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Chances of a capacity shortfall increasing

May 6, 2013

With tonnage growth subdued and rates flat, much of the TL segment seems to be in a “holding pattern” in terms of adding more capacity – a move that might create a trucking capacity crunch as early as this summer, noted Richard Mikes, managing partner of Transport Capital Partners (TCP), during a webinar hosted by Wall Street investment firm Stifel Nicolaus.

However, such a crunch could be offset by conflicting trends in the private fleet segment, as half of the private fleets polled by CK Commercial Vehicle Research (CKCVR) in its quarterly “fleet sentiment” report indicate they are adding capacity via purchases over the next three months – with an average of more than 40% of their new power unit orders designated as “new capacity.” 

“They [private fleets] have an incentive to add capacity to be sure their products get shipped and the ability to do so because they can fill the trucks with drivers,” noted Chris Kemmer, principal at CKCVR. “We expect the looming hours of service [HOS] regulation implementation adds to the urgency to solidify hauling capacity."

Such “urgency” doesn’t surprise TCP’s Mikes, as by his firm’s estimate some 15% to 20% of TL capacity exited the market due to the "Great Recession" and hasn’t returned – with potentially more capacity reductions ahead for the TL sector.

“In our most recent ‘Business Expectations’ survey, some 30% to 40% of the carriers polled said they were not planning to add capacity, with only 30% saying they’d increase capacity just 1% to 5%,” he said. Interestingly, Mikes noted that smaller TL carriers are more bullish concerning fleet expansion, with 25% of them saying the plan to boost capacity 6% to 10%.

One reason many TL carriers are shelving capacity expansion plans is that rates across the industry remain largely flat, Mikes pointed out. TCP’s data indicates contract dry van rates only increased to $1.55 per mile from $1.52 over the past year, while “spot market” rates went up to $1.29 per mile from $1.25.

Refrigerated rates stayed flat as well, hitting $1.66 per mile versus $1.62 a year ago, with the spot market only increasing to $1.45 per mile from $1.43 over the past year, he added. Flatbed rates – by far the most cyclical in the industry – remained in neutral as well, rising to $1.79 per mile from $1.78 a year ago, with spot market rates falling to $1.54 per mile from $1.64 a year ago.

“Rates are stuck in neutral, with 77% of the carriers we surveyed saying that rates have stayed the same over the last three months,” Mikes said. “Some 50% of the carriers in our survey also said that current rates are not good enough to justify investment in equipment.”

Add in the regulatory pressure posed by the CSA (Compliance Safety Accountability) program, HOS reform – which is projected to reduce TL productivity by 1.4% to 4%, further limiting capacity – and the acute shortage of drivers, Mikes believes the capacity crunch will be significant and hit quickly.

“We are just absolutely tight on capacity right now,” he said. “It won’t take much [freight] demand to generate a [capacity] shortage.”

John Larkin, Stifel’s head of transportation capital markets research, added that with “flattish demand” and “flattish supply” characterizing the current environment, the TL industry appears to be right on the cusp of a capacity shortfall.

Any one of a number of factors could push up demand, he explained, from pent up demand from the delayed arrival of spring this year, the acceleration of the rate of new home construction, or Hurricane Sandy rebuilding efforts. There could also be a “push down” in supply as well, resulting from the aforementioned impact of HOS changes, the ever-worsening driver recruiting and retention battle, the failure of small/disadvantaged carriers.

“Either would thereby tighten supply and demand even if the economy continues to grow only at a modest 1.5% to 2.0% GDP [gross domestic product] growth rate or better,” Larkin pointed out. “With tightening supply and demand, the potential for improved rate increases improves and we think that rate increases will then once again outstrip the rate of cost increases, especially for large TL carriers.” 

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