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Why we’re close to another capacity crunch — really!

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.

Lou Smyrlis

Lou Smyrlis

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.
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4 Comments » for Why we’re close to another capacity crunch — really!
  1. mike desmarais says:

    how does a guy like mark santos even have had a licence, seriously? we need to take a good look at medical conditions people have and stop these individuals from driving. seriously, my dad is diabetic and he’s had a couple close calls to hurting others, having reactions while driving due to his plain ignorance to eat sweets when he feels or thinks he is experiencing low blood sugar and simply if u say well maybe they can’t feel it coming on, well, why do these diabetics have drivers priveledges? one time he was so whacked he low sided his motorcycle at a t intersection, like, he never hit the brakes for he stop sign till he ran outa road… and to think they give A licences to people like this?

  2. Henry Van Ramshorst says:

    I’m sorry, but I have to disagree with Mike Desmarais. If an individual has a condition that he is maintaining well, he/she should be allowed to continue with driving, no mater what age. If he/she is involved in and incident such as Mikes father, then their license should be suspended until they get a new medical clearance certificate from a MTO DESIGNATED DOCTOR(We all can tell stories of how easy it is to get a doctors clearance if you go to the right one and pay the required fee).
    Same goes for driving violations. If you have too many points acumulated you get an interview, or lose you driving privelege. Why are we trying to reinvent the wheel? Don’t prejudge professional drivers because of their health or age unless it becomes a problem, just enforce the regulations as they are. Responsible profession drivers are extremely valuable and are retiring at an alarming rate, let’s not push them out prematurely.

  3. Mikey says:

    Well Mr. Ramshorst, it’s hard to believe that most Canadian Provinces will aalow a type 1 diabetic to hold an AZ licence while the U.S. DOT will not. It only makes sense to keep diabetics – all of them – from possessing and AZ licence. When a insulin reaction starts to take effect the individual starts to become euphoric and dismiss his developing condition. Usually choosing to ignore warning signs that could lead to a loss of consiousness. I know. Iève seen it first hand not to mention the other effects diabetes has on the body such as poor vision, kidney failure, really. A truck driving job is not where ANY of these people should be. It is simply impossible to 100 percent of the time maintain a type 1 diabetic condition to the point where that individual can be trusted behind the wheel of a big truck!!! Seriously it is not safe – thats like saying someone who has only 2 or 3 seizures a year should still be allowed to drive – come on.

  4. Henry Van Ramshorst says:

    I understand what you are saying, Mikey. I was not suggesting to keep people behind the wheel that could lose control at any time, these people shouldn’t even drive cars. However, I believe Mr. Desmarais is referring to all conditions, including age, which is also what I am referring to. If a “MTO DESIGNATED DOCTOR” says no, then so be it, no mater what the condition. Most people don’t even know they have a condition until somthing happens. Then when they see a doctor, if the doctor follows procedure properly, their license gets suspended. I’m saying that if you want to get your professional license back, you would then have to go through an “MTO DESIGNATED DOCTOR” to get reinstated. We have the systems already in place to deal with these things. We don’t need to reinvent the wheel, just improve on it and enforce them. Again, I say, don’t prejudge professional drivers because of their health or age unless it becomes a problem, they are extremely valuable.

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