The U.S. economy marked a milestone in June: the beginning of a fifth straight year of recovery as measured by growth in gross domestic product. Don’t worry, you didn’t miss the ticker-tape parade. With GDP increasing 1.1 percent and 1.7 percent in the first and second quarters of 2013, no one’s in much of a mood to celebrate.
Trucking companies, along with consumer demand for the goods they transport, are still miles short of a full recovery from the 2008-09 recession. In the second quarter, the 10 largest publicly owned truckload carriers increased revenue less than 1 percent year-over-year to slightly more than $3.4 billion in combined sales.
Their LTL counterparts did markedly better, with the 10 largest public LTL companies boosting sales 5.3 percent to a combined $6.1 billion in the second quarter.
When it comes to recovery from a disastrous 2009, however, the LTL sector is still catching up with truckload operators. In 2012, the 25 largest U.S. and Canadian LTL carriers were about $870 million short of the $29.7 billion in combined revenue they enjoyed in 2008, according to SJ Consulting Group.
Muted freight shipping demand in the first half of 2013 dampened carrier hopes for a rebound in the last six months of the year, though didn’t entirely dash them. But those hopes aren’t as high as they were at the end of 2012 or the start of 2013.
In recent months, trucking executives have described the economy as “doggone flat,” “just limping along” and, putting the best possible face on it, “good, but not great.”
Those with modest expectations for expansion in the second half may not be disappointed. “I don’t see a lot of pent-up demand for trucking,” Eric Starks, president of FTR Associates, said in a Journal of Commerce webcast last month. Starks doesn’t foresee a big intermodal rail surge during the traditional peak season, either. “It will be a bump, but not a towering peak,” Jess Dankert, director of supply chain at the Retail Industry Leaders Association, said in the webcast.
Changing retail shipping patterns mean more imports and freight demand in the spring and a muted fall peak, according to analysts and carrier representatives. “Spring is the new fall, at least for the larger truckload motor carriers,” said John White, executive vice president of U.S. Xpress Enterprises, the nation’s fifth-largest truckload carrier.
Higher spring demand showed up in a 6.5 percent year-over-year increase in trucking volumes in May and a 5.9 percent increase in June, according to the American Trucking Associations. Spot market truckload demand increased in July from June for the first time since 1996, according to load-matching service DAT. “Heavy freight, like autos and energy production, is growing faster than lighter freight, which is pushing truck tonnage up,” ATA Chief Economist Bob Costello said.
But has the slow pace of the economic recovery and its accompanying uncertainty truly been detrimental for trucking? There’s an argument to be made that trucking is more profitable and stable today as an industry than it might be if the trajectory of the 2010-13 expansion was more like that following the downturn that ended in 2003.
In the first decade of the 21st century, trucking companies of all types pursued a “bigger-is-better” policy, ramping up capacity to rapidly build revenue and grab market share. The Great Recession and Not-So-Great Recovery have altered carrier behavior, at least for the time being, shifting the focus of management from gaining market share to protecting the bottom line, putting sustainable profits ahead of topline growth. And that’s a good thing for carriers and shippers alike.
Profitability is the core of a nascent “Trucking Renaissance” that may be defined as the pursuit by motor carriers of healthier net income sustainable over economic cycles, through boom and bust. Think that’s impossible? Carriers such as Old Dominion Freight Line and Swift Transportation are doing it now.
Pricing is just one of the factors driving trucking toward its version of the “Rail Renaissance,” a term coined more than a decade ago by analyst Tony Hatch. Although motor carriers are quick to say they need higher rates to provide a satisfactory return on investment as labor and capital costs rise, disciplined cost management is the key to achieving sustainable profitability.
A more profitable base of trucking companies that could deliver a more stable supply of capacity would be a boon to shippers, even at a higher price.
Shippers with sharp memories will recall the truck capacity crunch and pricing increases of 2004 and 2005, when annual GDP increased 3.8 and 3.4 percent, according to the U.S. Bureau of Economic Analysis. Since 2009, by comparison, GDP has grown at an average pace of 2.2 percent, the BEA says.
Although rumors of a pending capacity shortage or “crunch” have worried shippers since early 2010, slower-than-expected economic growth have kept truck supply and demand fairly well balanced, despite the occasional quarterly spike.
Industry analysts still sound capacity warnings, but after four years without a crunch, shippers might be excused for comparing them to Aesop’s “The Boy Who Cried Wolf.” The threat of a capacity shortage and steep rate hikes, however, is real. The Journal of Commerce Truckload Capacity Index for the second quarter shows actual tractor counts at large truckload carriers 19 percent lower than in 2006.
The question is how much additional GDP growth would it take to constrict truck capacity enough to send pricing up sharply? Perhaps not much. There’s no doubt shippers could compensate by shifting freight to other modes, particularly intermodal rail, and turning to non-asset brokers and logistics companies to gain more access to tractor-trailers offered by smaller trucking companies.
“We see shippers moving more into the 3PL space and into brokerage,” Shelley Simpson, president of the Integrated Capacity Solutions division of J.B. Hunt Transport Services, said at the NASSTRAC Shippers Conference in April. “I haven’t met a shipper yet who hasn’t told me their costs need to be reduced, and I haven’t met a transportation provider who hasn’t told me their costs are going up.”
Even so, those shippers eventually would hit capacity walls and face higher transportation costs, unless they find other ways to mitigate those increases. “When we talk about costs going up for carriers and budgets being cut for shippers, we have to do things differently,” Simpson said. “We have to think about optimization, we have to look inside the supply chain, and we have to look at transportation from a more strategic view, versus bidding on an annual basis.”
Shippers and carriers should act on Simpson’s advice now, rather than waiting to see whether the U.S. economy really picks up in late 2013 or next year. Those last to the table looking for truck capacity may have to make due with crumbs.