Brian Scott is Managing Director of Commercial Banking for Western Alliance Bank’s Equipment Finance Team.
The transportation industry has been significantly affected by the pandemic economy. Now it is seeing a revival, from an equipment finance perspective, despite perceptions within the lending community that COVID-19 has had a negative impact.
The world has changed dramatically in just a year. From the way people work and go to school to the way they shop, travel and spend leisure time, COVID-19 has reshaped how many industries do business and challenged many to redefine their day-to-day operations.
In the business world, transportation– whether by road, rail, marine or air – and supply chain management have been among the most significantly affected sectors of the economy as businesses have had to reinvent, reshape and reimagine how to overcome many challenges, while seizing new opportunities in the space.
From an equipment finance perspective, the transportation industry is seeing a marked resurgence. In fact, a recent State of the Industry report by ACT Research revealed that the U.S. trailer industry booked nearly 30,000 net orders for August, which is a 46% increase from the month prior and a 150% increase than the same month last year.
These new figures confirm a revival in the industry, despite the perception within the overall lending community that COVID-19 has had a negative impact on the transportation industry. With these latest numbers dispelling that myth, there have been some big winners in the space with specific segments within transportation thriving, including grocery and retail, especially with companies that have active online marketplaces.
Changing Tides Drive Significant Changes
The growth in net orders underscores how a shift in perspective both within the industry and among lenders is vital to helping the industry maintain its momentum.
To begin with, the emergence of COVID-19 has highlighted the need for forward-thinking asset management. When the novel coronavirus first emerged and as it continued to thrust nearly every aspect of daily life into chaos, every industry froze and began to look at their portfolios. Transportation was no different, albeit there was perhaps more anxiety given that it is a high-risk industry and asset management was a significant issue.
Transportation, particularly fleet management, was in a downturn trend years before the coronavirus and desperately needed to evolve. In 2019, long-haul trucking experienced decreased shipping volume across the board, which drove down freight rates impacting the revenue stream of many carriers deterring new investments in assets. Before COVID-19, rail freight had also been steadily decreasing since mid-2018 and maritime trade volumes were declining, as well. Research firms and economists were predicting even more dire consequences as the virus spread.
On the contrary, the virus has facilitated – or better said forced – an evolution of thinking among leaders in the industry. No longer was a trailer a trailer. Analyzing trends and seeing growth markers within other key sectors created dynamism among industry trailblazers who saw an opportunity to capitalize on these developments and helped stimulate momentum in the overall redirection and reshaping of the industry.
Perhaps there is no better example than examining the shift within the trucking industry over the first half of 2020. As public demand for goods shifted from discretionary items, such as apparel and furnishings, to in-demand necessities such as groceries, transportation pivoted, too. Carriers that once had large fleets of dry trailers that would normally transport department store and big-box retail goods converted to more specialized refrigerated trucks to meet the rising demand for grocery delivery.
Whereas previously the transportation industry was staid and unlikely to invest in newer fleets, forward-thinking asset management has helped some companies capitalize on thriving segments of the economy such as grocery.
In the same vein, in order to implement forward-thinking asset management, companies have had to take stock of lending opportunities, making it increasingly important to have access to capital that could translate into taking advantage of opportunities as they arise.
This initially came with challenges as lenders – from independent equipment finance companies to large-scale banks – pulled back access to capital to more closely assess the economic situation. Truly astute and nimble equipment finance groups have been able to identify the same trends that transportation industry leaders have seen, and both provided capital and devised creative financing options to help carriers seize opportunities.
Charting a New Course for the Industry
Moving forward, taking a three-pronged approach will be vital to ensuring future success.
First, if anything has been learned from the impact of COVID-19, diversification will be key. More than ever, companies will need to ensure they are connected with clients who are positioned well for the future and ready for the long haul.
With manufacturing set to make a comeback in the U.S. as many commercial goods and pharmaceutical companies have announced their intentions to restart domestic production, along with the existing surge in perishable products that shows no signs of abating, carriers will need to take a sober look at their existing fleets and determine how best to enhance or modify their inventory to pursue growth opportunities.
