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First 2011 truck forecast: tighter capacity coming as equipment shortages, driver restraints worsen


November 16, 2010

A confluence of positive economic events is causing trucking industry officials and economists to predict tighter trucking capacity perhaps as soon as the second quarter of 2011, experts are saying.
 
The effects will be most noticeable in the $290 billion truckload sector, which has more severe capacity restraints on drivers and equipment than the $26.5 billion LTL sector, which still has overcapacity stemming from the last recession.
 
A shortage of as many as 300,000 drivers out of the total driver pool of 3 million truck drivers in all categories is possible, experts are predicting.
 
The next two years will be very strong for trucking pricing and shippers are being warned to lock in capacity now through longer-length contracts, experts are predicting.
 
“If history repeats itself, we will have two very good years in 2011 and 2012. Having a bad quarter does not mean no recovery,” says Noel Perry, an economist with Transportation Research Consulting Group, and a former executive with Schneider National and other transport companies.  “We’re going to have a much better profitable period than we thought.”
 
Recently, American Trucking Associations Chief Economist Bob Costello told a gathering of trucking executives in Phoenix that the industry is “on the cusp of some of the best years in trucking’s history.”
 
First, some history. Prior to this recession, the previous downturn of 2001-2001 was followed by a four-year period (2002-2006) when most trucking companies enjoyed some of the strongest pricing power they’ve had since deregulation in 1980. The collapse of $3 billion LTL giant Consolidated Freightways in 2002 triggered it, industry executives say.
 
Some of those same executives are quietly hoping the next two or three years will be a very strong period for truckload pricing. There see evidence pointing to spot equipment shortages as drivers become scarcer due to increased regulatory emphasis on unsafe truck drivers.
 
Perry is forecasting 3 percent growth in Gross Domestic Product for 2011. But because major truckload carriers such as Schneider National, Werner Enterprises, J.B. Hunt and others have cut over-the-road capacity by as much as 12 to 15 percent during the recession, Perry said there is no way these carriers can ramp up with enough trucks and drivers by the time the economy kicks in gear in mid-2011.
 
“We’re going to have a big shortage in drivers,” Perry says. Perry spoke at the recent annual meeting of the North American Transportation Employee Relations Association (NATERA).
 
The huge surplus in truckload that began in 2009 is going to disappear fast. Perry is predicting a shortage of some 200,000 units in truckload capacity next year as the freight economy improves.
 
“The reason the economy sucks right now is that the service economy is not good right now,” Perry said. “But the big story for freight is goods part of the economy is growing.”
 
Truck tonnage is growing about twice the rate of the overall economic growth. But the slow growth in housing will continue to affect the freight industry. Some leading economists believe the housing industry will not fully recover until 2012, or until some 3 million housing units are removed from the nation’s housing inventory. Housing amounts to about 15 percent of the U.S. economy.
 
In 2004, the peak of the last great time in trucking, the industry was about 150,000 short of drivers. Next year, there might be a shortage of as many as 100,000 drivers—or more. Changes in hours of service as well as the new Comprehensive Safety Analysis (CSA) as well as the continued crackdown on illegal aliens, and there could be as many as 300,000 drivers pulled out of the current truck driver labor pool by 2012.

“The pain will be at least twice as much as it was in 2012,” Perry predicted.
 
A combination of inadequate investment by carriers on drivers—Schneider National even closed its driving school during the most recent downtown—and a crackdown on unsafe truck drivers along with the fledgling economic recovery will cause trucking rates to rise as capacity tightens, Perry predicted.
 
“Human beings like stability—but what we’re getting is instability,” Perry says. “People have to manage through the cycle—not just for the peak but for the entire recovery.”
 
This is going to affect traditional shipper behavior. Shippers are expected to ask for longer-length contracts to lock in capacity longer as the truck capacity situation worsens, Perry said.

Satish Jindel, a principal with Pittsburgh-based SJ Consulting and a longtime industry analyst, said he believes contract rates might improve 5-to-7 percent next year. But he noted that carriers because fleets will have to spend more for drivers, fuel and equipment, carriers’ actual yields may improve only 3-to-4 percent.
 
“If demand in 2011 is as sustained as in 2010, those numbers are good. If demand goes up, then rates will go up further,” Jindel predicted.
 
But Jindel is not convinced truckload rates could rise as much as 10 percent next year, as longtime trucking analyst Jason Seidl of Dahlman Rose recently predicted in a note to investors.
 
“Somebody has to wake up to reality that truckload shippers have a competitive substitution called intermodal,” Jindel said. “If the truckload guys raise the rates too much, shippers are going to go to intermodal.”
 
That might be the case for shipments traveling more than 600 miles where intermodal is competitive with truckload on some lanes. But for shipments in the 300-to-400-mile range, truckload’s service is able to justify the higher rates, shippers and carriers say.
 
In LTL, there is overcapacity in fixed network in certain networks, Jindel said. But in available network there is not much overcapacity. “If the LTL sector maintains the level of discipline in pricing it has shown in the last 3-to-6 months, they can help themselves maintain price increases and improve their operating ratio.”
 
Jindel noted that except for Old Dominion Freight Line’s 89 operating ratio in the third quarter (and 90.8 OR for the first nine months of 2010), most other publicly held reporting LTL carriers are still reporting operating ratios in the mid-to-high 90s in the third quarter—usually the most profitable period for trucking companies.
 
“That is pathetic,” Jindel told LM. “Everybody should be in high 80s or low 90s in this environment.”

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