Transportation Best Practices/Trends: Truckload’s fork in the road

An apt way to describe the current state of the truckload market may be something along the lines of “more of the same.” The issues we’ve been following since early in the year are still affecting truckload market conditions for shippers in late 2012: mounting regulation; rising diesel prices; the looming driver crisis; and the lingering specter of a still uncertain economic outlook.

Cautious consumers have kept demand levels relatively low, which has actually helped truckload shippers better manage capacity. While that may be a good thing in the short term, it still leaves plenty of excess truckload capacity on the sidelines. However, the costs of doing business for truckload shippers don’t appear to be going down anytime soon.

With so many challenges on both the near- and short-term horizon, Logistics Management (LM) has invited back three of the nation’s foremost truckload analysts to shed some light on the current state of the market and share what shippers should expect as we prepare for 2013. Joining LM are John Larkin, managing director of the Stifel Nicolaus Transportation & Logistics Research Group; Noel Perry, managing director and senior consultant at FTR Associates, a freight transportation forecasting and analysis firm; and Donald Broughton, managing director at Avondale Partners LLC, an investment banking and analyst firm.

Logistics Management (LM): How would you describe the overall condition of the truckload marketplace on a year-to-date basis in 2012, in terms of rates/pricing and available capacity?
Donald Broughton: No net capacity is being added. The rate of demand growth started strong but unfortunately has steadily weakened throughout the year; and as a result, we’ve had to repeatedly cut our pricing outlook. We started the year believing greater than 6 percent pricing was possible, then cut that outlook to a range of 4 percent to 6 percent, and have now dropped our pricing outlook to less than 3 percent. Anyone reporting better pricing than 3 percent is living off the increases they booked earlier in the year. 

John Larkin: Presently, we sense that a little slack has materialized in the truckload industry even though few carriers have added incremental power units and incremental trailers as Donald mentions. We have experienced three straight months of contraction [June through August], albeit modest, in the manufacturing sector. Retail demand remains respectable but not stellar.
In the meantime, rate increases are still being secured in the contract markets, but those have been trending toward the very low, single-digit range. Earlier in the year and last year, carriers were receiving mid-single digit rate increases; and we could easily return to that more robust range if carriers maintain capacity discipline, FMCSA regulations effectively further reduce capacity, and economic growth accelerates. 

Noel Perry: Conditions have been somewhat disappointing to date this year because of softer-than-expected volumes. I’m also disappointed by reports of flat or sometimes falling pricing. It appears that this is a result of market share competition as costs have been going up at the higher rate than prices. During the first half of the year, carriers covered this exposure through very tight expense control and productivity gains. That progress appears to have slowed and margins are under pressure. Capacity remains at normal levels for an upturn—meaning a modest shortage. This is well below what we expected, and then economic growth slowed and the FMCSA delayed some of their regulatory changes.

LM: Is the current market a good one for truckload shippers?
Perry: I rate the current market as neutral for shippers—adequate capacity and relatively stable pricing. This is a surprising improvement over what normally occurs in the middle of an upturn.
Larkin: Spot market pricing has dipped in the past couple of months as the economy has decelerated, so those shippers relying more heavily on the spot market are enjoying reduced costs—at least for now. Few contract shippers are asking for significant rate reductions, as they understand how tenuous the supply/demand balance is right now in the truckload marketplace. But overall, service remains good, prices are reflective of the market, and capacity is available to ensure that freight continues moving in a fluid manner. 

LM: How is Peak Season shaping up in the truckload market? Does it look like it could be a “real” peak or more “muted” as has been the case in past years?
Larkin: My sense is that we’re in for another muted peak. Retailers are watching their inventory levels intensely to ensure that they don’t over order. To them, nothing is worse than conducting a clearance sale to prepare for the next season’s merchandise. It was possible that the diversion of freight to the West Coast (to protect against the possible ILA strike affecting ports along the East and Gulf coasts) could tax intermodal capacity for some number of weeks off of the West Coast. That may have created overflow traffic and could benefit the truckload industry.

Perry: I’m actually guardedly optimistic about this Peak Season. FTR Associates’ measure of freight producing sectors is showing good growth—and we’re getting anecdotal reports of an uptick in freight, beginning in mid-September.

