Too Many Trucks, Too Little Freight

The economic recession is opening new cracks in the road for the trucking industry — and thousands of tractors and trailers are falling through.
 

As they roll into the second half of 2009, trucking companies are shedding excess capacity any way they can — selling, parking or scrapping trucks and trailers. Many smaller companies are simply shutting down, dropping equipment into an already glutted used truck and trailer market, pushing bargain-basement prices even lower and making it more difficult for other companies to sell their vehicles.
 

And trucking companies are still towing too many empty trailers, with too many trucks chasing too little freight at prices that are too low, many say, to sustain their businesses over the long haul.
 

That, even though many major truckload carriers started parking trucks at a more rapid pace in the second quarter, bringing to 760,000 the number of usable tractors that are idle in a domestic fleet of more than 3.1 million, according to FTR Associates, an Indiana-based research and consulting firm. Because the industry typically has up to 300,000 trucks ready for service but parked as a buffer in operations, FTR President Eric Starks said, that means trucking companies have pulled some 450,000 trucks from the road as excess equipment in a downturn that began for the trucking industry in late 2006.
 

About 4.8 percent of the nation’s active fleet was idled in the first half of 2009, Starks said, the first time in the last three recessions the overall truck fleet in the United States has declined. But the moves to idle trucks have not come as quickly as demand has dropped, sending rates down sharply. FTR estimates rates for publicly traded carriers declined 3 to 4 percent in the second quarter from the first quarter. “We believe it’s closer to 10 to 15 percent down for some people,” Starks said. “Shippers are pushing back pretty hard on the rates, which is what you would expect them to do when there is excess capacity.”
 

Although some leading economic indicators finally point toward a recovery, it’s hard to see it from the seat of a truck cab. “There’s no visible catalyst in the marketplace to change where we’re at right now,” said Max Fuller, co-chairman of U.S. Xpress Enterprises, a $1.8 billion truckload operator in Chattanooga, Tenn. “We’re assuming the world’s not going to change a lot in the next six to nine months.”
 

“There’s still a lot of capacity, and on a daily basis we have to renegotiate rates with customers to retain their business,” said Wayne Spain, chief operating officer at Averitt Express, a $970 million less-than-truckload and truckload operator in Cookeville, Tenn. “Some people are aggressively shrinking their fleets, but it really isn’t enough.”
 

Some companies are finally reporting slight month-to-month increases in freight demand, inspiring hope that this year’s peak shipping season won’t resemble a sinkhole. But the American Trucking Associations’ Freight Tonnage Index in June fell 13.6 percent from the year before, and 2.4 percent from May.
 

Gary Girotti, vice president of the transportation practice at Atlanta-based transportation consultant Chainalytics said the point where capacity and demand reach some measure of balance may not co seco“We surveyed 65 of the largest truckload shippers in America — they account for about $12 billion in transportation spend — and their consensus was capacity will be in balance sometime around (next) June,” Girotti said. After that, as the economy heats up and freight demand rises, “capacity will be really tight by December 2010,” he said.
 

Until then, shippers will enjoy the lowest rates in decades for truckload and less-than-truckload service. “It’s still raining bid packages,” said Jeffrey Tucker, CEO of third-party truck brokerage and freight management firm Tucker Co. Worldwide.  “Folks are still busy trying to lock in these low rates. It’s a regular occurrence.”
 

Truckload rates are so low in some cases that shippers are consolidating loads and switching from already low-priced LTL carriers to truckload operators.
 

“We are seeing an uptick in activity, revenue-generating activity,” Tucker said. “We’re months ahead of last year’s pace in finding and signing on new customers. But anytime you see a lot of change, whether it’s a surplus of capacity or a shortage, it helps us.”
 

The advantage enjoyed by non-asset companies in this market was clear in the second-quarter results of C.H. Robinson Worldwide, which saw its net profit rise 2 percent despite a 17 percent drop in revenue to $1.9 billion. Its brokered truck division, which handles truckload and LTL freight, saw a 5.6 percent improvement in net revenue despite a 5 percent decline in truckload freight volume.
 

Trucking companies are making operational changes, too, as they struggle to survive this recession that may set new standards for performance in the recovery.
 

“We’ve tried to rethink our whole business model from top to bottom to look for any waste,” Fuller said. First, “we’ve taken the business that we’re not making a margin on any more and cut that out. We’re not going to haul it on a loss,” he said.
 

