Jim Meil, chief economist for Eaton Corp., forecasts some rough waters ahead for trucking. With freight volume expected to remain low for the first half of the year, operating costs such as fuel, equipment and insurance will continue to drag carriers' profitability down.
“What we're experiencing — and this is not unexpected in a lot of ways — is a change in the economic environment from tailwinds to headwinds for trucking,” Meil explained during a speech at PHH First Fleet's annual fleet management conference.
“Historically, economic expansions tend to last a decade, but have a soft spot in the middle,” Meil noted. “Right now, we're five years into an expansion that began in 2002 after eight months of recession. If this economy has legs, and we think it does, then that soft spot is going to occur now.”
Weak freight is the major indicator that we're entering a soft spot, he said. While freight volume fell about 3% overall in 2006, it dropped 5.9% in the second half of last year alone. Meil expects tonnage to remain down by 0.5% to 1% this year before rebounding by 4.5% in 2008.
While there is excess capacity for the first time since 2004, Meil pointed out that much of it is intentional due to last year's pre-buy effort by many fleets to acquire equipment ahead of 2007 emission changes, which boosted Class 8 base sticker prices as much as $10,000.
“The challenges…for trucking are that energy prices are expected to stay high, equipment costs will move higher as well, the government will have a more costly impact on the industry — hours-of-service rule changes and emission reduction legislation being the leading examples — all occurring within a flat to declining freight market,” he said.
Longer term, driver recruiting and retention is poised to present an even bigger problem since the existing population of drivers is getting older and retiring, with fewer younger workers replacing them. “The squeeze on drivers will be exacerbated by the combination of an aging population with low overall unemployment of around 4.7% in the year ahead,” he said. “That will make finding available workers very difficult.”
However, Meil stressed that trucking retains innate competitive advantages over other modes of freight transport, especially in terms of timely and flexible shipment delivery.
“Trucking is really in a sweet spot in terms of how it can deliver the service freight customers want,” he said. “That means trucking's overall dollar-value share of the freight market will continue growing. In 2000, trucking held a 81.9% share versus all other modes, climbing to 84.3% in 2005. By 2011, that share will climb to 84.8%.”