NASHVILLE, Tenn. – Is trucking rolling through another predictable cycle or do the next few years truly represent a "new beginning" for the industry?

That’s what Lana Batts and Richard Mikes of Transport Capital Partners ask in a new report that sums up the state of trucking over the last couple of years and examines where the industry is headed.

In a recap of recent market reports as well as their own 4Q Business Expectation Survey, the authors indicate that two-thirds of truckers are optimistic about the year ahead of expect volume and rate increases; average freight rates were still increasing for half the responding carriers; the mergers and acquisitions market that was constrained last year is moving to a higher level with 45 percent of the carriers indicating an interest in buying over the next 18 months.

However, even with the good news, the industry faces some very tough issues such as uncertain freight demand; tight industry capacity with a reduced tractor fleet; the effects of regulation on drivers, carriers and shippers; overall operating cost inflation such as double digit tire price increases; and fuel prices more than $3.50 per gallon.

Capacity:

It continues to tighten with bankruptcies, exporting of used equipment, and few new truck purchases, all making contributions. The reports highlights Avondale Partners‘ estimation that bankruptcies took 12 percent of gross capacity off the road while many trucking companies cut fleet size resulting in a net reduction of 15 percent.

ATA data suggests small fleet size shrunk 16 percent from its peak, while large fleets fell 13 percent.

Equipment Costs:

Annual cost increases for equipment in the last two decades has been around 7 percent per year, although most of the increases were incurred in the last decade as EPA mandated engine changes have added about $15,000 per truck coupled with poorer fuel economy and increased maintenance costs, the authors state.

"Clearly someone must pay the equipment bill as freight moves on truck assets that have to be owned by someone (obviously the brokers do not want to own while some carriers do not either preferring contractors)."

Contractors, meanwhile, have fled the industry without adequate compensation for their capital or labor. "The economic returns to capital must be there or capital will not flow to the industry long term. This was evidenced by the fleet downsizing of the last few years. Lenders who have been ‘burned’ by repossessions and bankruptcies are not likely to return without seeing solid earnings evidence."

As well, the recent upward trend in Class 8 purchases is not to expand but to replace as carriers face mounting maintenance costs and a looming driver shortage with an older fleet.

Regulatory Issues:

TCP surveys indicate 92 percent of the fleets are preparing for driver wage increases of up to 5 percent – "this is in spite of 9 percent-plus unemployment in the general economy."

CSA, specifically, has the biggest potential to remove drivers who do not meet the new guidelines. "We expect shippers will be gravitating away from marginal carriers as CSA is implemented and understood during 2011. This could take 2-5 percent of drivers off the road."

Hours of Service (HOS) regulations are less certain, but it’s been suggested that reducing driving hours from 11 to 10 coupled with other constraints "is keeping carriers scrambling."

Fleet utility could drop s much as 10 percent.

Fuel Costs:

"Rapidly rising fuel costs have an almost one-one correlation with trucking company bankruptcies," states the report.

The authors expect bankruptcies to increase, thus further driving out capacity.

"While for hire fleets have a plethora of fuel adjustment methods for dealing with rapidly rising fuel prices, they have varying degrees of success."

In essence, it is the rare carrier who can actually recover the brunt of fuel prices due to rates not based on actual miles traveled, but out of route miles and congestion, reefer fuel and day-to-day-increases."

TCP concludes that carriers are bringing these issues to the negotiating table as their pricing power increases to recoup these losses, resulting in rate increases of middle to upper single digits in the second half of 2011, plus equitable compensation for fuel.