You know the transportation market has reached an “inflection” point when a shipper picks up a trucker’s bar and restaurant tab. “I’ve not seen anything like this in my career,” a trucking executive, who requested anonymity, said after a large logistics company wined and dined his management team in June.
After three lean years, it seems truckers are no longer going to bed hungry. The surge in freight in the first half of 2010 filled container ships, intermodal trains and tractor-trailers and lifted tonnage levels, revenue and earnings across the trucking industry. Shippers accustomed to a line of trucks waiting at their gates and discounted rates suddenly couldn’t find a truck within miles unless they agreed to a price hike.
Tractor-trailers are becoming more available as the economy slows, although truckload carriers say they’re still turning away loads, in some cases hundreds a day. That has truckers looking beyond mere resuscitation toward the type of sustained profitability the railroads — their fiercest competitors — have enjoyed in the past decade.
They like the way “trucking renaissance” rolls off the tongue, even if they’re only whispering it. But they face a steep uphill grade to reach anything resembling the “rail renaissance,” the term coined by rail industry analyst Anthony Hatch that has become the byword of the railroads’ new era of financial health. To get there, however, truckers will need help from the economy and their customers, and they’ll need to fight some basic instincts when it comes to balancing price and volume, profitability and market share, as business picks up.
First, there’s still red ink to mop up from last year, and a fragile economic recovery with weak consumer confidence and an unemployment rate hovering around 10 percent. U.S. business inventories climbed 0.3 percent from May to June, reaching $1.36 trillion. After dropping to 1.23, the inventory-to-sales ratio climbed back to 1.26, indicating it is taking companies longer to work through stockpiles of supplies and goods.
“The economy is slowing, and I expect it to be slow for a while,” said Bob Costello, chief economist at the American Trucking Associations. But he’s more than cautiously optimistic. “I don’t think that’s going to throw too much of a wrench into the recovery on the bottom line for trucking fleets,” he said.
That’s because demand won’t fall as fast as capacity. “I think shippers underestimate how much capacity was taken out in the recession,” Costello said. “We had a historic drop in demand that masked a historic drop in supply.”
Estimates of how much capacity has been purged vary, but an analysis of five major public truckload carriers — Landstar System, USA Truck, Covenant Transportation, Werner Enterprises and J.B. Hunt Transport Services — shows they reduced their tractor fleets by a cumulative 17.5 percent between 2007 and 2010.
They parked some trucks, sold others and shifted some to intermodal or dedicated service. The result was fewer trucks for truckload freight.
Even in the less-than-truckload market, which needs not only trucks and drivers but also networked terminals to function, excess capacity is being absorbed as shippers break down higher-priced truckload freight into heavier LTL shipments.
That contraction is pushing up pricing. Truckload rates already are rising from the low single digits to more than 10 percent, depending on the type of freight, location and other factors. LTL rates are rising more slowly, but the increase can be tracked in higher second quarter revenue per hundredweight at trucking companies such as Old Dominion Freight Line, Saia, YRC and UPS Freight.
“If we get hit with even a muted fall freight season, I think we are going to see very tight conditions in the truckload market,” Costello said. “Supply and demand aren’t that far from equilibrium.”
If the economy strengthens in 2011, that equilibrium will tip even further toward carriers. At least one investment analyst, Jon A. Langenfeld of R.W. Baird & Co., already is predicting a “freight pricing renaissance.”
But before breaking out the champagne, truckers should remember the headlines of 2004 and 2005: “Good Times for Trans-Atlantic Carriers,” “The Party’s Over (for Shippers),” “Capacity Crunch” and “Trucking Is Fun Again.” For two or three years, business went swimmingly for carriers, from steamship companies to trucking operators — until the freight recession that foreshadowed the global recession.
For trucking, there may be no way to avoid the impact of cyclical changes in the economy.
“Trucking rates have to come up for them to make a reasonable profit, but beyond that, this is fundamentally the way the industry is,” said Gary Girotti, vice president of the transportation practice at consulting and technology firm Chainalytics. “Because the barriers to entry are low, no one can get away from the cyclical model. The railroads can charge well beyond their cost, the truckers just can’t get to that. I don’t know how you prevent the next cycle except by behaving differently.”
Changing behavior, some observers say, is the key to long-term prosperity. Despite the cyclical nature of the business, trucking executives and industry consultants believe a true renaissance in profitability is possible for companies willing to change how they manage their businesses.
However, a new dawn in trucking economics will look quite different from the rail renaissance, as different as a Class 8 tractor and a locomotive. Sustained profitability will only be won carrier-by-carrier, customer-by-customer and pallet-by-pallet. It will be driven by changes in management at individual companies rather than an industrywide shakeout.
Market conditions may be the catalyst, but it will take a real shift in what David Congdon calls corporate culture to usher in a trucking renaissance. “I believe this industry, speaking for LTL and truckload carriers, too, can be profitable and can sustain profitability,” the president and CEO of Old Dominion Freight Line said. “It just takes disciplined management to do it.”
