Squeeze ahead
Recession hangover, new regulations could bring capacity shortfall, higher trucking rates.
By Chris Dupin
Despite widespread unemployment and surplus trucks, truck capacity is reported to be tightening, and there is concern the squeeze may continue if the economic recovery continues and because of new, tougher safety regulation.
'It varies by region and type of truck, but on the van side, in certain regions of the country, shippers are reporting it is still tight,' said Wayne Johnson, chairman of the highway transportation committee of the National Industrial Transportation League, the nation's largest shipper group. 'I won't say they are having a real rough time, but they are having a little bit of difficulty.'
'Shippers increasingly have exhibited concern about the supply/demand imbalance as their ability to secure adequate capacity has become more difficult,' said Kirk Thompson, president and chief executive officer of J.B. Hunt, based in Lowell, Ark.
Commenting in July as J.B. Hunt reported its second quarter earnings, Thompson said, 'Demand for transportation services has increased fairly dramatically as we have emerged from a multiyear freight recession. Scarcity of capacity in intermodal, truckload and brokerage markets was quite pronounced in the current quarter.'
Johnson, director of logistics for the American Gypsum Co. in Dallas, noted in an interview in late July that there are some differences between markets for van and flatbed transport. He estimated that from Jan. 1 to late July, van transport prices increased 4 percent to 8 percent, while flatbed trucking was up 6 percent to 12 percent.
He said it was likely that van capacity would tighten from August to October because of peak season demand for trucking, and then loosen up after October. Reports seem to indicate capacity is most tight in the Southeast, Northeast, the Chicago area and the West Coast, he added.
At the same time flatbed trucks were still plentiful, but he predicted capacity would likely tighten in the fall, first as fruits and vegetables are harvested, and then as truckers divert flatbeds into the seasonal Christmas tree trade. Demand for flatbeds was depressed this summer both because of the slowdown in housing construction, and because some companies in the construction business did purchasing earlier in the year to avoid rising prices, he said.
Industry analysts attribute the tight supply in part to the improving economy. The American Tucking Associations' (ATA) seasonally adjusted truck tonnage index fell from a high of about 117.2 in February 2008 to as low as 100.9 in January 2009, but then climbed back up to 110.3 in April 2010 (The index is pegged at 100 for the average in 2000).
'When we speak with most of the asset owners in the transportation industry, they are finding their capacity is in very strong demand right now,' said Anthony P. Gallo, managing director of transportation and logistics research for Wells Fargo Securities. 'That ranges from intermodal companies to truckload companies to shipping companies as well.
'In fact, J.B. Hunt mentioned to us that some of their customers are looking for capacity commitments well past the expected peak season shipping season,' he said. 'That's because some shippers saw shortages earlier this year as well as this summer.'
In addition, 'if you step back from what is happening right now, the truckload industry has had at least three difficult years in a row, and during that time we saw a lot of capacity come out of the market. Now with a modest, or a bit-more-than-modest, improvement in the demand outlook, and little capacity coming back into the market, we are seeing tightness across the board.'
Gallo believes the tightest capacity is in the flatbed and refrigerated truck market, which are dominated by small independent owners that were particularly hard hit by the recession. He said the capacity crunch in the dry van market seems to be most severe in the West.
'During the recession we had an unprecedented drop in demand, but what it masked was an unprecedented, but lesser, drop in supply,' said Bob Costello, an economist at the ATA. 'There was still plenty of supply out there for the demand that was there. But then demand comes back, supply doesn't go up, and things get a lot tighter.'
That was partly a result of companies going out of business, he said. 'But the bigger impact was from companies that were surviving, but shrinking. From peak to trough, we saw the tractor count of those carriers that were surviving fall 14 percent. Demand based on the number of loads hauled fell 24 percent. So you can see why at the bottom there were still plenty of trucks to meet demand. But now demand is up 8.5 to 9 percent and now you start making up that 10-percent gap.'
Noel Perry, a partner at FTR Associates and founder of Transportation Fundamentals, noted that 2010 has seen 'an unusually healthy recovery for freight because it is so manufacturing-driven and export-driven ' that's a good thing for the industry, but it puts more pressure on capacity.'
