Spotlight: Trucking Trends

February 3, 2009

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With consumer spending so low and credit so tight, leveled-off gas prices offer little respite for trucking fleets, truck makers and truck-part manufacturers.

Fuel costs account for nearly 40 percent of the total operational costs of trucking, according to the American Transportation Research Institute's Analysis of the Operational Costs of Trucking. Yet even with the massive dip in oil prices, trucking is expected to remain under pressure in 2009 as volume orders drop and the credit market remains unstable.

"Around half of the rating outlooks for North American trucking ... are negative or CreditWatch negative, compared with about one-third for the transportation sector overall," Standard & Poor's Rating Services says (via Seeking Alpha).

Truck transportation is one of the first sectors to slow as orders for goods and shipments dry up during economic downturns, the Bureau of Labor Statistics notes. Representing nearly 70 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods, the trucking industry accounts for the bulk of freight transportation, the American Trucking Associations (ATA) says (via Logistics Management).

Given the lack of consumer and industrial spending, logistics consultancy FTR Associates predicts that freight demand may not increase until 2010, FleetOwner magazine reports.

Since publishing its North American Commercial Truck and Trailer Outlook for 2009, FTR has revised its forecast to reflect a more negative year ahead. Comparing this year with the 1982 recession, FTR envisioned tonnage would fall by 10 percent, causing trucking margins and equipment purchases to decline as well, Bulk Trasporter adds.

The ATA supports FTR's forecast in its American Trucking Trends 2008-2009 report, saying that its seasonally adjusted For-Hire Truck Tonnage Index sank by 11.1 percent in December. That is the largest single monthly drop since ATA began collecting tonnage data in 1973.

"Motor carrier freight is a reflection of the tangible-goods economy, and December's numbers leave no doubt that the United States is in the worst recession in decades," Logistics Management reports ATA chief economist Bob Costello as having said. "It is likely truck tonnage will not improve much before the third quarter of this year."

Before the financial collapse slammed on the trucking industry brakes, the sector enjoyed year-on-year growth. According to the ATA, in 2007 trucks transported 57.8 percent of trade between the U.S. and Canada, up 3.4 percent from 2006, and transported 66.2 percent of the trade value between the U.S. and Mexico, up 4.8 percent. Class-8 trucks accounted for 139.3 billion miles used for business in 2006, up 8.8 billion miles from the year before. The total miles (in billions) logged in 2006 was 432.9.

Analysts see a much different story shaping up for 2009 and beyond as a large number of small trucking operators have already gone out of business over the past year, logistics analyst Transport Intelligence says (via Supply Chain Brain).

"I do think we will see a wave of carrier failures this year," fleet consultant and president of transportation advisory Trincon Duff Swain tells FleetOwner. "It had tapered off a bit in last year's third quarter thanks to the drop in fuel prices. But as soon as that factor levels off again, [weak carriers] will have the same problem. And if anything, lenders will be far more critical in terms of scrutinizing how well managed the fleet is overall."

This points to another problem for the trucking industry: Along with diminishing volume, the tight credit market prevents trucking companies from buying equipment, investing in new technology and having adequate working capital. As such, FTR thinks freight volumes or trucker profits will be too small to support a big "pre-buy" in 2009. This heavily affects truck and truck equipment manufacturers, as it will keep them from increasing production and decreasing stock, especially for medium-duty trucks.

Class-8 vehicles are said to be at modest levels. FTR forecasts shipments of class-8 trucks to rise 14.9 percent in 2009 to 226,800 units but then dip by 18 percent in 2010 to 186,100 units.

Orders for class-4 through -7 vehicles, on the other hand, are predicted to be much weaker, according to the FTR report. "Class-4 sales have had double-digit year-to-year declines for the past six months, class-5 sales are down 20 percent year-to-year, class-6 sales are down 40 percent year-to-year, and class-7 sales are down 36.4 percent year-to-year," FTR says. "Factory shipments for classes-4 to -5 will grow slightly in 2009 and 2010, but 6 and 7 will continue to plummet."

