenue of trucking companies.
So the trucking companies that we follow at Bloomberg Intelligence,
(09:38):
you know, these are the large companies like a JB.
Hunt or Werner or night Swift. You know, they play
predominantly in a contractual market. So, you know, while we
do follow the spot market very closely because it's kind
of like a leading indicator for the contractual market, you know,
we really focus on contractual rates, uh here at Bloomberg Intelligence,
(09:59):
and you know, when you're looking at you know, next year,
you know, we think that rates on the contractual side
could start inch higher early next year, and that could
accelerate to high single digit growth by the year's end.
And if you put this all together, this might yield
a high single digit rate increase for twenty twenty five.
(10:22):
Obviously that's good news. And you know, we're we're basing
that conclusion because it really does appear the spot market
has bottom and we're also seeing an increase in tender rejections,
which may indicate that the market is tightening. You know,
when one of the other things that we look at
is truck stops market demand indecks. They're MDI index, you know,
(10:46):
and that's been up around eighteen percent quarter to date,
so you know that's selling us things are getting again.
We don't think they're getting tighter, but they're getting a
lot less looser, and and that's that's definitely that's definitely
good news for the trucking environment. And so you know,
we have mid single digit contractual rate increases, we have
(11:09):
low single digit you know, demand growth for twenty twenty five,
you know, and that could drive truckload carriers revenues up
mid single digits. And according to consensus of the Bloomberg
Intelligence Truckload peer group, it could drive earnings per share
sixty seven percent higher in twenty twenty five. You know,
(11:32):
just be mindful, over the last two years, earnings per share,
we're down around fifty percent each year. So it's not
like we're reaching a new high. We're just rebounding from
where we were, you know, in the peak of earnings.
We're twenty twenty two. So it's it's it's just, you know,
we're not going to get to those levels yet, and
who knows, you know, how long we'll take to get
(11:52):
back there, because as many of you remember, rates were
extremely extremely strong, you know, and so that's kind of
how we're looking at things when it comes to the
truckload market. So it's it's pretty pretty positive, I would say.
And then you know, LTL that's a different breed altogether.
You know, I mentioned earlier the ism that's telling us
(12:16):
that you know, demand is not going to be great
and the foreseeable future tonnage growth is expected to be
mostly flat next year, but you know, slightly better than
what it is this year. This year is expected to
be down about half percent. You know. But you know
what's really noticeable for the LTL market is that, you know,
(12:40):
when they do have volume growth, it really throws off
strong incremental margins and along with pricing, should drive you know,
overall better margins next year. Consensus expects operating ratios to
improve out ninety percent for the less than truckload market
in twenty twenty five. You know, night Swift is expected
(13:04):
to lead margin improvement next year with over two hundred
basis points and improvement followed by XBO at about one
hundred and fifty basis points. You know, XPO is kind
of like a self help story, if you will. You know,
they're really focusing on service improvements, pricing, power, productivity, and
market share games, which should all help their earnings next year.
(13:26):
At night Swift is really, you know, a company that
is consolidating a bunch of regional players into a national
player and you know they're going to get some synergies
from that, and that's that's kind of driving that. You know,
when we were looking at rates, we're you know much
more I guess bullish on the LTL pricing environment. And
(13:50):
that's really because of the fact that it's such a
consolidated market. You know, the top ten carriers have something
like you know, two of the market or it's actually
probably closer to three quarters of the market now with
Yellow gone. And then you also have night Swift that
is consolidating the market. So it's a market that's consolidated.
(14:11):
It's kind of coming even more consolidated, and you know,
the market participants really have embraced a disciplined approach and
a rational approach to pricing, and that should throw off
you know, in our view, you know, consistent mid single
digit rate increases. And you know what how we measure
(14:32):
that when we're when we're doing our models is we're
looking at revenue per one hundred weight x fuel search charges.
So you know, we think that can increase, you know,
for four to seven percent next year depending on the carrier.
So net, what should this do well in twenty twenty four,
we saw revenue for the lt L peer group, the
b I L t L peer group increasing four percent.
(14:55):
We saw earnings per share mostly flat. Next year, we
expect revenue growth around five percent, so you know, similar
to what we'd expect for the truckload market. And then
we also expect earnings per share to increase around twenty
two percent. And again those are those are you know,
when I say expect, those are consensus expectations. So consensus
(15:17):
is modeling a revenue growth of four point nine percent
and twenty twenty five and a VPS growth of twenty
one point five percent of EPs growth in twenty twenty five.
