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“Slow-paced” recovery could dampen trucking’s prospects

A slower-than-expected pace for economic growth in the U.S. is throwing a wet blanket of sorts on trucking’s freight prospects for the near term, according to a variety of reports. Yet opportunities remain for big well-capitalized carriers, albeit at the expense of smaller ones.

“The economy is recovering but at a slower pace than the mainstream media suggests,” noted John Larkin, a transportation analyst with Stifel Nicolas, in a research brief based on information gleaned from the Transportation Intermediaries Association (TIA) annual meeting in Las Vegas last week.

“This conclusion also applies to both the housing and automotive industries, which, according to the conventional wisdom, are helping drive the supposed acceleration of economic growth,” he added. “In short, we appear mired in what continues to be a slow-paced economic recovery.”

TL Werner Enterprises noted in its first quarter earnings release that it suffered an 18% drop in net income to just over $17.5 million on a 1% decline in revenues to $492.8 million – adding that it’s experiencing softer freight demand trends this April compared to the same month in 2012.

Werner also pointed out that its average monthly miles per truck declined by 3.2% in first quarter this year compared to first quarter 2012, due mainly to more severe winter weather, with only a “minimal” amount of base freight rate increases occurring in the first quarter this year as well.

J.B. Hunt Transportation Services managed to attain increases in both earnings and revenues in the first quarter of 2013versus the same quarter in 2012, but largely by re-directing more capacity away from its TL fleet to more profitable intermodal and dedicated contract carriage operations.

J.B. Hunt said its net earnings increased to $73.3 million on $1.29 billion in operating revenue in the first quarter, compared $67.7 million and $1.17 billion, respectively, during the same period in 2012. The company added that load growth of 13% in its intermodal division and 47% in its integrated capacity solutions (ICS) service, helped drive 15% and 26% increases in segment revenue, respectively, with its dedicated contract services (DCS) segment posting increased operating of revenue of 9% primarily from new long‐term contracts.

By contrast, revenue from J.B. Hunt’s TL segment plunged 21%, primarily the result of a 21% reduction in its fleet size.

Stifel’s Larkin said one reason driving some that shift away from core TL service such as what's occuring at J.B. Hunt may be due to an uptick in outsourcing by shippers; a trend that includes what Larkin dubbed “embracing brokers” to perform certain tasks not well-performed by the shipper's private fleet, dedicated fleet, or core contract carriers, such as handling freight in unbalanced or light density lanes, handling surge freight, seasonal freight, or freight tied to promotions.

“Some are going so far as to outsource carrier selection, routing guide implementation, carrier monitoring, and/or freight bill auditing and payment,” he added. “If the freight market is growing at 1% to 2%, as the U.S. economy continues its anemic recovery, the markets within which third party logistics (3PL) services companies operate appear to be growing significantly faster than that, say at three to four times the base rate of freight growth.”

Larkin also believes the upcoming hours-of-service (HOS) rule changes on July 1 are but one aspect of what he described as an “onslaught” of regulatory change that only large, well-capitalized carriers can successfully handle.

“The writing on the wall appears to indicate that small carriers will increasingly struggle with the HOS rules and the various other productivity sapping regulations coming down the pipeline,” he warned. “These carriers are under pressure from other sources too as they are having trouble finding sufficient credit and renewing their fleets which, in turn, makes it difficult to recruit the best drivers – or any compliant drivers at all.”

As a result, large shippers will not want to be reliant on such “competitively disadvantaged” small carriers and therefore are increasingly opting to forge deeper, more collaborative relationships with larger, better capitalized, better systematized carriers—precisely the ones that have demonstrated an ability to effectively cope with the seemingly never-ending avalanche of safety, environmental, and fuel efficiency regulations.

And it is in such a chaotic mix of change that carriers like Werner believe opportunities could present themselves if freight volumes start growing more robustly at some point this year.

“We believe there are several truckload capacity constraints including an older industry truck fleet, the higher cost of new trucks and trailers, significant safety regulatory changes and a challenging driver market,” Werner noted it in first quarter report. “It is very difficult for many smaller and medium size private carriers to replace their older, lower-value trucks with much higher cost, EPA -compliant new trucks, which significantly reduces the risk of trucks being added to the market.”

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