The economy is growing slowly and freight demand is down from last spring’s high mark, but orders for new trucks and trailers are exceeding all speed limits.
A significant ramp-up in demand for over-the-road equipment this fall has truck, trailer and component suppliers working overtime, extending order backlogs. Orders for new trailers hit a 33-month high in October, as dry van trailer orders more than doubled, according to vehicle market forecaster ACT Research. Total orders topped 17,000 units.
|And Class 8 tractor orders hit their second-highest level in two years in October, rising 24 percent month-to-month from September to about 18,900 units.
But that buying spree shouldn’t lull shippers into complacency about over-the-road capacity or its cost in 2011. Motor carriers are expected to retire more trucks and trailers than they buy in the next year, dropping older rigs and trailers from the equipment pool available to haul imported and domestic freight.
“We are still in a process of capacity shortfall,” said Kenny Vieth, president and partner at Columbus, Ind.-based ACT Research.
How short? ACT Research believes tractor-trailer supply will be tighter next year than it was in 2004, when a capacity crunch shifted pricing power from shippers to truckers for the first time since trucking deregulation in 1980.
“By the time we get to the middle of 2011, we see a capacity shortfall of 3 to 4 percent, which is huge,” Vieth said. “Our model suggests that in 2004 we had a 2.5 percent capacity shortfall.”
That means pressure on pricing — especially in the truckload segment — that eased in recent months is likely to return with a vengeance in 2011 and 2012.
“Truckers should have a couple of years to harvest fairly robust freight rate gains,” Vieth said. “Assuming we do have moderate economic growth, we don’t see the supply-demand equilibrium heading back toward a balance until 2013.”
What the surge in truck and trailer orders indicates is that fleet operators are getting serious about replacing older vehicles they held onto during the recession, when they extended their trade-in cycles beyond the traditional three years. The average age of a Class 8 tractor in the U.S. is now 6.7 years, Vieth said, adding the U.S. hasn’t seen a heavy-truck fleet that old since the 1980s. The oldest trucks are becoming a liability to carriers trying to maintain high on-time delivery standards and cut transit times.
“The challenge of maintaining 99 percent on-time delivery becomes incrementally more difficult with an older fleet,” Vieth said.
The surge in trucking equipment orders has been building for months, and it parallels a jump in orders at railcar suppliers and the large numbers of new ships on order. New container ship orders grew in October for the first time since July 2008.
But the increase in truck and trailer orders falls short of the level at which equipment replacement shifts to capacity expansion. October was only the second month since early 2007 that dry van net orders exceeded what ACT considers to be replacement level, indicating motor carriers are just beginning to catch up, Vieth said.
“We see below replacement retail sales continuing through the first half of 2011,” he told The Journal of Commerce. “Even then, we’ll be adding capacity at lower levels.”
That’s in part because trucking companies, stung by a steep drop in pricing and profitability over the past three years, are unlikely to expand their fleets unless new trucks contribute to their bottom lines. By keeping a tighter rein on new capacity, truckers hope to emulate the success their counterparts in the ocean shipping industry had in raising rates last year off 2009’s historic lows.
“There’s a discipline coming in that says, ‘You can’t build the church for Easter Sunday,’ ” Christopher B. Lofgren, chairman, president and CEO of Schneider National, said at last month’s Transcomp 2010 meeting and Intermodal Expo in Fort Lauderdale, Fla. Road capacity also will be restrained because buying trucks requires “a boatload of capital,” Lofgren said at the meeting.
The orders are good news for equipment makers emerging from the recession.
“Our Huntsville engine plant is operating in full production mode and shipping several hundred engines each week to our truck and bus assembly locations,” Daniel C. Ustian, chairman, president and CEO at Warrenville, Ill.-based Navistar, said in early November.
In the third quarter, Paccar raised its estimates for industrywide heavy-truck production in the U.S. this year by 10,000 trucks, to 120,000 to 130,000 Class 8s. In 2011, it expects total U.S. truck sales to increase to 160,000 to 180,000 units.
But that’s still at least 25 percent below normal replacement demand of 225,000 units, the Bellevue, Wash.-based manufacturer of Kenworth and Peterbilt trucks said.
Contact William B. Cassidy at email@example.com.