And that's available on the Bloomberg terminal. So you know,
while the backdrop is difficult when it comes to tonnage,
you know, we think that the positivity of rates should
(15:40):
definitely outperform all of that. So you know that that
is again, you know, a much better environment next year.
Then it will be, uh the one we just had,
you know, one of the interesting things. And I know
and it can like people like to argue about it.
Do we have a driver shortage? Is it retention shortage?
(16:00):
What is it? You know, at the end of the
end of the day. Uh. You know, trucking companies spend
a lot of time and money recruiting people and trying
to keep them in tractors. Uh. It's a very fungible
job where you know, a truck driver from company A,
if he's unhappy, he can go to company B, or
he can try to be an owner operator. So there's
a lot of turnover in the industry, especially uh that
(16:23):
first year that somebody enters the industry, because they come
in and you know, they might want to be like
you know, they might choose trucking as maybe a second career, uh,
and then you know, maybe doesn't meet their expectations because
you know, it is a very demanding job. And with that,
you know, I thank you for all those truckers out
there that do what you do, because you know, you
(16:44):
are essential to the economy. Uh, and not only essential
to the economy, but you're essential to every person's life
because you know, everything you get in your house, whether
it's food or a sofa, will come come to via truck.
So thank you for those drivers out there. That being said,
you know, if we have a kind of tougher stance
(17:06):
on immigration, the labor market will remain tight, and a
tighter market, drivers do have options. They could either you know,
go into a different industry, whether it's construction, manufacturing, warehousing,
you know, because maybe they're rather have a better work
life balance where they're home more often, or they're you know,
(17:27):
they have more reliability in their you know, scheduling, so
you know, they they know where they can be and
when they can be. So you know, you could see
a driver I'm not gonna call it shortage because some
of my friends out there might make fun of me,
but you know, definitely it's going to be tougher to
get drivers in the seats, and that could be inflationary
(17:49):
for trucking companies because you know, one way to get
people to drive for you is to pay them more.
So you know, we could see a driver pay increase
next year given the fact that you know, we do
expect a tighter market, you know, and also there are
you know, higher standards for drivers. You know, you have
(18:09):
you know, not only the alcohol and drug clearing house,
you have increased use of hair follicle testing, and then
you also have demographics which kind of could limit the
availability with safe qualified drivers over the long term. So
you know, while we don't think we're going to be
in a place where, you know, it's going to be
(18:30):
extremely difficult to find drivers, I think next year it's
going to be incrementally harder to attract and retain drivers.
And then also, you know, there are new regulations coming out.
The EPA passed more stringent nitrogen oxide rules that will
go into effect for trucks in twenty twenty seven. The
(18:51):
costs for those are really unknown some industry participants I
think it could be twenty to thirty thousand dollars more
for new truck, which obviously is not a chicken scratch
and could make trucks much more expensive. And then so
we could see you know, a huge pre buy of
equipment in twenty twenty six. So something maybe not to
(19:14):
think about so much in twenty twenty five, but put
on your radar in twenty twenty six when we're talking
about you know, supply demand as it relates to the
overall trucking industry. So you know, that's kind of like
our kind of broad take on the trucking markets. You know,
when we're looking at the rail industry, the rail industry
(19:36):
is you know, has always been a less violatile industry.
They've been having a couple of tough years all in all,
but you know, we just think that they're going to
start delivering growth in twenty twenty five. When it comes
to volume, you know, analysts the total volume for publicly
traded class one rails to increase by just under three
(19:59):
percent next this year, which is about fifty basis points
more than last year. And so you know, Canadian Pacific
Kansas City is expected to lead that up six and
a half percent, followed by its other Canadian peer, Canadian National,
which is expected to see volume increase around five percent
(20:19):
higher next year. And that's those are consensus expectations. A
lot of that on the case, the CPKC is really
being driven by the fact of this you know, new
service that they have following the merger last year, and
so you know that's going to drive a lot of
volumes cross border volumes between Mexico and the US. Again,
(20:44):
we don't know what the Trump administration's tariffs policies are
going to be, and that's probably the biggest risk to
demand for not only CPKC, but you know, all rails
because they all do benefit from from global trade. You know,
whether it's stuff coming in from the ports or cross
border with our neighbors to the north or the south.
