As the momentous year 2001 ground to a close — and this issue went to press — the economic news was decidedly mixed, making crystal-ball gazing extra dicey.
But not letting that prevent us from going out on a limb, our view of 2002 clearly suggests trucking will navigate a bumpy but bearable road for at least much of the first half of the year. Then, as the second half unfolds, the signs pointing to economic recovery should become palpable and the industry will merge onto a slow but steady road back to full recovery.
Predicting exactly when the recession will end is the real trick. From the safe distance of December just past, the optimists were looking to mid-year. The pessimists were content with sometime after.
What most economists agree on, however, is that when the economy starts to turn around, it will be a long, slow uphill slog back to where things were before the tech-sector meltdown signaled the end of the longest peacetime economic expansion in U.S. history.
Whether regarded as grim or just tough, that's the economic picture. The challenge for fleets is to get through this year in the best possible shape to be as well-positioned as possible for when growth on a measurable scale returns.
This will be a year in which fleets will seek higher rates on the one hand, while endeavoring to contain or cut their own costs on the other.
Concerns related to the war on terror will also remain key factors affecting fleet operations. Heightened security will increase operating costs and may impact driver recruitment.
Insurance costs are also rising as a direct result of the terrorist assault on the World Trade Center. What's more, insurance carriers that have become markedly risk-averse since Sept. 11 are curtailing availability to truck fleets.
There is good news. The cost of diesel and gasoline continues to fall, helping all fleets keep a tighter rein on this large operating cost.
And construction fleets, as well as those hauling building materials, should remain buoyed by a housing market that has stayed stubbornly strong in spite of the recession.
HOUSING MARCHES ON
In fact, the latest available data on housing starts is very cheering. In late December, the Commerce Dept. reported that housing construction climbed by 8.2% in November, reaching its highest level since January '01, thanks to builders betting more buyers would be attracted by low mortgage rates and the solid appreciation in housing values seen around the country.
Providing a cautiously optimistic overview of what the near future holds in store industrywide is Jerry Leonard, economist with Ormond Beach, FL-based Martin Labbe Associates.
“We think [the negative] conditions will level off in the first half of the year,” predicts Leonard. “Things will start to improve in the second quarter, but the climb out will be long and hard. It will be awhile before we reach levels last seen in March '00 [before things began to drop off].
“Freight has fallen off 6.5% since mid-2000,” Leonard says. “That tells us we need one full year of 6.5% growth in freight volume just to get back to where we were before the recession began. But it won't accelerate until we get to the end of '02.”
As the year progresses, according to Leonard, “the single best indicator” fleet managers can watch to better peg the timing of the recovery is the new-orders component of the National Association of Purchasing Management (NAPM) index.
“The new-orders component of the monthly report provides a good leading indicator of overall freight conditions,” Leonard explains. “The overall index, on the other hand, really confirms what is already going on at that point in time. Carriers know how things are — they want to know how things will be.”
Leonard says the last NAPM index before Sept. 11 showed the new-orders component had risen above 50% for the first time since June 2000. “That was a good sign,” he points out. “But after the terrorist attacks, that number plunged. Now, according to the latest report, that figure is at 48.8%, which means we're getting back to the 50% mark. And, therefore, the freight outlook for the next six months looks substantially improved.”
As for which fleets will benefit first from the higher freight volumes expected by the second half, Leonard points out that historically the truckload segment gets the first bounce when the economy picks up “because someone has to pick up the excess the rails can't handle when the freight starts to move again.”
Another chunk of positive news Leonard offers is the view that the drop in fuel prices will “hold up” for the next six months. “Prices won't necessarily continue to fall,” he elaborates, “but we don't expect to see them go up, either.”
Leonard explains this good fortune results from the confluence of three key factors: the switch from jet to diesel fuel production as U.S. plane travel declined after Sept. 11; a mild start to winter in the Northeast held down demand for heating oil, allowing diesel stocks to rise; and the worldwide drop in crude prices due to the ongoing power struggle between OPEC and non-member oil-producing nations including Russia.
TWO BAD THINGS
But, says Leonard, there are at least “two bad things” that will dog fleets in ‘02. Number one, he says the used-truck market is far from out of the woods. “Demand is very weak. The smaller carriers that typically buy used equipment have taken a beating in this recession and are being turned down by both finance and insurance companies.”
Number two is insurance itself. The monumental losses inflicted by the World Trade Center attacks have left insurance carriers extremely averse to any business as risk-prone as trucking. Leonard says this year fleets should expect to pay more for their insurance coverage — and to find coverage itself harder to obtain.
Management consultant Chris Brady, president of Manhasset, NY-based Commercial Motor Vehicle Consulting, concurs that fleets are in for a tough year.
