Fleetowner 7946 Crystalball

Looking ahead

July 21, 2008
“With respect to pricing and rates, the overall rate market has shifted from a rate decrease market to a rate stable market. If freight demand improves in the third quarter, the potential exists to begin obtaining necessary rate increases in the second ...

With respect to pricing and rates, the overall rate market has shifted from a rate decrease market to a rate stable market. If freight demand improves in the third quarter, the potential exists to begin obtaining necessary rate increases in the second half of 2008.” -From Werner Enterprises‘ second quarter earnings statement

A lot of things are occurring all at once right now, making the trucking industry‘s crystal ball very cloudy indeed. Fuel prices, of course, are first and foremost in everyone‘s mind at the moment - and how could they not be, at over $5 a gallon for many out there? The sluggish economy, hammered by the precipitous blowout in the housing and mortgage market, took away key sources of freight for many carriers. And of course the ever tighter focus on emissions - now including carbon, which could touch off a whole new series of restrictive regulations for truckers.

The effort to raise more funds for road and bridge maintenance, not to mention infrastructure expansion, is also side-swiping truckers are more and higher freeway tolls are bandied about by state legislators, with the leasing of toll roads to private entities - in some cases companies overseas! - adding to the fray.

There are other issues assaulting truckers, too, not the least being the big Associated Press story today decrying the numbers of “medically unsafe” truck drivers operating tractor-trailers and commercial buses today. (That‘s a story you‘ll more about in this space tomorrow.)

So how bad is it, really? Is trucking taking just one too many body blows in all of this? Could the financial underpinnings of this once-mighty industry be unraveling before our eyes?

Well, the answer is a little bit of both “yes and no.” I think we are entering a time where the fundamentals of how this industry operates - especially on the for-hire side - must undergo wholesale change, not in the least where freight rates are concerned. High fuel prices, a growing lack of drivers, ever-more restrictive anti-idling and anti-pollution laws, means trucking rates must start going up - way, WAY up. That will mean driving more long-haul freight to the railroads, while truckers pull back on many routes - or eliminate them altogether - to focus on shorter, more regional delivery lanes.

The thing is, despite the pain - almost 1,000 trucking companies have gone out of business since the start of this year - trucking should remain a much-needed cog in our economic machine here in the U.S. There‘s simply no other way to get large amounts of freight to and from specific points in the U.S. Trains and planes can‘t deliver things to warehouse docks and front doors - only trucks can. That unalterable fact will keep trucking viable.

I talked to Jason Seidl late last week about this. Seidl - recently appointed by Dahlman Rose & Co. as a director in its equity research department, focusing on the airfreight and surface transportation sectors - told me the trucking sector should be sluggish but stabilized as we move into the second half of the year, though a lot depends on how fuel prices shake out.

“We‘re going to see more ‘right sizing‘ of capacity, both in truckload (TL) and less-than-truckload (LTL), with a need to maintain or improve pricing,” he said. “The other big factor is, are we going to get a ‘peak season‘ this year? Or will it be disappointing like the last two years?”

One thing that‘s going on right now in the freight market is that shippers are “trading down” in terms of transportation mode. Shippers that used airfreight for next day delivery are opting for two- and three-day service via LTL or TL, while those using trucking services are down shifting to truck-rail intermodal or pure rail service.

Seidl also believes there‘s a lot more rail capacity out there at the moment than many realize, complicating the competitive landscape for truckers. “There‘s plenty of rail capacity, because don‘t forget, while coal and agricultural shipments are up, everything else is down,” he said, noting that forest product carloads are down roughly 11.2% this year (after a double digit drop last year), motor vehicle carloads are off 14%, and even intermodal shipments have decreased a couple of percentage points so far this year.

“With these fuel prices, more TL is shifting to rail and more TL carriers are trying to link to intermodal,” he said. “Look at J.B. Hunt: their TL division profits were down about 80%, but intermodal was up 20%. But remember this: yes, it‘s about pricing, but service levels must be consistent. Also, rail intermodal is only really competitive in excess of 800 miles. That‘s why there‘s not much LTL vs. rail competition yet.”

Seidl‘s a sharp guy - you have to be, being just 37 yet having spent 14 years covering the freight markets, most recently as vice president and senior analyst at Credit Suisse Group, before moving over to Dahlman & Rose - and what he‘s seeing is dovetailing with what a lot of carriers are saying in their earnings reports.

Landstar System Inc. president and CEO Henry Gerkens noted that in the second quarter this year, his company delivered double digit revenue growth as freight grew across multiple service offerings - but ones mainly outside of trucking. Revenue hauled by its “independent contractors” (read as “owner-operators”) increased just over 3%, while revenue hauled by truck brokerage carriers increased 21% and rail carriers went up 23%. He noted that revenue hauled by ocean cargo carriers increased the most, by 76%, reflecting strong exports no doubt bolstered by the weak dollar.

TL carrier Werner Enterprises noted in its second quarter earnings release that although the domestic economy remains sluggish, it experienced improving freight demand over the last five weeks of second quarter due to the tightening of capacity. Werner‘s management believes the primary reason for the freight improvement during June of this year is due to trucking company failures and shipper concerns about the potential for further trucking company failures, which results in more shipments being offered to high-service, financially-strong carriers.

Werner added that the rapid increase in diesel fuel prices during second quarter 2008 likely caused an acceleration of trucking company failures. As carrier failures have been occurring, shippers‘ understanding of the overall fuel impact has improved. In addition, many trucking companies, including Werner, reduced the size of their fleets over the past year to adapt to the challenging market conditions.

Still, the company said believes that because of the effect of higher priced diesel fuel on truckload freight rates, some price-sensitive shippers have been reallocating a greater portion of their long-haul freight from truckload to rail intermodal in recent months. Werner‘s Intermodal unit is handling a lot of that shift so, ultimately, customers can stay with Werner while exploring the lowest cost delivery option on a shipment-by-shipment basis. The Company also believes this partial modal shift has contributed to the more significant decline in freight demand in the longer haul truckload market.

There you have it - a lot of change and more on the way. It‘ll be interesting to see how all of this shakes out in the months ahead.

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