(21:07):
You know, intermodal, which is you know, more aligned with trucking.
You know, intermodial growth in the US may moderate to
around three point one percent next year from six point
four percent this year, and that's based on FDR's forecast.
Consensus expects a three point seven increase in intermodal median
growth for the public Class one peers in twenty twenty five,
(21:30):
and again Canadian rails are expected to outpace the US
rivals do impart easier comparisons from this year's strikes and wildfires.
You know, domestic intermodal should benefit from a tighter trucking
market in twenty twenty five, which we outlined earlier, which
along with improved service, should make rails more competitive to
win traffic from the highways. Something you know, during when
(21:54):
when when when, when the market was very tight in
twenty one twenty twenty two, they really kind of dropped
the ball because service really wasn't where it should be.
So you know, maybe during this trucking cycle they'll be
able to take more share from from the roads. And
what's really interesting in the rails right now is that
(22:16):
they're very, very very active in courting new business to
kind of spur growth beyond you know, what the economy
is going to provide. So for example, CSX, you know
their analyst day that they had recently, management highlighted a
pipeline around five hundred and forty new customer sites or
expansion projects with current shippers that could drive up to
(22:39):
three hundred thousand additional car loads or around eleven percent
over twenty twenty four volumes. So you know, this is
pretty important to them. So you know, the kind of
long term secular near shoring or on shoring trend will
benefit the rails, but you know, we're not going to
see a huge spike in demand. It's going to be
(22:59):
just an incremental positive for the industry and for them
to win business and wind share. It's really you know,
obviously it helps where you're located, but it's also about
you know, service and network fluidity. You know, we were
talking about earlier US rails. You know, they furloughed too
many workers when the pandemic began, and they're really caught
(23:23):
flat footed when demand returned faster than expected, and the
end result was just really poor service and missed opportunities.
And so you know, today the trukking market remains loose,
which provides fewer openings for share gains. And also, you
know oil is not very high right now, so you know,
(23:43):
lower oil prices or fuel prices will make the savings
from intermodal less of a motivation because that dollar amount
will be less. The percentage a discount might be the same,
but that dollar amount might not be as much. Where
you know, at the end of the day, a truck
will be able to provide a better service because you know,
(24:05):
your freate's being touched less and it's you know, they're
able to pick up at a door and drop off
at a door. You know, for those that don't need
that kind of service, rail is a great viable option. Uh.
And as rails get better at their own network fluidity,
they can become more much more compelling, you know. And
(24:26):
so what we're looking at the rails again, you know
it's it's it's mid single digit revenue growth. You know,
earnings growth around twelve percent, so you know, expectations are
for their earnings to grow a lot less than the
twenty one two percent. You know, we talked about for
the LTL carriers and the sixty seven percent, and we
(24:48):
talked about the truckload carriers. So you know, next year
net net for the railroads is going to be a
better year. A lot of it's going to be dependent
on their ability to provide a good, consistent, safe service.
There's a lot of interesting stories within the rail industry
that make you know, each kind of story very unique.
(25:11):
Whether it's you know, as we mentioned CPKC, you know
that that really interesting network where connects Canada, the US
and Mexico with one single line. Then you also have
you know, someone like Norfolk Southern who was dealing with uh,
you know, a tragic derailment a couple of years ago,
(25:33):
an activists and then you know the CEO being fired
and now you know they're they're kind of focused on
operating a better, more profitable railroad. So there's a lot
of interesting stories within the overall rail rail market. So
that concludes our outlook for the trucking and railroad markets
(25:55):
for twenty twenty five. You know, it's really we provided
you a real high level. If you really want to
get more into the weeds, please feel free to reach out.