“The retail sales figures for October and November were weak,” Brady points out. “Retail had a bounce up in October, but that was driven by auto sales buoyed by car makers' zero-percent financing incentives. Take that out and the bounce-back is not strong — and that means excessive inventories will exist to dampen freight demand going into '02.”
Brady points out that “this recession is very different than those of the last 30 years. It was not caused by the Federal Reserve increasing interest rates in response to an overheating economy,” he explains. “Rather, it was brought on by over-investment by businesses which themselves were built on loose credit. It was too easy to get capital to invest and expand where it wasn't justified.
“As a result,” he continues, “excess capacity must now be rationalized across the board. That's why I think the recession will bottom out by the end of the second quarter and be followed by a gradual if not sluggish return. In other words, I expect a slow upturn rather than a bounce back up. So, fleet capacity utilization will be coming up from very depressed levels.”
Brady offers a fairly involved analysis of how the first half “should” unfold for truck fleets. “Profit margins for hauling freight should improve thanks to lower fuel costs and lower labor costs (due to higher unemployment making more potential drivers available.) The downside,” he adds, “is that profitability depends on both the fleet's profit margin and its asset utilization, which will be down until the economy picks up. These offsetting factors will keep profits low.”
Using as an example the expense structure of a “typical” truckload carrier, Brady drills down further into the data, underscoring what an unusual year this will be. “Fuel accounts for 15-20% of their operating costs, while the insurance bite is only about 4%. So, a steep drop in fuel prices should have a larger positive impact despite even a 100% increase in the cost of insurance.”
Overall, Brady expects construction fleets to be “a little better off” than their freight-hauling counterparts. “Residential construction — housing starts — have held up very well, thanks to the steep drop in mortgage rates.
“Motor carriers, on the other hand,” Brady continues, “will find it very hard to increase rates with excess capacity being what it is. Only UPS and FedEx can do that since their competition is much less.” He's right about that. Both UPS and FedEx have already instituted rate hikes of 3.5%.
Given that the industry's excess capacity isn't going to dissipate anytime soon, Brady advises fleets to look for ways to gain customers by offering better service than a competitor rather than by low-balling on price.
“The thing is to look for service failures committed by competitors and then to make yourself available to the affected shippers,” he says. “Gaining share this way may come down to how a shipper views transportation — do they see it only as a commodity bought on price or does service matter to them?”
Brady also suggests that those fleets that need more trucks and that have cash on hand consider buying used trucks now. “Later in '02 or in '03, when truck sales pick up again, so will the market for used trucks. New and used truck buyers buy for the same reason — to handle shipment volume. And those who buy used almost never buy new.”
But, in general, Brady recommends that for this year fleets be conservative about their capital expenditures. “The key is to conserve cash and ensure a positive cash flow to handle contingencies until things do pick up.”
As for long-term advice, he urges fleets to invest in “back room” technology. “IT investments, such as in communication systems that increase the number of drivers a dispatcher can handle, are helping fleets run leaner. Getting away from paper and going electronic,” says Brady, “will net big productivity gains from administrative activities alone.”
Offering advice for truck fleets on how to navigate the bumpy road ahead is Richard Bell, a Little Rock, AR-based CPA and attorney.
Leaving aside the question of when the recession will end, Bell figures trucking's recovery will begin in the third or fourth quarter of this year and continue into '03.
Of course, depending on one's level of optimism, that means there's up to a year of lean running ahead of most fleets. But Bell has some ideas on what fleets can do to help themselves.
“There are some big things fleets can do to help them through this year,” says Bell. “Number one is to take advantage of the very welcome drop in fuel prices. It's not in most truckers' blood to hedge, but with the price down at $18 a barrel, hedging on fuel would be a wise decision.
“Number two,” he continues, “is to watch out for the rising cost of umbrella insurance coverage. We expect the price may triple to buy this coverage. Many privately owned fleets that can't afford umbrella coverage will simply drop it. But they would be wise to insulate their assets from liability by placing their legal ownership under various separate limited liability corporations or partnerships. This is a side benefit of changes in tax laws a few years back that allow ‘S’ corporations to own other corporations as subsidiaries,” Bell notes.
“Number three is to recognize rate increases must start with the largest publicly traded carriers,” he continues. “It trickles down from there so smaller fleets should wait and see before attempting to raise their rates. It won't be until late '03 or even '04 before the industry shakes out its excess capacity. Once the glut of trucks dries up, rate increases will occur.”
The trick for most carriers, it would seem, will be to hang on till then. Those fleets that survive the bumpy road to recovery will be the stronger for having done so.
But those that prosper in days ahead will be the ones that remember lessons learned this time around the block.
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