Truckload Roundtable: Keeping it on the Road
As the price of doing business escalates for truckload carriers, will shippers get the service they require to help stage their own rebound? Our panel of industry experts tell us that it's not just about risk and reward anymore, it's about survival.
By Patrick Burnson, Executive Editor -- Logistics Management, 3/1/2009
With the surface transport landscape littered with scores of bankrupt motor carriers, many analysts are suggesting that the truckload (TL) business is about as bad as it's going to get. In trying to determine what may lay in wait for TL shippers over the course of 2009, Logistics Management convened a roundtable comprising four of the industry's top thought leaders to shed some light on the gloomy situation.
Our esteemed panel consists of John Larkin, managing director of the transportation and logistics group of Stifel, Nicolaus & Company, Inc.; Eric Starks, president of FTR Associates, a major consultancy for the freight transportation industry; FTR's managing director Noel Perry, an economist and transport specialist who held senior research positions with Schnieider National and CSX; and Steven Neiman, principal with the Tioga Group, Inc., a multidisciplinary transportation and logistics consulting firm.
While there was no consensus on how deep the current economic downturn will go, the panel generated some very compelling conclusions and begged a few questions that may not be answered for some time to come.
LM: Is there a way to summarize the current state of the truckload market in a single sentence for U.S. shippers?
John Larkin: It's going to take me more than one sentence, but basically the truckload market is in a depression. The credit crisis has pushed the banking system to the precipice and, in turn, has caused deep drops in manufacturing activity and personal consumption. Meanwhile, shippers have begun to reengineer their products, packaging schemes, and supply chains with a keen eye on permanently reducing transportation requirements.
Noel Perry: I have to agree with John. But if you want one sentence, let's just say the trucking industry is in the worst recession of our working lives.
Steve Neiman: And this is occurring at a faster and deeper rate of decline in the for-hire truckload industry in my memory. Worse yet, the bottom is not yet in sight.
Eric Starks: Let me add that the combination of low, or no freight demand and growing excess capacity means rates for many TL carriers are static or even declining.
LM: Let's attempt to put this into perspective: Where can shippers expect to see freight volumes heading the rest of this year?
Starks: The heavy declines of the fourth quarter will continue for the first half of this year, especially for carriers of durable goods. After that, the fall off will be more muted.
Larkin: I'll add that freight volumes will remain perilously weak at least through the first half of the year and perhaps longer. We will have to work through an inventory glut before we see any improvement.
LM: Can anyone offer some numbers to describe volume decline?
Perry: Shippers can expect significant reductions, say from 3 to 5 percent, between now and July with basically flat conditions the rest of the year.
Nieman: Those are good numbers, Noel, but we feel that each shipper has to speak to its own volume projections. There are some indicators of what might occur that might stem the downward trend, and then there's the historical fact that all prior downward trends have eventually flattened out and then started to rise in volume.
LM: With that in mind, where will we see capacity heading?
Nieman: Carriers will continue to shrink capacity as fast as they can individually until demand starts to increase.
Perry: I'll try to put a date on that. Capacity utilization will fall until late summer at which point significant capacity reductions will catch up to the demand and stabilize utilization and prices.
Larkin: Well, Steve and Noel are right on. I would simply add that capacity will continue to decline as big fleets continue to downsize their exposure to the truckload market, as long as small fleets fail, and owner-operators either park their trucks or have their trucks repossessed. We might see a few large carriers exit, but that is a function of the creditor's or the bankruptcy judge's willingness to allow certain companies to continue operating.
LM: Where do you project we're going to see company failure rates heading?
Perry: Failure rates will resume their acceleration through March and will increase until early summer.
Starks: But don't forget the impact of fuel. Recent declines in fuel costs have allowed some of the weaker carriers to avoid failure so far, but a continued rough freight market will bring about more, especially for smaller carriers and independent operators. We expect to see a large spike as we move through 2009 similar to, or exceeding, the one that we saw in mid-2000. It is likely to remain elevated through the majority of the year.
Nieman: I would add that the future rate depends significantly on the future prices for diesel fuel. If prices stay low, the number of failures will not spike as it did recently. Instead, the cause will not be fuel costs as much as continuing negative cash flows.
LM: Anyone want to venture a guess as to when company failures may spike?
Larkin: Company failure rates should spike in the first half of 2009 as freight volumes are incredibly weak. But fuel prices, by definition, cannot continue to favorably fall so dramatically. As a consequence, shippers will look to reduce their exposure to financially troubled carriers.
LM: What are the characteristics of a TL carrier that will survive this storm?
