Quarterly Transportation Market Update: Trucking: The Long, Flat, Slow Recovery Begins
Surviving truckers are starting to see a “steady flow” of freight returning to their trucks. Overcapacity and the “laws of the jungle” are still factors, but carrier executives say shippers may soon be facing tightening space in some geographic regions
By John D. Schulz, Contributing Editor -- Logistics Management, 8/1/2009
After a three-year bout with the toughest economic conditions in the trucking industry in more than 30 years, truckers say that they're starting to see some uptick in freight demand. Whether it's merely a normal seasonal uptick in volume or the start of a long-awaited return to fairly robust freight levels is currently “Topic A” among trucking executives and analysts.
Whatever it is, the surviving carriers say that they're glad to see freight slowly returning to their trucks—even at modest tonnage levels.
The forecasting group FTR Associates recently reported that it believes motor carrier demand hit a three-year bottom in January of this year and has now started to pick up. But carrier executives aren't exactly breaking out the champagne just yet. FTR says the recovery in demand will be “U-shaped not V-shaped,” and at this stage the industry is currently bouncing along the bottom of that U. In other words, we're not going to see a quick burst of buying that a “V-shaped” demand curve would represent.
Rather, this “U-shaped” demand graph indicates sluggish demand in geographic areas such as the Central States and upper Midwest that were ravaged by the decline in the U.S. auto industry. FTR says that this “sluggishness” might last long enough to shake out one or two of the large national players in both the truckload and less-than-truckload sectors.
Trucking's fate is essentially tied to the overall health of the U.S. economy. Paul Ashworth, U.S. specialist for Capital Economics, a London-based macroeconomic research firm, recently told the Washington Post that while the U.S. has enjoyed “some improvement, we're still nowhere near a meaningful recovery, or even a slight recovery.”
Noel Perry, managing director and senior consultant for Nashville, Ind.-based FTR, is predicting the worst of the recession is past and trucking will be bouncing along the bottom for a while. FTR is forecasting the economy will stabilize in the third quarter, followed by a moderate recovery in 2010 with GDP growth estimated to rise 2.7 percent next year.
But FTR is forecasting that such an improvement in GDP doesn't mean a notable improvement in freight. Moreover, Perry says that there will be continued trucking company profitability issues, along with overcapacity.
Surprise, surprise, surprise
Nearly every other lengthy downturn has caused the failure of one or two “mega-carriers.” Not this time, to the surprise of some analysts.
On the truckload side, the most vulnerable would appear to be Phoenix-based Swift Transportation, a $3.2 billion privately held carrier that is the third-largest TL carrier in the U.S. Swift has been struggling for years but has maintained operations largely because of the personal wealth of founder Jerry Moyes, whose fortune includes ownership of the NHL Phoenix Coyotes—which recently skated into U.S. bankruptcy court.
On the LTL side, the carrier on the shakiest financial ground is YRC Worldwide, the $8.9 billion carrier that has lost approximately $1.9 billion in the last nine quarters. YRC has renegotiated its debt, sold assets, cut geographic coverage, closed terminals—and still may not be profitable. Analysts John Larkin and David Ross of Stifel Nicolaus recently advised investors that “YRC's fate lies in the hands of managers of the Teamster pension funds, YRC's bank group, YRC's shippers, and potential buyers of the company's real estate holdings.”
Some rival carrier executives have expressed surprise at the leniency of YRC's lenders. “The unusual thing we have seen is the willingness of lenders to keep some carriers afloat,” says Douglas W. Stotlar, president and CEO of Con-way Inc., parent of the nation's third-largest LTL carrier. “The laws of the jungle are not applying.”
At least for now, YRC's customers have largely stuck with the carrier due to its aggressive discounting. That's according to both YRC executives, rival carriers, and shippers who for now are enjoying a price war for their LTL freight.
In general, this is a great time to be a buyer of trucking services. Rates have barely nudged the past couple of years, and many shippers have been able to negotiate real declines in contractual TL rates of 3 to 5 percent the past year, with slightly smaller rate cuts in the LTL sector. Spot market trucking rates continue to plummet with bargains as much as 20 percent less than year-ago levels, some shippers say.
“It's a tough economic environment,” says Douglas G. Duncan, president and CEO of FedEx Freight (FEF), the nation's second-largest LTL carrier after YRC. “Clearly there is overcapacity. Anytime there is overcapacity in any industry, pricing is a factor. Trucking is no different.”
What's the survival plan?
Leading motor carrier executives are preparing for what they see as a “steady flow” of freight returning to their trucks. While all carriers want as much freight as possible on all their trucks, trucking's leaders say a slow return to normalcy is actually not that bad.
“As I travel around and talk with people, I sense we have bottomed out and that the supply chain is emptying itself out,” says Charles “Shorty” Whittington, president of Indiana-based Grammer Industries and chairman of the American Trucking Associations (ATA). “We're starting to see a steady flow and a trickle effect from that demand. I don't think we're going to see demand levels roar back. But I sense we're starting a period of steady pull.”
In some sectors and regions, it's better than steady. Refrigerated transport, somewhat restrained by capacity, has been one of the first sectors to report strong demand. Freight in and out of Texas, for example, has been able to garner higher rates than freight moving in and out of, say, the upper Midwest.
Nevertheless, shippers are proving to be tough customers as they try to lock in rates that reflect overcapacity in some areas. Con-way's Stotlar estimates the current overcapacity to be as much as 15 to 20 percent in both the TL and LTL markets, reflective of what he calls “anemic” freight demand levels.
“Rates reflect that environment,” says Stotlar. “If we get new business, it's usually price driven. Same thing if we lose an account. Everything revolves around a price negotiation.”