More often than not, that discipline has been in short supply in trucking, mainly because the industry is so large and fragmented. “The reason there is a rail renaissance is that the government allowed the rails to merge to the point where there’s an oligopoly,” Girotti said.
There are seven Class I railroads in North America. In contrast, more than 500,000 trucking enterprises are registered with the U.S. Department of Transportation. The vast majority are small businesses operating fewer than 20 trucks.
It’s also true a relatively small number of companies control a large share of trucking’s revenue. In the LTL sector, the top 25 carriers account for 87.5 percent of the total LTL market, according to SJ Consulting Group.
The top 50 LTL carriers accounted for 98.5 percent of LTL revenue last year.
Even with that market concentration, trucking companies won’t be able to control capacity and pricing with the ease of the Class I railroads. “Trucking’s renaissance will not be on a par with the rail renaissance in the next five years,” said Satish Jindel, president of the Pittsburgh-based transportation research firm.
“The railroads are gaining business from someone else — the trucker. The trucking guys don’t have that kind of conversion opportunity. They can manage their capacity, but they can’t count on volume, unless the economy grows at a faster rate.”
Typically, truckers “convert” freight from other truckers, as happened last year when Con-way Freight and FedEx Freight discounted rates and pulled market share from YRC Worldwide. It’s also been the case in boom markets, such as the 2004-05 recovery, when truckers, as one observer said, “get fat and greedy.”
One look at LTL truckers’ operating ratios — operating expenses as a percentage of revenue — compared with those of the railroads bears that out. While the best truckload and LTL companies have improved their ORs to the mid- to high-80s, railroads consistently run in the low- to mid-70s and often in the 60s.
“We’ve usually destroyed ourselves by buying more trucks and flooding the market” as demand rises, said Patrick E. Quinn, co-chairman of truckload carrier U.S. Xpress Enterprises. That’s less likely to happen this time around. “The way things are aligning, it looks as if capacity is going to be constrained, and as long as capacity is constrained, we’re going to have some leverage,” he said.
Those constraints may remain in place for several years, he said. The rising cost of equipment and labor is placing an external cap on trucking capacity, Quinn and other industry officials said, raising the barriers to entry and expansion just as demand returns. A new Class 8 tractor can cost well over $100,000, and that price is likely to rise because of tighter emissions standards. Used trucks are available and cheaper, but they’re beginning to command higher prices, and once the current generation of used trucks rolls to the junkyard, there will be fewer later models to replace them because of the economic downturn.
ACT Research, a market analyst for the commercial vehicle industry, expects truck orders this year to rise 26 percent over 2009 — one of the worst years in the industry’s history — but the vast majority of those trucks will replace older rigs that should have been traded during the recession. “I don’t know of any major companies that are looking to go out there and expand their fleet,” Quinn said.
That’s a major change from the recovery period in the last economic cycle, according to the ATA’s Costello. “Carriers aren’t speculatively buying trucks, not only because they shouldn’t, but because they can’t,” he said. “They’re going to wait until they get the freight. Also, it’s harder to get credit. To buy a new truck, they’ve got to take out a loan that’s twice as high as they had to have three or four years ago.”
And then there’s the driver. Tens of thousands of truckers were laid off or lost their jobs when businesses folded last year, and the surviving carriers can’t hire them fast enough. “We’re still short the drivers we need today with unemployment at 9.5 percent,” Quinn said. “What happens when construction comes back?”
The DOT’s Comprehensive Safety Analysis 2010, a major initiative aimed at advancing the enforcement of truck and driver safety regulations, is likely to make it difficult for some drivers to stay in trucking. Motor carriers will have to pay more to find and keep qualified drivers, Quinn said.
“We’ve given them better equipment and we’re getting them home more often,” he said. “I don’t know what we can do but pay them more for the difficult job that they do.”
Can trucking find sustainable profit in the face of such higher operating costs? “It had better,” said William T. Hupp, chief operating officer and executive vice president at Estes Express Lines, a privately owned LTL carrier. “The way it’s going now, there are a lot of companies that are not able to reinvest in themselves.”
Estes is known for the type of disciplined management that allowed the company to expand in the recession. It has cut hours and days from transit times linking hundreds of markets in the past year, purchased terminals and increased direct shipments between more distant areas. It’s been rewarded with more business.
Like ODFL’s Congdon, Hupp believes the road to sustained profitability is one each carrier must travel alone. “There’s nothing the industry can do collaboratively,” he said. “You’ve just got to manage your business and make sure you’re bringing value to your customer and that he’s willing to pay for it. If you’re not, you need to be reasonable in your approach with them and find ways to do that. Even though it’s painful, you’ve got to have the discipline to do that, or you’re fooling yourself.”
Hupp sees progress in the recent financial reports and statements of many competitors. “Carriers are very focused on managing yield, much more so than they have been in the past,” he said. “They’ve seen what happens when you don’t do that.”
Of course, it’s easier to make better long-term decisions when “you’re not in crisis management,” Hupp said. “The industry as a whole will get better at it, and maybe we’ll call it the trucking renaissance one day.”
Contact William B. Cassidy at firstname.lastname@example.org.