JB Hunt: Coronavirus costs on carriers will start to affect pricing for shippers

Dive Brief:

As the year progresses, the increased cost pressure on carriers from pandemic-related expenses will begin to show up in pricing discussions with shippers, J.B. Hunt President of Intermodal Darren Field said on a Thursday call with analysts. The carrier's intermodal revenue was down 7% year over year (YoY) in the second quarter, with operating income down 14% YoY. Volume for the segment was down 2% YoY.
"It’s hard to see three months, four months from now, much less next year in that pricing cycle," Field said. "But as we sit here today, I do think that we’re all feeling some challenges on the cost front headed our way." Interim CFO John Kuhlow said the company spent $11 million in Q2 and $15 million in Q1 on pandemic-specific costs, including paid time off for employees, personal protective equipment (PPE), cleaning and security.
Though J.B. Hunt executives predicted in April that shippers' ability to pay would be a real risk for the carrier in Q2, Kuhlow said he was "pleased with how our teams worked with our customers to deal with any payment issues."

Dive Insight:

Fluctuating demand and increased costs from personal protective equipment and employee benefits have thrown intermodal carriers for a loop

A lack of steady demand from West Coat ports has caused carriers to send empty equipment to the West Coast when volume does materialize, upping operating costs, especially in June when import volume began to pick up.

"The balance of our network continues to face significant challenges that I expect to become even more difficult in the third quarter," Field said.

"For a lot of the first half of the year, we were positioning our equipment into the market where we expected volume to return," he said. "And so, we had equipment already in California. We had equipment in the Midwest, in Chicago, where demand began to come back faster. Well, as the network is running today, we're going to be moving more empty equipment."

As a result of the network imbalances and other pandemic expenses, J.B. Hunt margins were down to 11.8% from 13.4% in the same quarter 2019. Field mentioned the carrier would be hesitant to add capacity in the coming months to improve that measure. Currently, pricing is the primary lever for improving margins. According to the Cass Freight Shipment Index, per-mile linehaul rates bottomed out in April.

Cass's Intermodal Pricing index was down 16.8% YoY in June — down 3.8% from May. Flatbed pricing in June as just 4.4% down from the same time last year. Though Cass confirmed that the spot market has bottomed out, it said pricing "remains soft" based on its Truckload Linehaul Index.

As of July 13, DAT predicted imports would make some kind of recovery, calling out back-to-school season and an uptick in suburban single-family homes. In June, the load-to-truck ratio was the highest its been since July 2018, and total flatbed volume was nearly flat to 2019, according to DAT.

But as the year progresses toward peak, the resurgence in case growth, and the reaction by businesses and local authorities around the country, becomes a more significant wildcard. Field said, so far, July volumes look like much like June. And without a return to somewhat normal freight market dynamics, the cost of operating in the current environment will challenge carriers' commitment to margin versus market share.