These are about the worst of times anyone could possibly dream up for the trucking industry, with the rough going not projected to end anytime soon. Part of what's making things so bad in trucking today is the long exposure to poor market conditions — aggravated by the enormous run-up in diesel fuel prices over the first half of 2008.
“The recession in the freight market started almost three years ago, when U.S. economic growth slowed from 3 to 4% a year down to between 0 and 1%,” explains Noel Perry, managing director and senior consultant at FTR Consulting Group, during a recent conference call with reporters.
Formerly chief economist with Green Bay, WI-based truckload carrier Schneider National, Perry says the freight market is now in true collapse — possibly contracting a further 10% in 2009 — and that puts a lot of cumulative stress on trucking operators that have been struggling through tough times for a long while already.
“We've not yet seen the full trauma of this in the industry because the decline in fuel prices [in late 2008] created a ‘lag’ with fuel surcharges, giving those that have fuel surcharges a nice bump in cash flow for the last quarter or so,” he notes. “But that disappears in the first and second quarter of this year. Then they'll have to deal [with the freight market] without that benefit.”
Perry believes one result from the fuel surcharge benefit is going to be a disproportionate number of small and medium fleets continuing to go bankrupt. “The gap between low- and high-risk fleets is huge,” he explains. “In downturns, large fleets tend to do better than small fleets because they have cash reserves, and most large fleets entered this recession with a lot in reserve.”
“The fourth quarter 2008 operating environment was challenging and reflected the broad-based economic weakness that is now widely known,” reports Kevin Knight, chairman and CEO of Knight Transportation, in the company's year-end earnings report. “Typical seasonal shipping patterns did not hold as volumes were uncharacteristically weaker in the quarter. This is the third consecutive year where a strong ‘peak’ shipping season did not materialize [and] price competition remained intense as carriers struggled to maintain equipment productivity.”
“Motor carrier freight is a reflection of the tangible-goods economy, and December's numbers leave no doubt that the United States is in the worst recession in decades,” adds Bob Costello, chief economist for the American Trucking Assns. The group's monthly truck tonnage index plunged 11.1% in December 2008, marking the largest month-to-month reduction since April 1994, when the unionized less-than-truckload industry was in the midst of a strike and the third-largest, single-month drop since ATA began collecting data in 1973.
“Our December reading confirms that the U.S. is in the thick of a recession,” Costello notes. “It is likely truck tonnage will not improve much before the third quarter of this year. The economy is expected to contract through the first half of 2009 and then only grow slightly through the end of the year.”
Still, if carriers can survive this extended period of extreme stress, they should be well-positioned for success when freight markets recover, Knight believes.
“We do not know what the future holds for our economy, and it is not within our means to foresee when industry supply and demand fundamentals will come back into balance,” he points out. “[But] we believe that this dynamic could eventually set the stage for tighter industry capacity and more favorable rates.”
Until then, it'll be a tough haul for a while.