Freight slowing, headwinds growing for trucking

Freight slowing, headwinds growing for trucking

With freight volumes continuing to slow and a variety of headwinds starting to grow – such as rising diesel fuel prices – the trucking industry is going to face a more challenging environment through the balance of 2011 and into the early part of 2012, according to the latest analysis from investment firm Robert W. Baird & Co.

With freight volumes continuing to slow and a variety of headwinds starting to grow – such as rising diesel fuel prices – the trucking industry is going to face a more challenging environment through the balance of 2011 and into the early part of 2012, according to the latest analysis from investment firm Robert W. Baird & Co.

That being said, trucking capacity is still expected to remain tight, thus continuing to afford carriers the opportunity to achieve rate increases although any such increases are expected to be lower than previous gains.

“We expect broader domestic freight rate growth to continue to decelerate into the seasonally weak first quarter of 2012,” noted Benjamin Hartford, one of Baird’s transportation analysts in the firm’s most recent “Freight Flows” brief.

“Though capacity constraints should support solidly positive rate growth in 2012, we believe 2 to 3% year-over-year (YOY) growth is likely, versus the 4 to 5% YOY contractual rate growth in recent quarters absent a demand catalyst,” he added.

Hartford added in an interview with Fleet Owner that rising fuel prices will both help and hurt truckers to some degree.

“Fuel has risen but is largely consistent with levels in early September,” he said. “The spike serves as a near-term headwind for truckers that continue to operate, but the rise in fuel also helps limit capacity in an already tight market.”

U.S. diesel fuel prices increased some 17 cents per gallon over the last month, according to data tracked by the Energy Information Administration (EIA), despite a decline in oil prices – an increase largely due to tight global diesel supplies and increased production of home heating oil in the U.S., which is made from the same base oil stock as diesel fuel.

While the U.S. average price for diesel fuel has dipped half a penny per gallon this week, falling to $3.887 from $3.892 last week, prices increased in five of the nine regions EIA monitors, with diesel up almost 2 cents per gallon in the Rocky Mountain region, 1.5 cents in New England and five cents per gallon in California.

Yet despite such cost-control challenges and predictions for more sluggish freight growth, some carriers may seek to expand – if ever so slightly – because the opportunity to garner rate increases still remains.

“I think we’re going to continue seeing sluggish freight growth, but it’s still growth – and no one in this industry wants to leave money on the table,” Steve Tam, vp-commercial vehicle sector with ACT Research Co., told Fleet Owner.

The dicey issue with the expansion equation, he explained, is that capital expenditures such as buying new trucks are by necessity part of a carrier’s long-term strategic growth plan, which often must be divorced from short-term “tactical” changes in the market such as month-to-month shifts in freight demand and weekly changes in diesel prices.

“So what we’re seeing among small- to medium-sized carriers is a ‘small-scale’ expansion effort,” Tam pointed out. “For example, if their normal equipment replacement order is 20 trucks, they may be buying 22 or 23 of them.”

Larger carriers – especially the publicly traded companies – are following a different format; either leasing and renting equipment or forging contracts with owner-operators and /or smaller carriers to gain capacity, he noted.

“Thus, they can take advantage of any freight growth while, in case a downturn does occur, maintaining the ability to quickly adjust their capacity footprint,” Tam said.

Such flexibility will be critical, as the freight outlook is becoming more uncertain, according to Baird’s analysis.

“Looking ahead, we acknowledge greater risk given a maturing economic cycle, weakened consumer sentiment, and U.S./European macroeconomic uncertainty,” noted Baird’s Hartford. “We believe lean inventory strategies among shippers are in direct response to these factors and the greater degree of uncertainty as to the persistence and direction of demand trends.”

However, though recent below-seasonal import trends continued into September – highlighting more cautious inventory strategies on the part of shippers – Hartford noted that mindset could also be a positive for truck freight.

“Lean inventory-to-sales levels also potentially support improved freight demand if end-market sales trends improve, which could have an outsized benefit to carriers given current industry capacity dynamics,” he said.

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