With that in mind, as manufacturing makes the shift, all transportation channels will be in higher demand. There has been a marked increase in marine travel, especially using inland or brown water transport. A report from IBISWorld about ocean and coastal transportation in the U.S. cited expectation for total trade value to increase at an annualized rate of 3.3% over the five years through to 2025. As a result, industry revenue is expected to rebound, growing at an annualized rate of 2.8% to nearly $4.0 billion over the next five years.
Next, the ability to be nimble as market conditions change will be just as important to the industry as a whole. Unlike the past where companies could stay the course with resources they have, fleet status will need to be continuously evaluated and upgraded as needed to ensure long-term economic vitality.
Beyond this, business leaders will need to keep a closer look at evolving economic drivers and trends such as the recent demand for refrigerated trucks from the demand on grocery and other perishable goods.
One such trend spurred by COVID-19 has been how retail has had to pivot itself. While many big-box retailers have had to temporarily shutter or reduce customer access to physical locations, they have been thriving in the online space as ecommerce revenue streams have grown. As a direct result, their distribution channels are changing. Where once the focus was on transporting goods to brick-and-mortar locations, they have had to overwhelmingly shift to direct-to-consumer shipping.
The impact of online shopping can be seen most clearly in the struggles e-retail giant Amazon has been having to ensure prompt delivery of purchases. While its sales may have surged, its shipping delays and supply chain challenges have pushed consumers to discount department stores, including Walmart and Target resulting in growth of market share among the two retailers.
Future trends to be on the lookout for include the country relocating itself, specifically moving from more expensive urban areas to more economical suburban areas where cost of living is lower and quality of life is higher.
Finally, tapping into resources and capital will be essential to ensuring companies can maintain their upward trajectory.
As previously indicated, there has been a shift in the mindset of many lenders. They have taken a step back and realized the potential of the industry, which has resulted in renewed confidence and desire to help revitalize fleets around the country.
Having solid banking relationships is the critical third prong to ensuring that a company can seize these opportunities and quickly translate them to sales and revenues. Shrewd lenders have helped educate borrowers about the many different and flexible structures available and their potential benefit. From weighing between leases versus loans and setting longer terms on loans saving liquidity to leveraging OEM opportunities that facilitate future trade-ins and subsidizing assets, lenders are more willing than ever to help boost the revenue potential of companies in the industry.
Understanding and Avoiding Pitfalls
Two of the most significant pitfalls faced by the industry are a staunch aversion to risk and challenges related to maintaining liquidity.
While there is still significant risk aversion, by partnering with the right people and resources, much of the risk can be shared. This could include exploring opportunities to partner with groups that will take an equity stake in their fleet, determining opportunities to help manage cashflow through opportunities such as leasing or finding ways to reduce cashflow exposure.
In the same vein, as the world continues to change, carriers need to consistently be aware of capacity to avoid being stretched too thin when disruptions – both anticipated and unexpected – occur. This is why growing and diversifying fleets will be important, but within smart, strategic guardrails. This is where strong financial relationships are more important than ever to help companies remain conservative in balance sheet management to help them withstand market forces, while taking advantage of opportunities to grow in a new economy.
The Prognosis for Transportation
Looking at COVID-19’s perceived impact on the industry as the virus took hold, and comparing it to the most recent data and trends, Western Alliance Bank anticipates transportation will experience a continued significant and dynamic resurgence as other sectors of the market, including retail, grocery, pharmaceutical and energy, continue to evolve.
These shifts will provide tremendous opportunities as carriers across all transportation channels become more specialized and in greater demand. Backed by the lending community that can provide valuable resources, companies will have unprecedented opportunities to realize their growth potential now and well into the future.
The COVID-19 pandemic has forced many lenders in the equipment finance industry to pivot their strategies to the online or digital environment. This may include payment modifications, self-service capabilities and increased bandwidth for online transactions. The equipment finance industry has... read more
When I look at the growing companies in the Monitor 101+, I see clearly that the entrepreneurial spirit is thriving in the equipment finance business. The fastest growing companies in this group share one important aspect, whether they are bank-owned,... read more