U.S. Xpress also shut down facilities, laid off more than 600 workers and cut several hundred vehicles from the five trucking fleets it operates, he said.
 

Lowell, Ark.-based J.B. Hunt Transport Services, a $3.7 billion company in 2008, sliced 599 trucks from its truckload fleet and 429 units from its dedicated carriage division in the second quarter. The result was still a9 percent decline in revenue per loaded mile, a rough estimate of the impact of pricing.
 

Werner Enterprises, a $1.9 billion carrier, cut its truckload fleet 10 percent year-over-year and reduced its length of haul 16 percent to rein in costs.
 

USA Truck, which had $519 million in  revenue last year, cut its fleet 8.4 percent in the first half of the year, reducing it to 2,325 trucks. It also shortened its length of haul as it shifts its business away from long-haul and toward regional truckload freight.
 

The trucking industry hasn’t lost this much capacity since the Teamsters union went on strike against major LTL carriers in 1994, Chainalytic’s Girotti said. “Truckload carriers are taking out capacity as quickly as they can,” he said. “There are a lot of small carriers that have exited the market.”
 

“We have a tremendous amount of idle capacity from bankruptcies or trucks being parked,” said Lana Batts, a managing partner with Transport Capital Partners. She said 35 percent of the truckload carriers surveyed by her firm in the second quarter said they were parking trucks. That capacity may be idle, but it’s ready to be put back in service when needed. “Very little of it will be scrapped or sold overseas,” she said.
 

FTR Associates estimated some 38,000 trucks were scrapped in the first half of 2009, but the pace actually has slowed from 22,000 trucks scrapped in the first three months of the year to 16,000 in the second quarter. “You’re probably not going to see much scrappage until commodity prices increase and you see more of an incentive for the owners to junk their trucks,” Starks said.
 

More than 3,000 trucking companies shut down last year, according to Avondale Partners. However, larger carriers picked up their freight without adding equipment, Girotti said.
 

That may explain why the slicing and dicing that reportedly eliminated 20 percent of the truckload industry’s capacity seems to have had so little effect in the marketplace.
 

“We’re not seeing any tightening up of capacity,” Tucker said. “You hear about the largest publicly traded or private companies cutting back on capacity, but this industry is just so big I don’t know that it has an impact on the smaller and midsize carriers.”
 

Some say larger carriers are playing chicken, waiting to see who would make the first, and deepest, cuts before reducing their own capacity.
 

“Most people haven’t been as aggressive as Hunt in taking capacity out,” said Scott Arves, president and CEO of Transport America, a truckload carrier and logistics company in Eagan, Mich. “Nobody wants to take capacity out at the same rate that freight’s down, which is something like 15 to 20 percent,” he said.
 

And no matter how fast or frantic the cutting, shipping demand is shrinking as fast if not faster than the number of trucks and trailers available to haul it. Most estimates place the drop in freight demand over the past year at 25 percent or higher, and trucking executives aren’t expecting a turnaround in 2009.
 

“We really don’t see any significant changes in the second half of the year,” said Averitt’s Spain. “I just don’t see the business coming back. Business is not terrible, but it’s just not good,” he said. “We don’t see a lot of changes, and our customers tell us the same thing. Their customers aren’t making (purchasing) decisions.”
 

In fact, trucking companies are making some of the same decisions to work through inventory that shippers are making. And if any transport operator can reduce capacity, it should be a truckload carrier. “It’s very easy — don’t order new trucks,” said Satish Jindel, a principal with Pittsburgh-based SJ Consulting. “Let the average age of your tractors go up.”
 

Ward’s Auto last month said heavy truck sales were down 33.4 percent year-over-year in the first half of 2009. FTR estimates production of Class 8 trucks this year will decline 47 percent from last year and said production next year, while improving, will remain 30 percent behind the 2008 levels.
 

Starks said companies idled 90,000 tractors in the first quarter and another 60,000 in the second quarter, even as they saw rates decline in the first half of the year and shippers use their market leverage to lock in lower rates in the second half of the year. “It will take a substantial improvement in freight demand to soak up the current significant fleet equipment surplus,” Starks said.
 

That may not happen until 2011, he estimates, and trucking companies then will start bringing the idled equipment into play.
 

“About two years out, there could be some pretty sizable rate increases,” U.S. Xpress’s Fuller said. 

Contact William B. Cassidy at wcassidy@joc.com.