Neiman: The for-hire TL carrier that will most likely survive the current difficulties is solidly profitable even in current times, has significant positive cash flow, does not allow its shippers to extend payment terms, has a solid balance sheet, has a variable cost structure that allows it to shrink rapidly, gets a lesser fraction of its business through intermediaries, and says "no" to high pressure tactics from customers and brokers that resort to such.
Starks: And these tend to be larger carriers that generally have better resources to withstand tough economic times. But remember, good management never goes out of style. Those who are aligned with discount retailers and other stable-demand sectors are looking to be much healthier.
LM: Any way to predict when the uptick in TL freight might begin?
Perry: History tells us that it will begin in earnest early in 2010.
Larkin: Well, given that this is the biggest freight downturn in all of our professional lifetimes, we are navigating uncharted waters, so to speak. So none of us knows how long this will last. If someone held a gun to my head and asked me when freight would begin to show positive year-over-year comparisons, I would point them to the fourth quarter of 2009.
Nieman: I honestly can't predict. There are some economic indicators to watch such as factory orders, overtime, and the purchasing manager index; but even the reporting of that data can lag. The best indicator is for the carrier to be on sufficiently good terms with its customers that the customers are reporting the status of future orders to its carriers in an attempt to have the carrier ready to respond.
LM: When it does pick up will there be enough TL capacity to get the U.S. moving?
Perry: No way!
Larkin: In fact, the period following the freight rebound will make 2004 and 2005 look mediocre—for the carriers that is—by comparison.
Starks: When demand finally turns the corner and gets hot, then we could see a historical capacity shortage that supersedes what we saw back in 2004. Much will depend on how long this downturn lasts. The longer the downturn the worse it will be.
Nieman: Traditionally carriers have been good at adding capacity when business gets stronger. However, the situation in the next two to three years is not going to be as favorable as it previously was. Many carrier management teams have learned the benefits that accrue by keeping capacity tight and they will strive to do so.
LM: Will the move from truck to rail persist, or was this something done out of necessity?
Nieman: Diversion from long haul for-hire truck—only in specific lanes—to rail intermodal has been occurring for some years and I believe it will continue. It will accelerate as fuel prices increase as they did in mid-2008. Savvy shippers and carriers tend to favor rail intermodal when the conditions surrounding the shipment requirements are favorable.
Starks: Well, I believe the move from truck to rail was a fundamental shift but one that has recently paused given the freight slowdown. The fuel cost advantage of moving trailers onto rails has declined and the move from over-the-road to over-the-rails has stopped. The huge level of idled truck capacity will make it difficult to move more freight onto the rails; and eventually, more containers and trailers will again move onto rails, but not until an economic recovery.
Larkin: I'll add that the move from truck to rail will continue as shippers implement their sustainability plans and reduce their carbon footprints. However, in the grand scheme of things, that will not reduce the opportunity for success for truckers as rail intermodal only serves long-haul, high-density lanes anchored on either end by big cities and highly automated intermodal ramps. The vast preponderance of traffic lanes are still truck only traffic lanes. This is the key point that so many seem to miss.
LM: We now have a new President with a mandate for "change." What impact will the new administration have on the TL market?
Perry: I say very little, if at all.
Starks: We don't anticipate any noticeable impact to the market. However, most government programs take a year or more to have any effect on the economy and freight demand. The expected stimulus plan could have significant impact on those carriers that are in the heavy-haul construction business, but this remains a relatively small part of the total freight market.
Larkin: I disagree with Noel and Eric. We feel the new administration is likely to be relatively anti-truck. Look for stricter security, safety, and environmental regulations, regardless of cost and impact to our global competitiveness. Security, safety, and the environment seem to be sacrosanct in Washington. Look for policy that endeavors to shift traffic from truck to rail as rail is viewed as the energy efficient, environmentally-friendly mode that will partially bail us out of our inability to generate adequate financing for highway infrastructure investments.
Nieman: Well, I think it depends on how the economic stimulus package is framed. Just because an action creates demand for freight service, that does not make it the preferable or the most successful plan to implement with TL.
LM: Finally, gentlemen, what advice would you give to TL shippers in light of what you just shared?
Starks: The economic turmoil is not yet over and will keep freight demand weak for some time. But, this can be a significant opportunity for shippers to reevaluate whom they do business with and to look for significant cost savings.
Larkin: Align with the core carriers that you believe will survive a protracted downturn. Be kind to them with respect to rates now and they will be there for you in two to three years when we are experiencing what could be the mother of all capacity shortages.
Perry: Pretty simple, really. I would say to be conservative in 2009, but develop your recovery plans now.
Nieman: We all seem to be on the same page with this question. When times are difficult, as they are now and will be for the foreseeable future, good rapport with preferred carriers should be rewarded with good long-term relationships.
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