PRINCETON, NJ. Wildly mixed economic and business forces make it “tough to forecast even one or two quarters out,” but there is some good news for trucking hidden among the contradictory signs, according to Paul Will, the vice chairman, president and COO of the Celadon Group (NYSE: CGI). After three years of significant overcapacity in truckload carriage, “it now appears to be in equilibrium and going forward will be in carriers’ favor, especially if economy picks up at all,” Will said during his state of the industry keynote address at ALK Technology’s 2011 Summit.
Positives for the general economy include expanding manufacturing output, strong exports, slowly declining unemployment, robust capital equipment investment and expectations that GDP growth will run at about 3% for the next three years, Will said. Consumers are also beginning to spend again and have paid down personal debt from a high of 138% in 2004 to 113%, he told the ALK summit.
Countering the good news, estimates are that it will take 48 months for employment to recover to pre-recession levels, Will said. And while a weak U.S. dollar props up exports, it is also bringing rising consumer costs, which is combining with slow wage growth to act as a brake on consumer spending, he said.
The supply of new and existing homes on the market has started to come down, Will reported, but it is still “much higher than historic averages, mortgages are hard to get and first time buyers are not coming back to reduce that supply,” he said.
While tightening capacity bodes well for trucking, “carriers face a tug of war with both shippers and the government,” Will said. “Shippers want increased payload, more tractors and drivers, indemnification [from liability claims], and stretched payment terms. The government wants emissions changes that have a high price, increased [gross vehicle] weights, hours-of-service rules with less flexibility, and safety monitoring that is shrinking the driver pool.”
While truckload carrier productivity measured by mileage per truck has remained flat since the 1990s, equipment costs have escalated sharply in recent years, according to Will. “In 2006 a new truck cost $95,000 and could be sold as a used vehicle for $50,000, meaning you had to finance $45,000,” he said. “In 2010, that new truck cost $120,000 but is still only worth $50,000 used, so you now have to expense $70,000. Depreciation on a cost-per-mile basis has almost doubled since 2000.”
As a result the average age for the U.S. Class 8 fleet has risen from 5.4 years before the recession to 6.8 years, Will explained. “There was no pre-buy of trucks in 2009, which means we now have a shortage of late model used equipment, and “Class 8 sales of new trucks are well below a reasonable replacement rate, with only large fleets buying new trucks,” he said.
With higher maintenance requirements, fleets unable to replace aging trucks “can see their cost-per-mile triple,” Will said. Combined with higher fuel costs, “carrier failures are likely to increase, especially among smaller fleets,” he said.
However slow the recovery, though, freight growth has been good, with spot market demand at its highest since the post-Katrina recovery efforts, Will said.”Rail service continues to improve, but the reality is that 83% of all freight still moves by truck. With capacity continuing to come out of the market, and carriers unwilling to add new capacity as they have in the past, conditions now favor carriers and will for some time.”