Photo: Sean Kilcarr/Fleet Owner

Could consolidation solve trucking’s overcapacity problem?

July 18, 2017
Forecasting more mergers and acquisitions for trucking

It’s been bandied about for a while within industry circles that there may just be too many trucks on the road right now compared to the level of freight demand; a reason cited by more than a few observers for the downward pressure on rates motor carriers have experienced for much of the year.

Indeed, Marc Althen, president of Penske Logistics, estimated during the unveiling of the annual State of Logistics report back in June that there are some 115,000 “surplus” Class 8 trucks operating on the road today, up from 75,000 a year ago.

[But if that’s so, why is there still so much fuss about the growing shortage of truck drivers? A topic for another day methinks.]

As a result, some analysts think more consolidation among trucking companies is the answer – setting the stage for, in their view, an “improvement” in industry operating conditions.

First Ratings out of New York is the latest group to suggest that such a merger trend may be taking shape, pointing to the recent combination between Knight Transportation and Swift Transportation Co. as but one example.

“Further industry consolidation into 2018 would likely drive better revenue fundamentals that would support trucking operator financial profiles over the long term,” the firm argued in a recent research note.

“Trucking market conditions remain challenging, with lingering overcapacity contributing to soft yields,” Fitch said. “Carriers are also facing a regulatory mandate to install electronic logging devices (ELD) on trucks, [while] evolving relationships with shippers are placing new demands on carriers to provide improved service as e-commerce grows in importance.”

The firm stressed that the ELD regulatory mandate, which goes into effect this December, may place more “financial and operating pressure” on smaller trucking companies and convince many to exit the business – potentially creating a “positive impact” on freight yields over time if noncompliant companies exit the market.

“We also believe the mandate could provide an opportunity for additional consolidation if some carriers' profitability worsens due to productivity headwinds resulting from the [ELD] mandate,” Fitch said.

Aside from such “regulatory pressure,” the firm added that future technological changes, which will provide shippers with more transparency and flexibility, may have the most “significant impact” on the industry's profitability.

“Demands for services by large shippers will change rapidly over the next few years as e-commerce sales widen from small parcel packages to include larger and more industrial products,” Fitch explained.

Further moves toward consolidation would help address that and other overcapacity problems, while enhancing depressed yields in a very fragmented industry, the firm continued.

“Consolidation of fleets allows the industry to adjust capacity more quickly and accurately through efficient fleet management,” Fitch noted. “Some softness in the revenue environment is fading and positive signs are emerging on the demand side. The ATA Tonnage Index recently saw its largest increase in May. Building on this, increased merger and acquisition activity among larger, asset-heavy companies could allow for more pricing power in contract negotiations with shippers.”

We’ll wait and see if this consolidation trend takes shape as predicted. And we won’t have to wait very long, methinks.

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