And you know, again whether it's on the Bloomberg terminal
or on social media, happy to have a conversation with
you about our outlook. Further, Also, I want to note
that this episode marks are a sixty second episode and
(26:19):
I can't tell you how much fun it's been to
have the opportunity to speak with so many insightful and
interesting people that are driving supply chains, and I'm looking
forward to bringing more great guests onto the podcast in
twenty twenty five. I also want to thank you for
tuning in. I'm touched by all the positive feedback, whether
it's online or you know, when I run into people
(26:40):
at conferences. It's been a great ride for me. It's
really been fun to do and again the conversations I've
really truly enjoyed. So I also want to thank all
the guests that have come on prior for your time
and your insights, you know, and also I'd love to
hear from you our listensteners, so you know, if you
(27:01):
like the podcast, please subscribe and leave a review. And
if you want to learn more about the freight transportation markets,
check out our work on the Bloomberg terminal at BIG
and you can see some of our stuff on social media. Also, finally,
I want to wish you all a very happy holiday
season and very happy healthy twenty twenty five. Thanks everyone,
(27:22):
and take care
Hi everyone, this is Lee Clasgow when We're Talking Transports.
Welcome to Bloomberg Intelligence Talking Transports podcast. I'm your host,
Lee Clasgow, senior Freight transportation and Logistics analysts at Bloomberg Intelligence,
Bloomberg's in house research arm of almost five hundred analysts
and strategists around the world. Before diving in a little
public service announcement, your support is instrumental to keep bringing
(00:30):
great guests in conversations to you, our listeners, and we
need your support. So please, if you enjoy this podcast,
share it, like it, and leave a comment. Also, if
you have any ideas for future episodes or just want
to talk transports, please hit me up on the Bloomberg terminal,
on LinkedIn or on Twitter at Logistics Lee. Now on
to our episode today, we're going to be doing something
(00:52):
a little different. Your guest is going to be me
Lee Klaskow, senior freight transportation and logistics analysts at Bloomberg Intelligence,
and we're going to talk to you today about the
outlook for the trucking market for twenty twenty five, and
we're also going to touch upon the railroad industry as well,
So buckle in. Hopefully this will be insightful and I
(01:13):
look forward to your comments of following the episode. You know,
when we're looking at the freight transportation logistics market at
Bloomberg Intelligence, we take a top down and bottoms up
approach to the markets, and so you know what we
have to do is we have to kind of figure out,
you know, what's going on in the world and you know,
how is that going to impact the demand for freight
(01:34):
in the individual companies that we cover. Well, you know,
it's going to be challenging out there. There's no if
stends or butts about it. You know, we have two
major wars still going on, one in the Middle East
and one in Europe, and intensions in the Middle East
seem to be flaring up, not down. We have a
lot of unknowns with the Due administration coming into the US.
(01:56):
We're not really sure what Trump is going to do
when it comes to immigration and tariffs, which both can
be extremely inflationary. And speaking of inflation, inflation is still
an issue. You know, people are grappling with higher costs.
You know, one of my favorite charts on the Bloomberg
terminal is eggs CPI. That's not a delicious breakfast option.
(02:21):
Really what it at tracks is the cost of eggs,
and they're up thirty seven percent year over a year,
even though they're down nine percent from their twenty twenty
three highs. So you know, costs are a major aspect.
You know, when CPI is expected to moderate next year,
that's the good news. So on the Bloomberg terminal, if
you go to ECFC go or enter for those in
(02:43):
the no what we see here is, you know, consensus
expectations for various macro indices. So with CPI, which is
a gauge for inflation, that's expected to come in two
point nine percent in twenty twenty four. Obviously, that's that's
that's good, though it's relatively high from historical standpoints because
(03:04):
it's down from eight percent in twenty twenty two, and
that that kind of movement of downward is supposed to
continue next year, according to consensus, is going to moderate
to two point four percent in twenty twenty five. GDP
is also expected to moderate, which is not good. This year.
Growth was expected are two point seven percent. Next year,
(03:24):
the consensus is at two point one percent in twenty
twenty five, but there's a lot of uncertainty with that number.
You know my view, you know, even though I'm not
an economist, nor do I play one on TV. You know,
it could go up a lot or it could go
down a lot, depending you know, on the new administration coming,
you know, in the US, because we again we really
don't know what the tarifs are actually going to be
(03:46):
versus the you know, the saber rattling, and we really
don't know what the immigration policy is going to be,
and so those those two things could have positive and
negative implications for economic growth. And then we have industrial production.