'Freight has picked up, and that has taken underutilized assets and put them back to work,' agreed Steve Tam, a vice president at Americas Commercial Transportation Research (ACT). 'There are not many excess trucks out there and that has happened rather rapidly.'
'We continue to believe that more of the improvement in the freight market over the last six months can be attributed to a decreasing supply of truck capacity rather than rising demand,' said Omaha-based trucking company Werner Enterprises, as it reported its second quarter earnings in July. 'However both factors are helping the freight market improve.'
Werner added that 'inventory restocking also appeared to improve demand in recent months, particularly with many of our large retail customers. Our brokerage data suggests that carrier failures have begun to slow in recent weeks due to an improving freight market. However, we believe that many carriers are aging their fleets due to the rising cost of new trucks and inadequate rates.
'The challenges of complying with increased government regulations and a lack of available equipment financing are proving difficult for smaller, private carriers,' Werner said.
FTR Associates' Perry said, 'In any upturn the fleet tends to lag behind the increase in freight. It's just human nature, nobody wants to over-hire after being stung. Rates and the downturn were so bad, companies cut not only capacity more than normal they cut their management, and their white-collar infrastructure.'
Driver Shortage. Analysts say trucking companies are limited in their ability to hire drivers because they have cut their recruitment and personnel staffs.
Perry estimated the trucking industry needs to hire about 600,000 drivers annually, probably 500,000 this year because of the depressed economy. 'It takes a lot of work to make those hires,' he said, noting the trucking industry employs about 3.3 million, so turnover is extremely high.
'Going forward the driver supply is very much an area of concern because it will be a brake on how quickly supply can come forward,' Costello said.
'Getting that recruiting pipeline restarted is causing a short-term capacity crunch,' Tam said. 'One camp points to the fact that we have 8 million to 10 million people out of work, and some of those people sitting in the unemployment pool are prime candidates for trucking jobs ' to get back behind the wheel of a truck or behind the wheel for the first time.'
'Employment in trucking fell significantly more than for the macro economy,' Costello said. 'Those drivers did not go away, so you might ask: Where are they? Fleets have different opinions about this. Some believe drivers will stay on unemployment as long as they can; particularly because mileage was down so much there was not much of a difference between what a driver could make on unemployment and working during the recession. Some may have found jobs and may be working less, but they are home every night.'
Costello said drivers will return to the industry, but 'the underlying issues for the driver shortage did not go away and it may be snapping back faster than I would have thought.'
'We do not believe there is any such thing as a driver shortage,' said Joe Rajkovacz, regulatory affairs director for the Owner Operator Independent Drivers Association. 'That poppycock, that Kool-Aid is stunning in its hubris.'
Rajkovacz said as recently as 2007, when he was a member of a Department of Transportation commercial driver license taskforce with the mission of improving security, there were about 50,000 new people applying for commercial driver licenses every month. He believes businesses seeking to promote the idea of a driver shortage are doing so to gain support for allowing foreign nationals to become truck drivers in the United States.
'The naysayers who say we are going to have a shortage say that is not a very good pool to pull from, we need qualified drivers now,' Tam said.
However, Tam believes the driver shortage is a short-term problem and that it should not be thought of as a 'driver shortage ' it is a driver pay shortage. If you were willing to pay more for the drivers you want, you would have no trouble finding workers.'
CSA. Comprehensive Safety Analysis 2010 (CSA 2010), a Federal Motor Carrier Safety Administration (FMCSA) effort that aims to reduce trucking crashes, fatalities and injuries, will make finding drivers more challenging, Tam said.
CSA will use data from inspections and crash reports to evaluate drivers and carriers, requiring trucking companies to develop safety improvement plans, and will hand out warnings, fines or even orders to shut down to companies with poor safety records.
'CSA 2010 or 2011 (Tam uses the 2011 date as a hedge, because he and others think implementation may be delayed past November into next year as problems with the regulation are worked out) is going to dictate that you just can't put any Tom, Dick or Harry behind the wheel of a truck. You are going to have to be more selective as to who is a driver.'
He also thinks that as the economy picks up, competition for workers will increase.
Perry said driver supply will also be affected by new 'hours of service' that limit the maximum time a driver can work each week.