Although FTR believes the situation will eventually improve in 2010, others disagree, citing that the shrinkage of goods and packaging will not reverse the situation for trucking companies and their suppliers. "Even if consumer demand happens to improve over the next few months, there will be no definite corresponding increase in the shipment of consumer goods," Dave Ross, a transportation analyst with Stifel Nicolaus Financial, tells Today's Trucking. "[D]etermining how consumer activity affects trucking isn't as clear cut as it used to be."

For one, "it takes far less truck to move far more wealth," Today's Trucking explains, because goods/packaging are smaller and therefore more can be loaded onto the truck, equaling fewer truckloads a week to deliver the same amount of product. This results in less trucking being done, less wear-and-tear on equipment, thus lengthening trade cycles and lessening demand for new builds.

Yet truck usage is restricted by several factors today. Other key variables affecting truck capacity include limitations for certain destinations and the back-haul and empties returns opportunities; driver availability in some regions; and equipment availability. These domestic transportation capacity issues are not expected to end any time soon. (Source: Supply Chain Brain)

The only winners, it seems, are those reliant on the trucking sector. Shippers are advised to take advantage of the reduction in fuel surcharges in the first half of 2009, as oil is projected to hover around $60 per barrel, according to the Energy Information Administration's Annual Energy Outlook 2009. The report also notes the total number of miles traveled by freight trucks is expected to decrease slightly in 2009, falling from 231 billion miles in 2008 to 226 billion miles in 2009. There is practically no growth expected in U.S. oil consumption this year.

Fewer trucks on the road and significantly lower fuel costs than last year's creates a buyer's market, Logistics Management says. "For both rail and trucking carriers, this is a brutal market, and there is no indication that volumes will pick up in the first half of 2009," AlixPartners' Paul Svindland explains to Logistics Management. "So, from the shipper's side of the equation, with plenty of capacity available, trucking rates will be in their favor because it's a buyer's market with significant downward pressure on pricing."

Industry observers agree that the bargaining strength will be solely in the shipper's hands in early 2009, so carriers are advised to negotiate and renegotiate to lock in conditions of contract for as long as possible, especially in relation to fuel, Logistics Management reports. Given the instability of fuel prices of late, carriers should continually readjust and adapt until the market settles late in 2009.

Resources

An Analysis of the Operational Costs of Trucking American Transportation Research Institute, Dec. 15, 2008

Industry Report Card: Recession Is Creating a Dim 2009 Outlook for the North American Transportation Sector Standard & Poor's, Jan. 13, 2009

Outlook Worsening for U.S. Transportation Companies — S&P Seeking Alpha, Jan. 14, 2009

Truck Transport and Warehousing Bureau of Labor Statistics, Jan. 16, 2009 (last modified)

North American Commercial Truck and Trailer Outlook FTR Associates

Trucking Outlook Negative Across the Board by Justin Carretta FleetOwner, Oct. 1, 2008

FTR 2009 Forecast on Downward Trend Bulk Transporter, Dec. 30, 2008

Trucking News: ATA Says For-Hire Truck Tonnage Index is Down 11.1 Percent by Jeff Berman Logistics Management, Jan. 27, 2009

ATA Releases: American Trucking Trends 2008-2009 by Tiffany Wiazlowski American Trucking Associations, Dec. 15, 2008

North American Logistics 2009 by Chris Thorby Transport Intelligence / Supply Chain Brain, Jan. 21, 2009

Rail Seen as Big Winner Over Other Transportation Modes in Report... Global Logistics & Supply Chain Strategies / Supply Chain Brain, Dec. 19, 2008

Outlook '09 Tight Squeeze by David Cullen FleetOwner, Jan. 1, 2009

Outlook 2009 by Jack Meli Today's Trucking, Jan. 25, 2009

Annual Energy Outlook 2009 Energy Information Administration, January 2009

2009 Logistics Outlook by John Paul Quinn Logistics Management, Jan. 1, 2009

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