In my presentations to several transportation industry groups this summer I floated the idea that we may actually be just an economic uptick away from another serious capacity crunch in the trucking sector and a return to upward pressure on rates – perhaps as early as the next few months.
Based on the perplexed looks I received from many of the shipper and carrier professionals listening to me I could tell they thought I had finally succeeded in tanning my body as well as my brain during my summer holidays.
How could I be talking about a return to the strong upward pressure on rates we experienced from the third quarter of 2003 up to about the first quarter of 2006, when motor carriers right now are scrambling to stay alive, accepting significantly lower rates in many cases just to maintain cash flow?
Some threw the annual statistics our own Transportation Media Research churns out right back at me: Have I not been pointing out for the past year that shippers see both the TL and LTL market to be in excess capacity? Have I not been saying that the number of shippers paying out rate increases above 4% (exclusive of the fuel surcharge) has been getting smaller and smaller since 2006? Did I not in the past note that when shippers switch from truck to rail the main reason is concern over pricing?
Yes, yes, and yes. (And I must admit I’m impressed by those of you able to retain all these statistics). But there really is a reason to my “madness” and it is tied to the catharsis the motor carrier industry is currently undergoing.
The American Trucking Association reported that there were 935 trucking company failures in the first quarter of 2008, a 142.9% increase over last year. These carriers, operated approximately 42,000 power units representing about 2% of that country’s total capacity. To place that in a Canadian perspective, it’s the equivalent of pretty well wiping out the entire British Columbia trucking industry. Then on May 20, 2008, Jevic Transportation closed its doors, representing the largest failure of an LTL carrier since the departure of Consolidated Freightways in 2003.
Canadian motor carrier bankruptcy figures aren’t as up to date as is the case in the US, but the last time we went through a similar downturn in the late 90s, the trucking industry shed one quarter of its small carriers. Of particular concern should be that government figures show that since 2007 motor carrier revenues have been on a consistent decline while their costs have not been keeping a similar pace. That’s a recipe for financial disaster, particularly for asset-heavy carriers caught with too high debt loads thanks to aggressive acquisition strategies. Al’s Cartage was the biggest name to go under this year and garnered the most attention. It wouldn’t surprise me if a few more familiar names joined the ranks of the departed this year but it’s just as important to keep an eye on lower-profile small carriers exiting the market; their contribution to capacity, although not what it once was, is still important.
After 2005, the tight capacity in the motor carrier sector was loosened to a significant degree by the pre-buy (trucking companies moving up their equipment buying cycle so they could purchase trucks prior to the 2007 deadline for new emissions standards that added up to $10,000 to the price of an engine). They will likely do so again to deal with the next emissions standards deadline of 2010.
But there simply isn’t much time to put a pre-buy strategy in place this time around (the trucks must be purchased in 2009) and, more importantly, there aren’t as many Class 8 trucks up for replacement. If we assume a 7-year average life cycle (many US analysts use a 9-year cycle but we prefer a 7-year cycle to take into account the punishment heavier weights and longer travelling distances inflicts on the Canadian fleet) there are only 18,361 trucks up for renewal in 2009. Even if up to a third of motor carriers were to opt for the pre-buy strategy (as they did during the two previous pre-buys this decade), investing in new iron that would pull 2010 and 2011 purchases into next year, the base number of Class 8 trucks due for replacement is just too low to envision Class 8 truck capacity being increased by 35,000 to 39,000 new rigs as was the case for 2006 and 2007.
In short, there are enough significant factors limiting supply that soon as demand perks up we’ll feel an instant impact on truck transportation pricing.