Broughton: Let me put it this way: When you’re supposed to meet a girl at 7 p.m. and she doesn’t show up until 7:30 p.m., she’s late. When it gets to be 10 p.m. and she still hasn’t shown up, you’ve been stood up. This is October and we still haven’t seen a fall surge. In my estimation, the U.S. economy is being stood up.

LM: How big of a factor is the current regulatory landscape 10 months into 2012, with CSA in effect and HOS changes looming?
Broughton: It has undoubtedly raised the cost of drivers because it has reduced the pool of qualified drivers. At the same time utilization has been hurt, which magnifies the negative financial pressure of driver pay increasing.

Larkin: Don is right. The regulatory landscape is a moving target. Trying to gauge the impact of the all the forthcoming FMCSA rulemakings, the various lawsuits filed, the ultimate implementation of CSA, and the ultimate HOS rules is one of the major challenges we face.

In an environment with little economic growth, the implementation of all these rules—including new potential rules regarding EOBRs, speed limiters, new drug testing procedures, and new procedures for certifying the health of drivers—will have only a modest impact on the tightening of supply and demand over the next few years. However, if the economy takes off and freight volume growth accelerates, we could see the “mother of all capacity shortages” by late 2013 and into 2014. Under the latter scenario, pricing could be the best we have witnessed since deregulation.

LM: What do you think the truckload market will look like 12 months to 18 months from now?
Perry: If the economy keeps growing and the FMCSA regulations negatively affect the market, things will be significantly tighter 12 months out. I am much less optimistic about 2014, a possible year for recession.

Broughton: While the current rate of trucking company failure is very low, a quarter or two of contraction in truck tonnage, of which there is a growing likelihood, could produce the largest number of trucks being pulled from the road in history. 

Larkin: I’m a little more optimistic. The truckload industry, with any kind of luck, will be in great shape 12 months to 18 months from now. Supply will be tight and carriers will be able to deal only with those shippers willing to productively collaborate. Freight will be ample, enabling carriers to enhance their yields by shedding imbalanced lanes, uncooperative customers, and freight carrying non-compensatory rates. 

Dedicated contracts will proliferate as shippers look to lock in capacity on driver friendly, highly repetitive lanes. Hopefully, much of the volatility will be taken out of the truckload market by then; and, of course, we will have a much better handle on natural gas powered engines by then as well. The big, well-capitalized companies will be in the best position to implement what could be a game changing engine design, further expanding their competitive advantage vis-à-vis the smaller, often financially weaker carriers.

LM: What type of impact might the outcome of the presidential election have on the truckload market?
Larkin: Most companies in the private sector have adopted a very conservative stance as they await the outcome of the election. They aren’t hiring unless they absolutely have to and aren’t investing new money in capital projects unless they absolutely must. They’ve been hoarding cash, paying down debt, and buying in their own stock
As a result, the economy seems to oscillate between 1 percent growth and 2 percent growth, which is mediocre growth at best. Right now, by the way, we appear to be at the low end of that range. If Romney wins, then I think the private sector will be reasonably certain that tax rates aren’t going up; additional regulations won’t soon be put into place; an energy self sufficiency policy will soon be implemented; and Obamacare will be partially or totally repealed. With the elimination of so much domestic uncertainty, private sector companies will start to hire and invest in long-term projects. Unemployment will decline, disposable income will rise, and more freight will have to be hauled. Given that supply and demand are roughly in balance, an acceleration in demand could create a very favorable carrier-friendly environment where shippers will be more willing than ever to exchange rate increases for capacity commitments. 

Broughton: John is correct. The trucking industry can’t afford another four years of Obama. Regulations have been dramatically expanded on the industry, adding to costs and hurting productivity. But perhaps as important, regulations have been dramatically expanded on the industry’s customers, and that has resulted in slower rates of tonnage demand growth. It’s not an accident that this administration has presided over the worst economic recovery in the post-World War II era. If Romney rolls back much of the regulation on the industry, its suppliers, and its customers, he could unleash the U.S. economy.

Perry: I have a bit of a different take. Since neither candidate has either the ideas or the courage to fundamentally address our economic issues, I see little fundamental effect from the election. It is likely that a Romney win would result in a modest reduction in the upcoming waves of regulatory changes.