Do the math: We are in for a trucking industry capacity crunch
January 27, 2013
January 27, 2013
While co-hosting a CITT webinar on transportation trends in late January with Cormark market analyst David Newman, the issue of trucking industry consolidation and the subsequent impact on capacity, came up, yet again.
It’s an issue key to shippers who rely on truck transportation to get their products to market, particularly if other modes don’t make for viable alternatives, for the obvious reason that tighter capacity spells upward pressure on rates.
Our annual Transportation Buying Trends Survey, conducted in partnership with CITT and CITA, shows shippers already believe that LTL and TL trucking will have the greatest pricing power amongst all modes in 2013. But so far, shippers expect increases to core pricing (excluding surcharges) in both the LTL and TL trucking sectors to be modest with about half expecting no more than a 5% increase and about a fifth expecting rates to remain flat with 2012. Fewer than 10% of shippers we surveyed expect core pricing rates to spike beyond 5%.
Motor carrier executives themselves, although wasting no opportunity at industry conferences to speak about the need for significant price increases to repair the damage to their bottom lines since the recession, predominantly expect core rate increases lower than 4%. And almost 40% of the carrier executives we surveyed actually believed rates in 2013 would be about the same as 2012.
Throw in the reality that the year-over-year increase in the fuel surcharge in 2012 was just 7%, compared to 41% the previous year, and there is hardly cause for concern among shippers about sharp pressure to ground transportation budgets. These are certainly good times for purchasers of transportation services when the mode they feel has the greatest pricing power is unlikely to push for more than a 5% rate increase.
But there are some factors at play that could change that scenario.
Pricing to a large degree is driven by the state of supply and demand and our research shows that in the minds of shippers truck capacity right now is just about where it should be. The significant overhang from the recession has been whittled away but with the Canadian and US economies still growing sluggishly there is hardly any pressure on existing capacity.
What could alter the capacity balance is trucking industry consolidation. I know, I know…I’ve been talking about that for a few years now. The question is do the major Canadian motor carriers have the will, the resources and, frankly, the guts to go for the big deals that would truly consolidate their industry? So far all they’ve been willing to tackle is bolt-on type acquisitions that are too small to present any real risk if they don’t work out. At that pace I, along with most of you reading this, will be long retired before the trucking consolidation is tight enough to be a concern.
But Cormark’s David Newman believes that the LTL side of the business, which is difficult to scale down during economic downturns, is ripe for consolidation as a way to reduce fixed cost issues. He cites Transforce’s recent stake in Vitran as an example that change may be in the air. The cover story in the Jan/Feb issue of Fleet Executive includes Newman’s comments as well as those of several other market analysts and observers regarding the likelihood of industry consolidation.
Personally, I think we could be in for a capacity squeeze even if trucking industry consolidation doesn’t catch fire.
Consider the hard numbers already staring us in the face:
Last year will go down as the third best year for Class 8 truck sales since 1999. Yet our annual report on the capacity of the nation’s Top 100 carriers (see our Jan/Feb issue) shows they are running fewer heavy duty trucks today than in 2008. Look stateside and you see the same thing but in greater measure. Large US TL carrier capacity is down 5% over the past five years and the same goes for small TL carriers, according to stats from the American Trucking Associations. US LTL carrier capacity is down 12%. The new trucks being purchased are primarily to replace aging vehicles; they are not capacity additions.
Market research also shows that the recovery in freight volumes is not being felt equally across the board. While large carriers in the US are doing better, small carriers actually experienced a 4.6% drop in freight volumes from September 2011 to August 2012. More than two years after the end of the recession and small US carriers are still seeing a drop in their business. This is going to affect their ability to finance additions to their fleet.
Consider also the purchasing decision motor carriers looking to add to their fleet face these days compared to six years ago. Back in 2006, the average sticker price for a Class 8 truck was about $95,000. The value for the 4- to 5-year old used truck the carrier would turn in was about $50,000, leaving the carrier with just $45,000 to finance. Today, that new truck costs $125,000 on average thanks to modifications necessary to meet mandated engine emissions standards. And the used truck the carrier turns in is valued at about $20,000 because carriers extended their truck replacement cycles by a couple of years during the recession. So the carrier is left with $105,000 to finance in order to purchase a new rig. Small carriers are having to turn in two and three of their used trucks to afford one new one.
When you do the math, it’s clear: We are in for a capacity crunch.
With more than 25 years of experience reporting on transportation issues, Lou is one of the more recognizable personalities in the industry. An award-winning writer well known for his insightful writing and meticulous market analysis, he is a leading authority on industry trends and statistics. All posts by Lou Smyrlis