Shakeout ahead

The recent report of economic activity shows a significant drop in the growth of consumer demand, as well as business investment.

The recent report of economic activity shows a significant drop in the growth of consumer demand, as well as business investment. Coupled with the number of trucks available to haul freight, we can expect a shakeout for the rest of this year and into next year.

By a shakeout I mean that the number of fleets in business will drop. This drop can be attributed to three factors: reduced freight relative to capacity, reduced earnings, and a continuing driver shortage.

Even with the driver shortage, current fleet capacity has risen sharply from last year's level. With equipment capacity higher than driver capacity, fleets are under pressure to use more of their equipment.

Even idle equipment is still generating costs — financing, depreciation and storage, for example — but with no revenue to offset them. Assuming a vehicle would be in use for a maximum of 3,000 hours per year and suffer a $40,000 reduction in residual value over three years, with straight-line depreciation the cost of an idle truck would be $4.44 per hour.

That may not seem like much, but at an average speed of 50 mph, the fleet must generate an additional 8.9¢ per mile of revenue to make up the difference. Add a 15% capital cost and $10 per day storage cost, and the per-mile cost rises to 12.6¢ a mile. For fleets that operate slip-seat operations, the cost is about half that amount.

There is an argument that using newer trucks and parking older trucks would reduce that expense. But I disagree. All expenses must be covered, regardless of which truck is being used.

The cost of idle equipment places significant pressure on fleets to keep all their trucks moving. We can do that — but can we do it with freight on board? Current economic conditions suggest that we cannot. The American Trucking Associations' freight tonnage index has indicated an overall decline in freight for the past several months. It's the classic scenario of too many trucks chasing too little freight, resulting in rates that are flat at best, and possibly lower.

Even flat rates could cause a drop in earnings since insurance, fuel, driver's wages/benefits, depreciation and maintenance costs are not decreasing at this time. This puts significant pressure on earnings.

Last year, motor carriers were flush with earnings that will disappear this year. In the past this has led to the need to dramatically reduce expenses. Closing terminals, consolidating operations, not buying equipment, reducing training and staff are all viable approaches used in the past to curtail costs. There is no reason to expect that it will not happen again this time around.

Since most private fleets operate within a given transportation need, they have to curtail their fleet operations only if the demand for their goods declines. Those that use for-hire as a buffer fleet will no longer need to do so. Consequently, for-hire fleets will drop their rates, which could lead companies to re-evaluate the merits of an in-house fleet.

Decreased earnings in the for-hire sector will put a damper on the demand for equipment. Combined with last year's strong pre-buy of Class 8 equipment, this could lead to a downturn that lasts longer than we originally anticipated.

The one bright spot — if we can call it that — is that the current driver shortage will not grow as much this year because the increase in demand for transportation is so minimal. As a result, carriers of all types have time to rethink their strategies for moving forward into 2008 and 2009. With earnings depressed, we can expect an increase in the number of mergers and acquisitions in the fleet marketplace.

TAGS: News
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