Quarterly Freight Transportation Market Update: Truckload’s volatile nature
June 01, 2013
The truckload (TL) business is volatile by nature. Freight demand levels spike and fall with customer demand as well as the normal cyclicality and seasonality of business—and carriers have certainly come to understand these natural occurrences.
However, the past three years have been more volatile than normal. Coming out of the 2008-2009 recession in which many TL carriers idled thousands of trucks, the sector has slowly rebuilt its capacity to basically where it was six years ago. But where it goes from here is almost anyone’s guess. Price increases in the truckload market were relatively subdued during 2012. In 2013 there is a wide range of theories on where pricing is headed—from nearly flat to double-digit gains.
Richard Mikes, managing partner for Transport Capital Partners (TCP), a firm that closely tracks trends in the TL market, says that 2013 has been “a very unusual year” with many false starts to a full economic recovery. “Truck tonnage has been up and down,” he says. “March was up 9 percent year over year. But first-quarter tonnage is only up 3.9 percent year over year.”
TCP’s survey of TL carriers showed that rates continue to be stuck in neutral. Seventy-seven percent of carriers report that freight rates have remained the same over the last three months. However, larger carriers (those over $25 million revenue) seem to be faring better than smaller carriers. Some of those under $25 million-a-year carriers are actually reporting slightly falling year-over-year rates on some lanes. “The numbers show that the pressure is clearly on the smaller carriers,” Mikes adds.
Large carrier executives agree. Mark Rourke, president of transportation services for Schneider National, the nation’s second-largest TL company, says “caution” is the byword of the times. “The shipper and carrier communities are fairly cautious and conservative—nobody is planning on this year being much different than what we saw in 2012,” says Rourke. “There are still concerns over the economy, and the carriers coming out of the 2009 recession are more cautious in using the assets they have. There is now a focus on margins rather than growth.”
Rourke then ticked off some areas where TL carriers’ costs are rising—health care, regulatory impacts, equipment, emissions controls. “That’s a heck of a lot of costs,” he says. “You have to think about returns before you think about growth.”
And while carriers are focusing on those elements affecting their returns, let’s focus on three areas that TL carriers say will make an impact on their ongoing relations with shippers—capacity, regulations, and fuel.
Capacity at equilibrium, costs are not
When you speak to TL executives, the word you hear to describe the current supply-demand situation is “equilibrium”—meaning there are just about as many trucks right now for the volume of TL freight tendered.
“It’s still unpredictable,” says Saul Gonzalez, president of Con-way Truckload, a $559 million unit of Con-way Inc. Gonzalez noted the first quarter was solid although was impacted to some extent by the weather. The traditional surge in spring shipments was delayed because of the cold weather and extended rains that hit most of the Midwest and East.
“We’re starting to see a more normal seasonal uptick as retailers begin to stock spring goods, but it’s late and there’s still a lot of unpredictability,” Gonzalez says. “Customers are cautiously optimistic.”
Except for a few 50-truck to 100-truck operators, few fleets are actually adding much over-the-road equipment. Class 8 truck sales, while robust and projected to hit roughly 260,000 units this year, are nearly entirely being bought for replacement vehicles as carriers are eager to modernize their fleets—but not expand them.
“With perhaps one or two exceptions, and maybe a regional player adding trucks, carriers are being cautious and conservative,” says Rourke. “On any given day, supply-demand is pretty close to equilibrium—it’s choppy, but overall it’s close to balanced.”
John White, executive vice president of sales and marketing for U.S. Xpress, the nation’s fifth-largest TL carrier, says that there has been a somewhat prolonged period of equilibrium for the TL sector. “The overall tonnage continues to grow, but at a fairly muted rate, up 3.9 percent for the first three months year-over-year, according to American Trucking Associations’ figures. But on the global economic side, we’re just bumping along. There’s not a ton of robust news that says we’re getting into a capacity crunch.”
While that may be good news for shippers, that’s offset by sharply rising carrier costs for everything from equipment, drivers, fuel, insurance, and borrowing costs. “Some lesser financially stable carriers are finding that the financing costs are significantly more to buy a truck than in the past,” says White. “Some carriers have had to trade in two to buy one.”
That might indicate capacity constraints are coming back; but on the other hand, there’s not a ton of capacity exiting the market place. With that in mind, truck fleet size appears adequate heading into the peak-shipping season.
“Capacity has basically been at equilibrium for the past 12 to 18 months,” says John Steele, executive vice president and CFO of Werner Enterprises.
But Steele says this overall balance contains inherent challenges. Seasonal volume spikes, product surges, and unplanned product demand continue to challenge shippers to find the necessary capacity when it’s needed.
“So while overall supply and demand remain somewhat in check, imbalances occur frequently,” Steele explains.
However, that doesn’t mean there aren’t challenges out there. “We could see tightening the second half of the year,” White warns. “But right now we don’t see it or feel it. We don’t see any markets where capacity is constrained. Usually, we see a spring surge and more demand—we’re seeing a little bit, but it’s muted compared to what we saw the last two or three years.”
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