Stotlar says he can't blame his customers. He's doing the same thing with his vendors, as Con-way tries to lock in discounts at that end.
There are signs, however, that industry overcapacity is shrinking. Class 8 truck sales, which peaked at 265,000 in 2006, are expected to be less than half that this year. A recent analysis by R.L. Polk showed new registrations for Class 3 through 8 trucks were the lowest since November 1991. By way of comparison, those November 1991 figures were the lowest since Polk began compiling new commercial vehicle registration data in 1985. That means that April of 2009 registrations were the second-lowest month for combined Class 3-8 trucks in the past 24 years, and down 52.1 percent from April 2008 levels. Class 8 truck registrations decline by 50.4 percent from April 2008 with Class 6 truck registrations showing the sharpest yearly decline, off a whopping 71.8 percent.
The West showed the largest dropoff in new truck registrations, off 56.8 percent, according to the Polk data. That was followed by the Northeast and the Central States, with the South showing the strongest sales—but still off 48.2 percent from year-ago levels.
“We're not adding any capacity, and none of our competitors are either,” says Con-way's Stotlar, who traditionally has operated one of the best-run fleets in the country. He estimated that Con-way currently has about 7 percent of its LTL fleet parked in a reflection of that “anemic freight demand.” Despite the tough economic times, some LTL and TL carriers are shifting strategies to take advantage. On the TL side, giant J.B. Hunt has diversified, getting only about 25 percent of its revenue now from purely dry van truckload freight. Instead, it has branched out into intermodal, dedicated contract and brokerage services to try and even out demand from the notorious boom-and-bust cycles of pure TL freight.
On the LTL side, Pittsburgh-based Pitt Ohio Express has been a leader in trying to offer a broader range of services to shippers. Along with five other U.S. and Canadian LTL carriers, Pitt Ohio formed the “Reliance Network” to offer longer-haul services. The two-year-old service is now garnering in excess of $1 billion in revenue, according to Pitt Ohio's president Chuck Hammel. “It's really been a bright spot for us and our customers,” Hammel says. “It's the type of service that customers are asking for.”
Others are forging ahead as well. FedEx Freight, despite a 27.6 percent tonnage in its quarter ended in May, nonetheless is pushing out more initiatives and services designed for its fast-cycle logistics customers.
“This will pass,” Duncan says confidently. “We're still focused on the business four or five years from now and trying to be in the best position to serve our customers. Whatever cycle we're in now, and clearly there is overcapacity in the market, that doesn't stop us from trying to assist our customers in what they're trying to do in the long term.”
On the truckload side, dry truckload carriers have downsized. Schneider, Swift, and J.B. Hunt all have increased their intermodal service offerings. Some are increasing their regional TL offerings, such as national-regional innovator Knight Transportation, based in Phoenix. Asset-light models such as Landstar and Greatwide Logistics (now run by former Overnite Transportation chief Leo Suggs) will continue to gain, analysts say. Others with heavy Mexico operations such as Celadon and Swift may fare well if the auto-related manufacturers goes south of the border.
Down the road…
Bill Graves has been part of a trucking family since the 1930s when he father owned Graves Trucking in Kansas. Now president and CEO of the American Trucking Associations, the former Kansas governor talks to hundreds of trucking executives every week, and is cautiously optimistic about the rest of the year and 2010.
“Most of our members are still optimistic about some positive growth in the last quarter of this year,” says Graves. “Now 'positive' doesn't mean 'significant.' But we are trending in the right direction.”
Graves said most trucking fleets are being “rather cautious” in their expansion plans for two reasons. They are concerned about capital expenditure costs and want to reduce the overcapacity in the industry. Should the economy rebound in a meaningful way next year, that supply/demand curve could swing the carriers' way for the first time since mid-2006. “Having freight and tight capacity is not a bad thing for the trucking industry,” Graves says with a smile.
Patrick E. Quinn, president and co-chairman of U.S. Xpress Enterprises, parent of the nation's fifth-largest TL carrier, said he's already seeing “quite strong” growth in some geographic regions such as the Southeast and Southwest. The Midwest, especially freight associated with the depressed auto sector, conversely still has much overcapacity.
“It's modestly beginning to change,” says Quinn. “There still is a lot of pressure on rates; but when you have an imbalance in demand that can affect rates.”
Quinn is concerned about two external factors that could derail trucking's recovery. One is the rise in crude oil prices, which have translated into $3 per gallon diesel in early summer. The other is a rise in interest rates, which could dampen businesses' expansion plans. “Those two things could kill whatever nascent recovery we are seeing,” Quinn says. “I thought we learned our lessons about fuel use last year, but maybe not.”
Again, oil speculation is causing concern to many in the industry as it slows growth. It also has the effect of being an unwanted national tax that takes away from consumer spending. Then there are pending worries over tax increases and inflationary issues as a result of President Obama's $787 billion economic stimulus.
Analysts are estimating 15 percent of capacity has exited the truckload market since the freight recession began in mid-2006. Some of that is not returning. Werner Enterprises, the fourth-largest TL carrier, indicated recently it would like to continue shrinking its dry van truckload to merely one-third of revenue with the remainder being dedicated and intermodal services.
For shippers, the time to act is now. Analysts and carrier executives both say the current real reduction in freight rates year-over-year will not last, especially if diesel continues to rise. “I think we are entering a period of stabilization, rather than recovery,” says Rosalyn Wilson, author of the annual State of Logistics report from the Council of Supply Chain Management Professionals (CSCMP). “We will not return to pre-recession levels until probably late 2010.”
While Wilson is predicting that freight volumes will begin to rise consistently in the fourth quarter of 2010, some carriers “will find it difficult to raise rates.” In other words, a long, flat, slow recovery.
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