Local, regional markets strengthening for trucking

Local, regional markets strengthening for trucking

About 81% of so-called “middle-market” trucking firms are somewhat confident to very confident in the strength of the local and regional economies they serve, according to a quarterly survey conducted by GE Capital, with that confidence range falling to 61% for the U.S. economy as a whole and to 49% when looking at the global economy.

Dan Clark, president and GM of transportation finance for GE Capital, told Fleet Owner that “confidence” stems in large measure from an improving revenue stream all of trucking is experiencing as rising freight volumes collides with tight capacity.

“With capacity where it is now combined with rising freight demand, that’s helping [carriers] build revenue,” he explained.

“Early in 2014, we had a different situation, where the harsh winter weather pushed [trucking] expenses above revenue growth,” Clark pointed out. “But by the second and into the third quarters, revenue growth took off and that’s why the local and regional economies look stronger to them [trucking executives] than at the national and global level.”

John Conkin, GE Capital’s senior VP of transportation finance, added that regional freight is growing more attractive to trucking operators as it offers a way to get drivers home more frequently and can be less costly to manage.

“With regional freight, they get better asset utilization, they don’t’ have long-haul OTR [over-the-road] expenses, and they get better route optimization.” He told Fleet Owner. “We’ve also seen carriers getting more selective of the lanes and freight they are taking on as well.”

That “selectivity” is in part occurring as motor carriers seek to push up profit margins. Clark noted that 56% of the trucking companies participating in GE’s poll expect margin growth to be around 3.5% next year, compared to just 40% of them back in March.

“And that’s margin increase occurring on top of what’s been in put in place this year and in the prior year,” he stressed. “That continues to help their bottom line.”

Yet Conkin noted much of that margin increase will be needed to offset higher costs, especially in terms of driver pay raises. “Most fleets we see pushing up rates are doing so to pay their drivers more,” he said.

Conkin added that GE Capital’s survey also found that almost half of the motor carrier executives polled expect trucking to expand in the coming year, with demand for financing likely to remain strong as businesses borrow to add vehicles and other equipment.

Other findings from GE Capital’s quarterly survey include:

  • About 49% believe the sector will expand in the year ahead.
  • Capital expenditures are expected to be greater this year for 35% of trucking firms.
  • Nearly half of trucking firms expect to add more new equipment in the next 12 months than they did in the last 12 months and the majority expects the addition of used equipment to remain stable.
  • Reducing deadhead, increasing tonnage from existing customers and regional expansion are the greatest business opportunities for middle-market trucking firms.
  • Most firms will finance new equipment with a loan and 44% will use cash on hand to purchase new equipment in the next 12 months.

And while diesel fuel prices dropped significantly during 2014 – and are expected to remain low for 2015 – that’s not necessarily being viewed as a bottom line benefit to either TL or LTL carriers, noted John Larkin, managing director & head of transportation capital markets research for Wall Street investment firm Stifel, Nicolaus & Co.

“Excess fuel burned while stuck in traffic, the cost of ‘out of route miles,’ time spent idling while waiting to pick up or receive a load, etc., all add to expenses—and lower diesel costs reduces this burden,” he explained in a recent research note. “But, for the more fuel efficient carriers, lower diesel prices may actually work against those companies which are made more than whole from their fuel surcharge programs.”

For example, he said if a carrier gets 8 MPG [miles per gallon] as a result of a brand new fleet, aerodynamics, driver technique/training, etc.—and the shipper uses a more normalized 6.5 MPG to calculate the surcharge—the carrier makes money.

“So if that benefit exceeds the costs associated with the unpaid fuel expenses listed above, this could serve to make lower diesel prices a slight headwind for the most fuel efficient fleets—a category which most of the large, public TL carriers fall into,” Larkin stressed.

The low-cost diesel dynamics worsen for LTL carriers, he added.

“As LTL carriers operate in a network business, the portion of fuel miles covered by the carriers is harder to define, but on average, LTL carriers are made whole – or better than whole – on rising [diesel] prices and lose some margin on falling prices,” Larkin said.

“Contracts are now negotiated on an ‘all-in’ basis, and if an annual deal was struck with the assumption fuel would stay relatively flat, the base rate would now be insufficient to earn the expected margin,” he explained.

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