Overcapacity looms as carriers prepare for '98

Stiffer competition will jeopardize profitsIncreases in U.S. exports have resulted in improved financials for most carriers. However, aggressive expansion plans by many carriers are creating an overcapacity problem. Truckload carriers, in particular, have already set the stage by increasing the size of their fleets much more than is required to support traffic gains. In the LTL industry, many regional

Stiffer competition will jeopardize profits

Increases in U.S. exports have resulted in improved financials for most carriers. However, aggressive expansion plans by many carriers are creating an overcapacity problem. Truckload carriers, in particular, have already set the stage by increasing the size of their fleets much more than is required to support traffic gains. In the LTL industry, many regional carriers have continued to open scores of new terminals and add to rolling stock. The resulting increase in capacity will likely lead to more competitive behavior later this year and weakened profitability.

Last year, overall truck traffic grew by 6-8% and carriers were (finally) able to push through substantial rate increases. Most carriers posted gains in revenue, lowered their operating ratios, and showed higher profits.

The UPS strike was a big factor during the third quarter for the LTL industry. While this segment picked up a relatively small portion of UPS business, it was enough. Revenues for LTL carriers rose 14% last year compared to the third quarter of '96, and expenses only increased by about 10%. As a result, net income more than doubled, and the net profit margin rose to 3.6% from 1.8%.

However, the overall LTL results for the third quarter masked other factors that will get more attention during '98. The top four unionized fleets, for instance, are still showing below-par profit margins even after three quarters of healthy traffic growth. At the same time, smaller regional carriers continue to make market share gains.

But the top four unionized carriers are making important operational changes. Linehaul miles dropped on a year-over-year basis, even as total tons rose by 2%. Terminal throughput is up.

With high fixed costs and profits that are very sensitive to traffic swings, these carriers need to show better results when traffic is up. (The small silver lining in this cloud is that the contrasting results between the top four union carriers and the rest of the industry won't give the Teamsters much leverage during the contract negotiations.)

Another factor that will come into play this year is capacity utilization. Many LTL carriers have increased their fleet and opened scores of new terminals as part of aggressive expansion plans, which may lead to a repeat of the '95 overcapacity situation. The problem won't be as acute as with TL general freight carriers, but the 'best guess' scenario is that LTL carriers will see their markets weaken in the third quarter and lose some of the gains in rate hikes they have seen up to now.

TL general freight carriers face a tricky dilemma. Traffic is up, they need to increase capacity, and there are lingering spillover effects from last year's rail bottlenecks. In addition, carriers want to avoid a repeat of the equipment shortages of '93 and '94. Most are adding to their fleets with purchases of new Class 8 units. This will increase fleet capacity by more than 5%, more than enough to keep up with traffic increases.

The most likely outcome right now is that truck traffic will continue to grow, but at more moderate rates than last year, depressed in part by the Asian economy. In addition, the rail bottlenecks will ease and most of the spillover freight will return to the rails. By the third quarter, TL carriers could see the beginnings of significant overcapacity.

This scenario will come on the heels of an 'underachieving' year for many TL carriers. The third-quarter results show healthy year-over-year revenue increases of almost 8% for dry van and platform carriers. But rate hikes were still mediocre, about 2%, and expenses rose even faster.

Third-quarter profitability was no better than the year-ago period. Operating ratios worsened slightly for many carriers, even though fuel prices declined and equipment costs remained flat. Increases in driver pay and problems with driver retention are raising costs and lowering efficiency. Carriers have bet that higher pay will limit turnover, reduce accidents, and improve efficiency. These factors have all improved for carriers, but not enough to outweigh increases.

ATA Trucking Information Services publishes a variety of reports on the financial and operating status of the motor carrier industry. For more information on available data and services, contact ATA at 703-838-1978.

[Editor's Note: Please refer to tables listed on pages 26 and 28 of FLEET OWNER's February 1998 issue.]

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