The pricing pendulum continues to swing towards carriers in spite of a sluggish to moderate freight environment. This is due to carriers who reduced capacity during the recession in response to lower freight volumes, now keeping capacity relatively stable during the recovery. An upward trend in fleet capacity utilization (Chart A) has allowed carriers to be more selective in choosing freight without suffering a steep decrease in truck utilization, resulting in the upswing in prices. Pricing improvements have resulted in a profit recovery for the for-hire trucking industry.
In the past, higher business profits in the for-hire carrier industry resulted in aggressive capacity expansion by those carriers, which in some instances caused fleet capacity utilization to fall. This resulted in a shift of the pricing pendulum back towards shippers. Commercial Motor Vehicle Consulting (CMVC) does not foresee this occurring in the near future because the freight environment is not conducive to aggressively expanding capacity.
Freight volumes are expanding at sluggish to moderate growth rates (Chart B), so aggressive growth in capacity expansion would require carriers to gain market share in order to keep fleet capacity utilization at high levels. Carriers would use pricing to gain market share, but pricing is still recovering from the recession. At this stage, carriers are more focused on increasing revenues through increased pricing rather than expanding capacity. Because of the uncertainty surrounding the freight environment, carriers are focused on maximizing truck utilization, since expanding capacity may result in a steep decrease in truck utilization if freight volumes should decrease as a result of another recession.
In the near term, tighter credit availability as compared to before the recession will also slow the rate at which carriers can expand capacity. While large carriers can go to the capital markets for financing, most carriers are small- to mid-size businesses requiring bank financing. Although credit availability has eased from the peak of the financial crisis, availability remains tighter than before the recession. In the near term, credit availability will force some discipline on carriers with respect to the growth rate of capacity expansion.
Assuming freight volumes continue to expand, CMVC foresees a continual shift in the pricing pendulum towards for-hire carriers. Higher business profits will help carriers upgrade aging trucks and trailers; higher profits will also help carriers increase funding for programs to recruit and retain drivers. During the recession, carriers reduced funds for programs related to recruiting drivers; now, they must increase funds for programs to lure and train new drivers.
CMVC does not believe the for-hire industry has gained discipline with respect to capacity expansion in order to maintain pricing power, but rather CMVC believes the sluggish to moderate growth freight environment is not conducive to aggressively expanding capacity as carriers are in the process of improving pricing following the recession. Carriers' capacity expansion plans may change in the future, particularly if the growth rate of freight volumes accelerates. In the meantime, CMVC foresees a slow approach to capacity expansion and a focus on improved pricing.
Commercial Motor Vehicle Consulting publishes the monthly newsletter “Visibility of the Supply Chain” for general freight carriers. To order a copy, contact Chris Brady of CMVC at [email protected] or 516-869-5954.
