Reinvestment in truck capacity to fall short of demand

An interesting question from a JOC.com reader hit my inbox this week after we published a story on trucking bankruptcies and the way they are slowly taking capacity out of U.S. trucking markets. Here’s a condensed version (the writer requested anonymity):

Q: When a trucking company goes broke, drivers and owner-operators still want to perform trucking services and at the same time demand for those truckers still remains. Therefore, I would think that those operators move to other trucking companies that are absorbing redistribution in demand. As for the trucks, those assets will be put for auction and other companies will acquire them. The question for me is if in the long run there is enough investment in trucks to maintain the same rate of growth with increased demand?

My short answer is “no,” there is not enough investment in trucks to maintain a steady growth rate in step with rising demand, despite strong Class 8 truck sales this year. On top of that, I very much doubt all of the truck drivers and rolling stock affected by the growing number of trucking bankruptcies are being “redistributed” to other carriers on a one-to-one basis.

There are a bunch of factors that lead me to this conclusion: 1) the cost of new and used trucks; 2) the age of used equipment; 3) carriers’ difficulty finding and keeping truck drivers; and 4) the willingness — or otherwise — of banks to lend to smaller trucking companies.

First, the ticket price of new and used equipment has climbed since the 2007-2009 recession, helped by federal emissions regulations that increase engine and truck costs. New Class 8 tractors can easily cost $120,000 or more, depending on their features. Used truck prices for recent models are higher than before the recession because fewer trucks were built in recent years, when freight demand was low. It’s not uncommon to hear of carriers replacing older trucks with a smaller number of new ones, bringing down the age and size of their fleets.

Carriers have an important pecuniary interest here too — as capacity tightens, they are better able to raise rates and pick freight that will give them a better return. They’re not interested in buying trucks ahead of demand — a practice that got them into trouble in past economic cycles. “We’re not building the church for Easter Sunday,” trucking executives like to say.

The age of used equipment put up for sale following bankruptcies is another issue. More and more of that equipment is older, simply because fewer trucks were produced in the recession and early years of the recovery. As that equipment ages, its use changes. Tractors that racked up 100,000+ miles in their first three to five years get less mileage as they age, according to ACT Research. “You quickly drop from 95,000 miles to 45,000 miles,” and then 20,000 or 10,000 miles as trucks are sold, resold and resold again, Kenny Vieth, president and senior analyst at ACT, told me in June. Mileage drops as trucks shift from national to regional and local service.

The older the truck, then, the less “active capacity value” it offers the shipper. Eventually they wind up rusting on a farm. At the end of 2013, the average total fleet age was 9.8 years, while the average age of “active” tractors under 15 years old is about 5.9 years, Vieth said.

A tractor must be under 15 years old to be considered “active” by ACT, which estimates there are about 2 million active U.S. Class 8 trucks and another 1.1 million “inactive” tractors. For the first time since 2007, ACT expects active capacity to rise this year, climbing 1 to 1.5 percent. But there are still a lot of 2006 and older model trucks on the road. “There’s a lot more guys driving older trucks today, because the new trucks cost so stinking much,” Vieth said.

Finding qualified drivers is probably the biggest obstacle to increasing capacity. Trucking companies of all types complain that it’s increasingly difficult to hire and keep truck drivers, and truckload carriers such as U.S. Xpress, Swift Transportation, Con-way Truckload and Transport America are raising pay and offering incentives to get more drivers behind the wheel.

However, many of the drivers at the smaller companies that are going out of business may not meet the tighter qualifications of larger carriers. And at the same time they’re crying for drivers, trucking companies are closely examining the safety records of driver candidates and considering the impact of hiring inexperienced drivers or ones with checkered accident records.

Based on recent stories it seems that lenders are getting tougher with smaller trucking companies that have amassed debt. In two recent bankruptcy cases — the liquidation of New Century Transportation in June and the reorganization and receivership of Drug Transport this month — the carriers’ primary lenders cracked down on them.

Well-run smaller carriers — of which there are many — will survive, but the next couple of years could see many marginal companies, or sloppily run companies, go belly up or sell. And because of increased operating costs, including higher costs of regulatory compliance, the barriers you have to jump to get started in the business — historically low in trucking — are being raised. Although I don’t have a ratio that indicates the actual amount of capacity lost in these bankruptcies, I believe more companies are exiting the business than entering.

Market forces are working to reduce truck capacity at worst and at best slow its growth. Probably only sustained higher economic growth over the next few years could change that.

Contact William B. Cassidy at wcassidy@joc.com and follow him on Twitter: @wbcassidy_joc.

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