This is a number you know, we look at closely
when we're looking at the less than truckload market, the
(04:06):
LTL market. You know, that was down or expected to
be down zero point one percent this year, and we're
expected growth next year one point three percent. So that
is good news. You know, that's good news for LTL carriers,
and it's also a good news for good news for
a large part of rail demand as well. And just
sticking on ltls for a little bit, you know, another
(04:27):
macro index that we use to kind of gauge demand
is the ISM index, and it's you know, we've again
we've views it a major proxy for LTL demand. You know,
that's been in contraction territory for twenty four of the
last twenty five months. So you know what that's telling
us is the next three months is probably not going
(04:48):
to be great for LTL demand. You know, we've seen
demand quote unquote not being great for a lot of
the carriers that report monthly data. In November more or
less it was in align with expectations. But you know,
it's just the backdrop is tough there for for the
lt L carriers because you know, they don't no longer
(05:09):
have the they have more difficult comps coming off of
the Yellow bankruptcy of last year. So you know, that's
kind of the macro setup and how we're looking at
the overall trucking market, you know, and so when when
we're looking at the the the various modes of transportation,
you know we're going to first, I guess, you know,
(05:31):
for this conversation, start with the truckload market. Uh. You know.
And one of the great things about Bloomberg the Terminal,
at least from an analyst standpoint and someone that follows
the freight markets, is we have so much third party data.
I'm only going to touch upon a few of the contributors.
You know that that we use, uh, you know one
(05:53):
of those is is FTR. You know what we use
is a couple of their data points when we're looking
at the markets. They have a truck utilization index and
it's still well below historical levels, but it's been steadily
improving since bottoming in the second quarter of twenty twenty three.
As excess capacity slowly exits the spot truckload market. FTR
(06:17):
is forecasting average utilization rates to reach ninety three percent
by the end of this year from about eighty nine
percent from that trough. So you know, it's slowly increasing
and then reaching ninety five point two by the end
of next year, and this will be above the current
twenty year average of ninety one point one. So you
(06:41):
know that's that's really really good news because rates tend
to do much better when that index is ninety five
percent or higher. And so you know what that's telling
us is that capacity will be tightening. We don't know
if it's going to be necessarily tight capacity, but it's
(07:04):
definitely going to be It looks like it's going to
be better where from where we are, again, a lot
of uncertainty that can change a lot depending on you know,
what the Trump Administration's policies actually end up looking for
once they get they implemented. And you know, when we're
looking at demand, you know, while we use FTR kind
of like as maybe a benchmark, you know, we do
(07:28):
do our own work on expectations. You know, they're you know,
expecting truckload volume to rise point four percent in twenty
twenty four and accelerate to one point six percent in
twenty twenty five, and then to two percent in twenty
twenty six. My crystal ball in twenty twenty six is
(07:49):
a little foggy, but you know, if we're looking at
next year, how I'm going to frame it is, you know,
I'm really going to look just a GDP and probably
model and number somewhere there. And you know, as we
mentioned earlier, GDP is expected to be around two point
one percent next year, So that's kind of like our
base case for for demand on the truckload market. The
(08:10):
good news is, you know, when we're looking at demand,
looking at the GDP, you know, the Fed does appear
to have orchestrated a soft landing, with the probability of
a US recession reduced to about twenty five percent from
a high of sixty five percent in July, and that's
again based on consensus on the Bloomberg terminal. So it
(08:31):
looks like we're kind of out of the woods in
terms of recession and next year. So that's good news.
And again we don't know that growth low single digits,
it's going to be a little higher than that, or
is it going to be a little lower than that,
And again that's really going to be debated or dependent
on you know, where we see, you know, the policies
(08:53):
from the new administration heading out. So you know, that
looks like trucking condition should be more favorable next year,
which is of course great news. Uh. You know, we
look at FTRS Truck Condition Index and that is expected
to term positive next year. So that is a net
(09:16):
positive for the overall markets. And so you know, what
is that going to do? So we have it seems
like a better supply and demand market and that should
bode well for rates, it should bode well for earnings,
and it should bode well for revenue of trucking companies.
So the trucking companies that we follow at Bloomberg Intelligence,
(09:38):
you know, these are the large companies like a JB.
Hunt or Werner or night Swift. You know, they play
predominantly in a contractual market. So, you know, while we
do follow the spot market very closely because it's kind
of like a leading indicator for the contractual market, you know,
we really focus on contractual rates, uh here at Bloomberg Intelligence,
(09:59):
and you know, when you're looking at you know, next year,
you know, we think that rates on the contractual side
could start inch higher early next year, and that could
accelerate to high single digit growth by the year's end.
