According to GE Capital, its Q2 Trucking Industry Economic Outlook Survey reveals that U.S. middle-market firms engaged in trucking see their “key challenge” this year as maintaining margins even as higher costs for healthcare and for the many aspects of “doing business” apply pressure to margins.
As for the cost of doing business, the recruitment and retention of qualified drivers as well as the increasing costs of insurance and regulatory changes—especially those regarding Hours of Service (HOS) and Comprehensive Safety Accountability CSA)-- were seen as major concerns for trucking operations.
“Trucking firms spend significant resources adapting to changes in the regulatory environment and recruiting and retaining qualified drivers,” GE Capital pointed out in an executive summary.
Those obstacles, noted the report’s executive summary, along with new equipment needs and other business expenses, have created a “challenging environment” for margin growth.
Yet despite the concerns around drivers, regs, fuel, updating equipment, and higher healthcare and other costs, the survey results indicate that “margin growth is expected to continue at a brisk pace.” Indeed, the firm pegs it as reaching 6.3% in the trucking sector in the coming year.
What’s more, the survey respondents indicated that increasing tonnage volumes from both existing customers and regional expansion will comprise “the greatest business opportunities” for 2014.
“Trucking industry respondents told us that their top three concerns were the cost of healthcare, the overall cost of doing business and the ability to maintain margins,” Dan Clark, president & gm of GE Capital Transportation Finance, told FleetOwner.
He noted that a lot fits into the overall category of costs of doing business. “The recruiting and training of drivers is a big factor,” Clark remarked. “Fuel costs and insurance costs are big factors. And then there are the standard costs that every business faces — rent, wages, etc.
“Wage pressure is a real concern — not just in trucking but across the board,” he continued. “The latest Middle Market Indicator, a quarterly survey put out by the National Center for the Middle Market [a partnership between GE Capital and The Ohio State University’s Fisher College of Business], showed that the leaders of middle-market businesses are seeing more competition for workers.”
In addition, Clark said that new hires are expecting higher wages than even a year ago. “It’s a good thing that we have a generally stronger job market, but wage pressure makes it even harder to find drivers.
“In fact, recruitment and retention of qualified drivers and increasing insurance costs are the two biggest areas of concern in this industry,” he emphasized. “That’s followed by concern about regulatory changes, especially Hours of Service and CSA regulations.”
Regarding equipment trends, Clark reported that “we’re seeing replacements happening now, both in terms of trucks and trailers. Our survey found that 45% of trucking companies plan to increase the amount of new equipment they will add this year vs. last year and that 55% plan to finance new equipment with loans.
“The fleet on the road is relatively old, so that’s making replacement purchases a necessity along with the need to avoid maintenance costs and improve CSA scores,” he continued. “But the fuel economy we’re seeing with the newer equipment is also adding to the desire to update. So, all in all, it’s natural for people to think about upgrading to new equipment.
Clark stressed that “fuel efficiency is always top-of-mind in trucking. We’re getting more and more requests for trucks with natural gas engines. At the same time, the nat-gas fueling network is being built across the country. As you probably know, we’ve got a relationship with Clean Energy and they’re pioneers in this field. Nat-gas is relatively cheap, it’s domestically produced and it’s got more stable pricing than oil.
“Long term, I think you’re going to see both CNG and LNG being used because they each have their applications — CNG is great on shorter hauls and LNG is better for long hauls,” he said.
“Back in the 1940s,” Clark observed, “people said the industry would never switch from gasoline to diesel. I don’t think nat-gas will take over entirely, but I wouldn’t be surprised if 30% to 40% of the fleet was using it within 10 to 15 years.”
As for the survey pointing to margin growth hitting a brisk pace this year, Clark said that “trucking is a generally low-margin business and shippers are known for putting on the pressure. But business leaders know what they need to do to increase their margins. They told us that increasing tonnage volumes from existing customers and tackling regional expansion are their greatest opportunities.
“Regional expansion could mean a few different things,” he observed. “It could mean acquiring another business in an adjacent market, such as acquiring a major competitor in the next state so you can take over its clients and shipping routes. Or it could mean branching out to serve new markets — maybe expanding from serving shippers in the Dallas-Fort Worth area to serving shippers in San Antonio as well. Basically, mergers and acquisitions are an opportunity to increase efficiencies by combining office staff and drivers.
“Beyond gaining tonnage volume,” he added, “I think it’s clear that shipping rates will have to rise. Capacity is tight, so it’s a simple issue of supply-and-demand.”
Along with margin growth and rising tonnage, other trends the survey results point to include:
- 55% of trucking firms plan to finance new equipment with loans in 2014
- 45% plan to increase the amount of new equipment they will add in 2014 vs. 2013
- Majority expect the addition of used equipment will remain the same as last year
- 44% of trucking firms will add workers— with employment forecast to grow an average of 3.4% year-over-year
- 57% of trucking business leaders expect the industry to expand in the coming year
“We are seeing a stronger economy in the U.S. and, in a big picture way, we know that the leaders of mid-market businesses nationwide are making plans for the future,” Clark remarked.
“We’re seeing what we like to call a renewed spirit of growth,” he continued. “They’re feeling less uncertain about domestic issues — think of last year’s debate over healthcare reform and the government shutdown. Now, they’re refocusing on their businesses and what it takes to get ahead, according to the latest Middle Market Indicator.”
Turning back to the GE Capital survey, he said it “showed that more than three-quarters (78%) of those in the trucking industry are extremely confident or somewhat confident about their local economy. And almost three-quarters (74%) said they expect improved overall performance this year.
"Those are two very important data points, in my opinion,” Clark summed up. “If business owners are optimistic about their prospects, they’re probably going to buy trucks and trailers, make new hires and try their best to grow their businesses.”
According to GE Capital, nearly half-- 49%-- of middle-market trucking companies report annual revenues of less than $50,000,000 and the median number of employees at these companies is 200.
In addition, the firm noted that over three-fourths of middle-market trucking firms are privately held corporations.
The complete CXO Industry Economic Outlook Survey— of which trucking is just one part-- was produced in cooperation with the National Center for the Middle Market (NCMM), a multiyear partnership between GE Capital and The Ohio State University’s Fisher College of Business.