By all measures, the first quarter was not a very good one for trucking, but early signs indicate freight volumes may already be rebounding, according to presentations by leading fleet executives, equipment suppliers and industry analysts at the Bear Stearns annual Global Transportation Conference in New York City last month.
Weak freight tonnage in the first quarter of the year brought a 6% drop in equipment utilization for truckload carriers and rate pressure for both LTL and TL segments, according to Edward Wolfe, Bear Stearns' airfreight and surface transportation analyst. Despite a tougher freight climate, “there is no evidence of smaller fleets exiting the industry” and regional LTLs are still exhibiting growth, Wolfe said during the opening session of the annual conference for investors and other financial analysts who follow trucking and transportation.
The underutilization has created an excess capacity of about 120,000 Class 8 trucks in North America, according to James Meil, chief economist for Eaton Corp. Although it would only take a small increase in freight demand to absorb that excess truck capacity, “we'll need to see housing and automotive [markets] stop declining before we see freight increase,” he said.
Using his own calculations, Kenny Vieth of A.C.T. Research put the industry's excess capacity at nearly the same level — 116,000 Class 8 trucks. While most expected truck sales to pick up in the second half of 2007, after fleets overcame their reluctance to buy vehicles with the new EPA-mandated '07 emissions technology, Vieth said the current economic conditions mean “there's no impetus for [U.S.] fleets to buy a lot of trucks this year.”
However, Vieth has increased his Class 8 sales forecast for 2007 based largely on export sales to Mexico and other markets. Driven by coming emissions standards and a weaker dollar, exports accounted for half of all Class 8 sales in the first four months of the year, while typically they account for only 11%, he said.
Chief executives from major carriers such as U.S. Xpress Enterprises, Covenant Transportation Group, Celadon Group, USA Truck, Arkansas Best Corp. and YRC Worldwide (formerly Yellow Roadway) all noted the downturn in freight during the first quarter of the year, and most pegged the start of the downturn to October of last year. On the LTL side, YRC CEO William Zollar said the company had seen a 4% drop in LTL tonnage since last October, and Arkansas Best CEO Robert A. Davidson reported that LTL tonnage was off 5.8% in the first quarter.
Calling the first quarter “pretty rough,” U.S. Xpress co-chairman Max Fuller reported “a fairly strong upturn in March” for truckload and dedicated freight. While all of the other truckload executives echoed similar views on the beginning of the year, there was less unanimity on timing for a recovery.
Based on stronger March and April volumes, Covenant CEO David Parker said he saw “signals that the second half of the year will be stronger.” Approximately half of the other carrier executives presenting at the conference concurred with that assessment.
Representing the other fleet view, Celadon CEO Steve Russell acknowledged the same upturn in April, but told the analysts “there's no way to forecast” a return to higher freight tonnage.
Major shippers at the conference cited rates dropping 2% to 3% for both TL and LTL services in recent bids, and some said that they had stopped paying accessorial charges as demand for freight capacity has weakened. Most, however, were quick to add that service and other non-rate issues were the deciding factors in awarding bids, and that they were trying to stick with core carriers who would stand by them when capacity tightens again.
In addition to the rate/tonnage issue, carriers at the Bear Stearns event noted that driver shortage and turnover problems have eased considerably with the weaker freight climate. Also noted by many was the relatively smooth transition to ultra-low-sulfur diesel (ULSD) last year and expectations that they will see selective catalytic reduction (SCR) technology used to meet 2010 emissions requirements.
Most fleets presenting at the New York event said they'd only had limited exposure to the new '07-spec diesels, but that the engines they were running were reliable and relatively trouble-free. Only one reported a “horrendous experience” with three test versions of '07 engines that all had to be replaced.