And if you put this all together, this might yield
a high single digit rate increase for twenty twenty five.
(10:22):
Obviously that's good news. And you know, we're we're basing
that conclusion because it really does appear the spot market
has bottom and we're also seeing an increase in tender rejections,
which may indicate that the market is tightening. You know,
when one of the other things that we look at
is truck stops market demand indecks. They're MDI index, you know,
(10:46):
and that's been up around eighteen percent quarter to date,
so you know that's selling us things are getting again.
We don't think they're getting tighter, but they're getting a
lot less looser, and and that's that's definitely that's definitely
good news for the trucking environment. And so you know,
we have mid single digit contractual rate increases, we have
(11:09):
low single digit you know, demand growth for twenty twenty five,
you know, and that could drive truckload carriers revenues up
mid single digits. And according to consensus of the Bloomberg
Intelligence Truckload peer group, it could drive earnings per share
sixty seven percent higher in twenty twenty five. You know,
(11:32):
just be mindful, over the last two years, earnings per share,
we're down around fifty percent each year. So it's not
like we're reaching a new high. We're just rebounding from
where we were, you know, in the peak of earnings.
We're twenty twenty two. So it's it's it's just, you know,
we're not going to get to those levels yet, and
who knows, you know, how long we'll take to get
(11:52):
back there, because as many of you remember, rates were
extremely extremely strong, you know, and so that's kind of
how we're looking at things when it comes to the
truckload market. So it's it's pretty pretty positive, I would say.
And then you know, LTL that's a different breed altogether.
You know, I mentioned earlier the ism that's telling us
(12:16):
that you know, demand is not going to be great
and the foreseeable future tonnage growth is expected to be
mostly flat next year, but you know, slightly better than
what it is this year. This year is expected to
be down about half percent. You know. But you know
what's really noticeable for the LTL market is that, you know,
(12:40):
when they do have volume growth, it really throws off
strong incremental margins and along with pricing, should drive you know,
overall better margins next year. Consensus expects operating ratios to
improve out ninety percent for the less than truckload market
in twenty twenty five. You know, night Swift is expected
(13:04):
to lead margin improvement next year with over two hundred
basis points and improvement followed by XBO at about one
hundred and fifty basis points. You know, XPO is kind
of like a self help story, if you will. You know,
they're really focusing on service improvements, pricing, power, productivity, and
market share games, which should all help their earnings next year.
(13:26):
At night Swift is really, you know, a company that
is consolidating a bunch of regional players into a national
player and you know they're going to get some synergies
from that, and that's that's kind of driving that. You know,
when we were looking at rates, we're you know much
more I guess bullish on the LTL pricing environment. And
(13:50):
that's really because of the fact that it's such a
consolidated market. You know, the top ten carriers have something
like you know, two of the market or it's actually
probably closer to three quarters of the market now with
Yellow gone. And then you also have night Swift that
is consolidating the market. So it's a market that's consolidated.
(14:11):
It's kind of coming even more consolidated, and you know,
the market participants really have embraced a disciplined approach and
a rational approach to pricing, and that should throw off
you know, in our view, you know, consistent mid single
digit rate increases. And you know what how we measure
(14:32):
that when we're when we're doing our models is we're
looking at revenue per one hundred weight x fuel search charges.
So you know, we think that can increase, you know,
for four to seven percent next year depending on the carrier.
So net, what should this do well in twenty twenty four,
we saw revenue for the lt L peer group, the
b I L t L peer group increasing four percent.
(14:55):
We saw earnings per share mostly flat. Next year, we
expect revenue growth around five percent, so you know, similar
to what we'd expect for the truckload market. And then
we also expect earnings per share to increase around twenty
two percent. And again those are those are you know,
when I say expect, those are consensus expectations. So consensus
(15:17):
is modeling a revenue growth of four point nine percent
and twenty twenty five and a VPS growth of twenty
one point five percent of EPs growth in twenty twenty five.
And that's available on the Bloomberg terminal. So you know,
while the backdrop is difficult when it comes to tonnage,
you know, we think that the positivity of rates should
(15:40):
definitely outperform all of that. So you know that that
is again, you know, a much better environment next year.
Then it will be, uh the one we just had,
you know, one of the interesting things. And I know
and it can like people like to argue about it.
Do we have a driver shortage? Is it retention shortage?
