2009 State of Logistics: Truckload carriers ask, "Recovery? What recovery?"
John D. Schulz, Contributing Editor -- Logistics Management, 7/1/2009
Truckload (TL) is normally viewed as the engine that drives innovation in the trucking industry. Today it’s a shrinking giant. TL carriers reduced capacity by an estimated 7 percent last year as it coped with a serious recession that has caused double-digit drops in tonnage demand. That reduction in capacity was an attempt by TL carriers to reduce their high fixed costs in an era of declining demand.
Accounting for 87 percent of all for-hire trucking revenue, the non-union TL sector has proven to be an agile provider whose strength has been the ability to align capacity and resources where shippers need them to be. So, when the current trucking downturn began in August 2006, the TL sector reacted by shedding capacity and parking trucks at what normally would be considered an alarming rate.
Over the last two years, trucking analysts estimate that 18 percent of capacity has come out of TL in an attempt to align supply and demand. This was done to help reduce overcapacity, which has resulted in bargain rates for shippers who have been able to negotiate single-digit rate decreases in their annual contract renewals.
Because of declining rates, some leading TL carriers have diversified away from pure dry van freight into other transport segments. J.B. Hunt, once the largest over-the-road truckload carrier, now gets less than 25 percent over its overall revenue from dry van freight. Instead, it has diversified into intermodal, dedicated contract services, and other options for shippers. This trend is expected to continue, especially if high diesel prices make intermodal rail more attractive to shippers.
“The big guys in truckload have fared better than the big guys in the LTL sector,” says Satish Jindel, principal of SJ Consulting. “One reason is they have taken out capacity. They are replacing their three-year-old tractors, but not adding to their fleets.”
According to trucking analyst John Larkin of Stifel Nicolaus, J.B. Hunt’s total truck count has been reduced by 36 percent over the last two full calendar years. Werner Enterprises, the nation’s fourth-largest TL carrier, shaved 14 percent of its over-the-road fleet. Covenant Transport, the nation’s 11th-largest TL carrier, took out 8 percent, including a whopping 44 percent of its owner-operators.
But even that capacity reduction may not be enough—and shippers may continue to win mid-single digit percentage rate reductions in their TL contracts for this year, analysts predict, due to a sharp decline in freight demand. The Cass Freight Shipment Index was down 25 percent in April from year-ago levels, and the American Trucking Associations’ Truck Tonnage Index for May was off 11.0 percent from year-ago levels.
Analyst Ed Wolfe of Wolfe Research produced a shipper survey conducted in mid-April that showed despite reduced inventory levels, traffic managers are pushing out inventory re-stocking further than when polled just three months earlier. Over 70 percent of shippers polled said they don’t expect to even begin restocking inventory before the second half 2009. And 34 percent said they don’t expect to begin restocking inventory until 2010.
Intermodal options have risen for cost-conscious shippers as well. While overall intermodal volumes declined 16.4 percent in the first quarter, purely domestic intermodal moves rose 4.6 percent. All this is causing some analysts to predict as much as a 3 percent to 5 percent reduction in TL rates this year, depending on lane and a shipper’s particular volume and carriers.
Still, analysts are expecting a recovery to occur in the TL sector first. “The stimulus package will begin to put more infrastructure-related freight on the road,” Jindel predicts.
But don’t look for any surge in TL capacity anytime soon. After posting a record year of more than 256,000 sales in 2006, overall Class 8 sales could be as low as 75,000 this year, according to FTR Associates, a consulting firm. If that 75,000 number is correct, analyst Larkin says that’s well below the normal replacement rate, which would aid in further capacity reductions and would certainly stem the decline in TL rates.
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