And he said a Department of Homeland Security requirement making states demand proof of immigration status for any driver license is expected to have an impact, 'since something like 5 percent of drivers are not legal.
'These factors will double the shortage of drivers that is appearing because of the improvement in the recovery in the freight market,' he said.
However, he allows that it may be harder to fill long-haul trucking jobs because of 'softer side quality-of-life issues.'
Tam said many companies want to reduce their involvement in hauls of more than 500 miles, which may make driving more attractive to some workers.
Some companies also report that finding independent owner-operators is more difficult than in the past, Gallo said. 'The small independent operator has taken a lot of pain in recent years.'
Aging Fleet. In addition to issues related to driver supply, the trucking fleet is aging.
From 2004 to 2006, the number of Class 8 trucks manufactured in the United States grew from 216,000 in 2004 to 296,000 in 2006. Those numbers dropped to 134,000 in 2007, 132,000 in 2008, and 94,000 in 2009. Volumes will rebound to 108,000 this year and will reach 180,000 according to projections by ACT Research.
ACT's national model shows fleets nationally have an average age of 6.6 years, implying a trade cycle of 13 years. That's 'a very old fleet and that is not a sustainable situation,' Tam said.
At some top-ranked, full-truckload carriers, average truck age is 3.5 years, implying a seven-year trade in cycle. But Tam explained some of these companies don't want to hold onto equipment longer than that since a seven-year-old truck can have 500,000 to 600,000 miles.
Of course, truck age is less important for some companies, he said. Drayage firms moving cargo over a short distance can afford to take bigger risks, since if a truck breaks down, it is relatively easy to dispatch another tractor to pick up the load and a tow truck to bring the disabled truck back to a garage. Ditto for truckers serving growers of Brussels sprouts in the California's Central Valley. They operate 'in a rust-free environment so you see some really cool classic trucks,' he added.
While many trucks were parked during the recession, relatively few were scrapped. From 2006 to 2008, Perry said a record number of trucks were exported, but it never exceeded 20,000 per year. He said there are 200,000 to 300,000 surplus used Class 8 trucks.
'It is probably that as the market comes back, a disproportionate growth will come out of used trucks rather than new,' he said.
Base Load, 'Random.' Perry said truck freight can be looked at as having two big segments:
' Base load cargo that moves everyday in predictable ways and tends to be handled by dedicated contracts.
' 'Random route freight' that moves different directions, at different times and in varying volumes.
Base load freight tends to moved by private or asset-based fleets, he said, while 'random route' freight is handled by brokers.
In the late 1990s and early 2000s Perry explained, 'the spread of price between those two segments became very narrow, and the random route stuff is much more expensive to handle and historically there was a premium on it. For a number of reasons, the premium became very low. People began to lose money on it so there was pretty significant exodus in capacity during the downturn.'
Gallo of Wells Fargo concurs, saying a number of large carriers made strategic reductions in capacity because they were finding they could 'not earn adequate returns in the random over-the-road, truckload business. So companies like J.B. Hunt and Werner Enterprises and a few others have really reduced capacity over the years.'
'After these three difficult years there's a fairly dramatic change in the psychology of some of these business owners and CEOs, where putting capital back into these businesses where the returns are just now beginning to return. I think they would rather see the returns improve and show some more sustainability before they put more money into the business,' he said.
Many of the public companies that are taking a cautious approach to investing in trucking are debt-free, he added. Smaller companies that have to rely on financing may be even more cautious about investing in trucking, he said.
What does this mean to shippers?
'The random route capacity is the one that is most dependent on swing capacity and expands most rapidly in upturns,' Perry said. 'So what we have is a tighter shortage in the random route segment than in the base load segment and an increase in spread between the prices for those two segments.'
So if a shipper is looking for surge capacity, it is possible it will have to pay a premium for it.
'If the economy keeps going the fall peak will see some pretty high premiums, and there is a little bit of evidence that shippers believe that because intermodal and imported containers are up quite a bit,' Perry said. That 'suggests retailers are shipping early in hopes of avoiding that shortage or high prices.'
Gallo said shippers may want to approach their trucking companies about longer term deals. 'Carriers, too, are very tired of this broad variability in their business, and are interested in longer term deals, either through an outright dedicated contract or longer term understandings.'