(16:00):
What is it? You know, at the end of the
end of the day. Uh. You know, trucking companies spend
a lot of time and money recruiting people and trying
to keep them in tractors. Uh. It's a very fungible
job where you know, a truck driver from company A,
if he's unhappy, he can go to company B, or
he can try to be an owner operator. So there's
a lot of turnover in the industry, especially uh that
(16:23):
first year that somebody enters the industry, because they come
in and you know, they might want to be like
you know, they might choose trucking as maybe a second career, uh,
and then you know, maybe doesn't meet their expectations because
you know, it is a very demanding job. And with that,
you know, I thank you for all those truckers out
there that do what you do, because you know, you
(16:44):
are essential to the economy. Uh, and not only essential
to the economy, but you're essential to every person's life
because you know, everything you get in your house, whether
it's food or a sofa, will come come to via truck.
So thank you for those drivers out there. That being said,
you know, if we have a kind of tougher stance
(17:06):
on immigration, the labor market will remain tight, and a
tighter market, drivers do have options. They could either you know,
go into a different industry, whether it's construction, manufacturing, warehousing,
you know, because maybe they're rather have a better work
life balance where they're home more often, or they're you know,
(17:27):
they have more reliability in their you know, scheduling, so
you know, they they know where they can be and
when they can be. So you know, you could see
a driver I'm not gonna call it shortage because some
of my friends out there might make fun of me,
but you know, definitely it's going to be tougher to
get drivers in the seats, and that could be inflationary
(17:49):
for trucking companies because you know, one way to get
people to drive for you is to pay them more.
So you know, we could see a driver pay increase
next year given the fact that you know, we do
expect a tighter market, you know, and also there are
you know, higher standards for drivers. You know, you have
(18:09):
you know, not only the alcohol and drug clearing house,
you have increased use of hair follicle testing, and then
you also have demographics which kind of could limit the
availability with safe qualified drivers over the long term. So
you know, while we don't think we're going to be
in a place where, you know, it's going to be
(18:30):
extremely difficult to find drivers, I think next year it's
going to be incrementally harder to attract and retain drivers.
And then also, you know, there are new regulations coming out.
The EPA passed more stringent nitrogen oxide rules that will
go into effect for trucks in twenty twenty seven. The
(18:51):
costs for those are really unknown some industry participants I
think it could be twenty to thirty thousand dollars more
for new truck, which obviously is not a chicken scratch
and could make trucks much more expensive. And then so
we could see you know, a huge pre buy of
equipment in twenty twenty six. So something maybe not to
(19:14):
think about so much in twenty twenty five, but put
on your radar in twenty twenty six when we're talking
about you know, supply demand as it relates to the
overall trucking industry. So you know, that's kind of like
our kind of broad take on the trucking markets. You know,
when we're looking at the rail industry, the rail industry
(19:36):
is you know, has always been a less violatile industry.
They've been having a couple of tough years all in all,
but you know, we just think that they're going to
start delivering growth in twenty twenty five. When it comes
to volume, you know, analysts the total volume for publicly
traded class one rails to increase by just under three
(19:59):
percent next this year, which is about fifty basis points
more than last year. And so you know, Canadian Pacific
Kansas City is expected to lead that up six and
a half percent, followed by its other Canadian peer, Canadian National,
which is expected to see volume increase around five percent
(20:19):
higher next year. And that's those are consensus expectations. A
lot of that on the case, the CPKC is really
being driven by the fact of this you know, new
service that they have following the merger last year, and
so you know that's going to drive a lot of
volumes cross border volumes between Mexico and the US. Again,
(20:44):
we don't know what the Trump administration's tariffs policies are
going to be, and that's probably the biggest risk to
demand for not only CPKC, but you know, all rails
because they all do benefit from from global trade. You know,
whether it's stuff coming in from the ports or cross
border with our neighbors to the north or the south.
(21:07):
You know, intermodal, which is you know, more aligned with trucking.
You know, intermodial growth in the US may moderate to
around three point one percent next year from six point
four percent this year, and that's based on FDR's forecast.
Consensus expects a three point seven increase in intermodal median
growth for the public Class one peers in twenty twenty five,
(21:30):
and again Canadian rails are expected to outpace the US
rivals do impart easier comparisons from this year's strikes and wildfires.
