Harsh winter weather combined with replacement-only truck buying, last year’s changes to hours of service (HOS) rules, and a spate of trucking company exits in the fourth quarter of 2013 is leaving TL capacity extremely limited for the short-term, according to several industry observers. And if economic activity improves even slightly in the months ahead, then a “true” TL capacity shortage may finally unfold.
In a conference call with reporters organized by Wall Street investment firm Stifel Nicolaus & Co. last week, Paul Newbourne, senior VP of operations for Armada Supply Chain Solutions, noted the difficult winter restricted TL capacity in the short term as carriers shut down equipment during storm, with others choosing not to dispatch trucks into regions where forecasts called for heavy snow and/or ice.
“That meant many fleets lost their ‘cadence’ in terms of truck availability as one storm after another affected their operations,” he explained. “While there’s also been a lot of volatility in demand, most of that’s been attributable to the weather. Yet the U.S. economy in spite of all of that continues to chug along.”
That steady economic “chugging” means that as the weather improves and the snow melts, the general longer-term trend of tightening capacity should continue to play out as the economy continues to grow – slowly and steadily – while a tight driver supply combined with “regulatory drag” puts a damper on the ability of carriers to maintain much less add capacity.
“The onslaught of federally mandated rules and regulations, combined with a severe driver shortage brought on by ever more stringent hiring criteria and performance requirements, continues to slowly but surely tighten up the TL industry supply/demand dynamic,” Newbourne said.
In particular, HOS changes made on July 1 last year represent a “theoretical” 17% reduction in the standard work week for truck drivers, noted Rosalyn “Roz” Wilson, senior business analyst with Delcan Corp. and primary author for the annual State of Logistics report last year – with estimates on the actual productivity impact of the rule change falling somewhere between 2% and 10%.
Chris Ferrell, director of the Tompkins Supply Chain Consortium and author of a recent report entitled Trends in the Transportation Industry, a report by Tompkins Supply Chain Consortium, noted that supply and demand of TL capacity has been in balance since the end of the Great Recession despite what he called “dire and repeated” predictions from carrier executives and industry experts.
Yet he believes two things suggest that 2014 might, in fact, be the year for the capacity shortfall to truly emerge. First, a study by the American Transportation Research Institute (ATRI) suggests that 80% of surveyed carriers experienced lost productivity since the HOS rule changes in July 2013, with preliminary results suggest the hit is in the 1% to 3% range—a daunting number for an industry with notoriously low margins.
“A larger concern to shippers may be the impact the 34-hour restart and mandatory break after 8 hours may have on individual drivers,” he said. “Of the 2,300 drivers surveyed, 82.5% indicated that the new HOS rules have had a negative impact on their quality of life. Also, 67% report a decrease in wages earned since the rules took effect.”
The second issue is the economy is starting to get some consistency in its growth numbers. In the third quarter of 2013 gross domestic product (GDP) grew 3.6% -- and the fact that this is only the fourth time GDP exceeded 3% growth in the past 18 quarters is a big reason why transportation supply and demand has remained in equilibrium.
“But if the economy starts posting consistent growth at a time when carriers’ expenses are increasing and drivers’ pay is decreasing, capacity will disappear quickly and shippers could be caught off guard,” Ferrell warned. “If the next prediction comes true, the capacity issue will be exacerbated further.”
John Larkin, Stifel’s managing director and head of transportation capital markets research, added during the Newbourne conference call that a “rash” to trucking company bankruptcies and exits in the fourth quarter last year is worsening the capacity situation further.
“We are also reducing [earnings] estimates for the first quarter the across-the-board as the prolonged winter and severe weather conditions have materially and negatively impacted operations for the majority of transportation companies under our coverage,” he added. “While we had anticipated some headwinds in the quarter, the impact has clearly been greater than many companies had expected and that we had modeled. In total, we are reducing estimates on 13 of the 24 companies under our direct coverage.”
“This is why we think the outlook for tighter capacity is more likely,” added Armada’s Newbourne. “Carriers will also be much more selective in choosing types of freight and customers. This is why we’re heading into a TL capacity shortage and inflationary [truck freight] rate environment.”