You know, domestic intermodal should benefit from a tighter trucking
market in twenty twenty five, which we outlined earlier, which
along with improved service, should make rails more competitive to
win traffic from the highways. Something you know, during when
(21:54):
when when when, when the market was very tight in
twenty one twenty twenty two, they really kind of dropped
the ball because service really wasn't where it should be.
So you know, maybe during this trucking cycle they'll be
able to take more share from from the roads. And
what's really interesting in the rails right now is that
(22:16):
they're very, very very active in courting new business to
kind of spur growth beyond you know, what the economy
is going to provide. So for example, CSX, you know
their analyst day that they had recently, management highlighted a
pipeline around five hundred and forty new customer sites or
expansion projects with current shippers that could drive up to
(22:39):
three hundred thousand additional car loads or around eleven percent
over twenty twenty four volumes. So you know, this is
pretty important to them. So you know, the kind of
long term secular near shoring or on shoring trend will
benefit the rails, but you know, we're not going to
see a huge spike in demand. It's going to be
(22:59):
just an incremental positive for the industry and for them
to win business and wind share. It's really you know,
obviously it helps where you're located, but it's also about
you know, service and network fluidity. You know, we were
talking about earlier US rails. You know, they furloughed too
many workers when the pandemic began, and they're really caught
(23:23):
flat footed when demand returned faster than expected, and the
end result was just really poor service and missed opportunities.
And so you know, today the trukking market remains loose,
which provides fewer openings for share gains. And also, you
know oil is not very high right now, so you know,
(23:43):
lower oil prices or fuel prices will make the savings
from intermodal less of a motivation because that dollar amount
will be less. The percentage a discount might be the same,
but that dollar amount might not be as much. Where
you know, at the end of the day, a truck
will be able to provide a better service because you know,
(24:05):
your freate's being touched less and it's you know, they're
able to pick up at a door and drop off
at a door. You know, for those that don't need
that kind of service, rail is a great viable option. Uh.
And as rails get better at their own network fluidity,
they can become more much more compelling, you know. And
(24:26):
so what we're looking at the rails again, you know
it's it's it's mid single digit revenue growth. You know,
earnings growth around twelve percent, so you know, expectations are
for their earnings to grow a lot less than the
twenty one two percent. You know, we talked about for
the LTL carriers and the sixty seven percent, and we
(24:48):
talked about the truckload carriers. So you know, next year
net net for the railroads is going to be a
better year. A lot of it's going to be dependent
on their ability to provide a good, consistent, safe service.
There's a lot of interesting stories within the rail industry
that make you know, each kind of story very unique.
(25:11):
Whether it's you know, as we mentioned CPKC, you know
that that really interesting network where connects Canada, the US
and Mexico with one single line. Then you also have
you know, someone like Norfolk Southern who was dealing with uh,
you know, a tragic derailment a couple of years ago,
(25:33):
an activists and then you know the CEO being fired
and now you know they're they're kind of focused on
operating a better, more profitable railroad. So there's a lot
of interesting stories within the overall rail rail market. So
that concludes our outlook for the trucking and railroad markets
(25:55):
for twenty twenty five. You know, it's really we provided
you a real high level. If you really want to
get more into the weeds, please feel free to reach out.
And you know, again whether it's on the Bloomberg terminal
or on social media, happy to have a conversation with
you about our outlook. Further, Also, I want to note
that this episode marks are a sixty second episode and
(26:19):
I can't tell you how much fun it's been to
have the opportunity to speak with so many insightful and
interesting people that are driving supply chains, and I'm looking
forward to bringing more great guests onto the podcast in
twenty twenty five. I also want to thank you for
tuning in. I'm touched by all the positive feedback, whether
it's online or you know, when I run into people
(26:40):
at conferences. It's been a great ride for me. It's
really been fun to do and again the conversations I've
really truly enjoyed. So I also want to thank all
the guests that have come on prior for your time
and your insights, you know, and also I'd love to
hear from you our listensteners, so you know, if you
(27:01):
like the podcast, please subscribe and leave a review. And
if you want to learn more about the freight transportation markets,
check out our work on the Bloomberg terminal at BIG
and you can see some of our stuff on social media. Also, finally,
I want to wish you all a very happy holiday
season and very happy healthy twenty twenty five. Thanks everyone,
(27:22):
and take care
Host
Lee Klaskow
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