Logistics Management - June 2010

TRUCKLOAD
Special Report
There are solid indications that the
days of excess supply are over. According
to an analysis of rates and interviews
with analysts and leading TL
executives, all signs point to a revival
of truckload rates due to rising costs,
tighter capacity, increased regulation,
and the overall economic recovery in
the industrial and retail sectors.
“We’re in a state of flux right now,”
says John G. Larkin, longtime trucking
analyst with financial analyst firm
Stifel Nicolaus. “Most contract TL
rates are presently being negotiated
down another 5 percent to 6 percent
on top of the major rate decreases negotiated
over the past several years,” he
says. These rates will be in place until
contracts come due next year or until
shippers start to run out of capacity.
“Our sense is that shippers will not
run out of capacity over the remainder
of 2010 as the recovery will be tepid
at best,” Larkin adds, noting that U.S.
unemployment remains stubbornly
high and American businesses are
reticent to add more workers or make
large capital expenditures not knowing
whether incremental anti-business legislation
will be enacted by Congress.
“But assuming a moderate recovery
from here, pricing power should
start to return to the carriers in a
bigger way come 2011, especially if incremental capacity
exits the industry between now and then,” Larkin predicts.
Unfortunately for carriers, incremental costs may offset
much of those 2011 rate increases. Those cost increases
are likely to include higher driver pay, higher fuel costs,
and higher equipment ownership costs. While contract
rates look like a bargain for shippers now, with the exception
of some expedited carriers and flatbed carriers, spot
pricing has consistently been improving over the past
several quarters.
Spot TL rates were “often below variable cost a year ago,
but that is no longer the case,” Larkin says. Contract rates
usually follow any rise in spot market rates, he adds.
William Greene, trucking analyst with Morgan Stanley,
says that while overall TL fundamentals are improving,
trucking rates may not rise substantially until 2011. He’s
predicting “low- to mid-single digit TL pricing increases”
by year-end.
“We saw capacity come back in
February and March that we’re
really not used to seeing. In the
last three weeks of April, we
saw rate increases coming.”
The big carriers’ view
Truckload is the most fragmented
sector of the trucking industry with
even the largest carriers such as
Swift Transportation and Schneider
National barely holding 1 percent
market share. While the mega-carriers
have some economies of scale, thousands
of smaller niche TL players can
at times offer identical services at bargain
rates because of lower overhead
costs and other innovations.
TL has also historically been
trucking’s most responsive sector.
Because nearly all the top players are
non-union, they can take capacity out
quickly in any economic downturn—
and most did. Larkin estimated as
much as 15 percent of over-the-road
TL capacity left the industry during
the 2006-2009 trucking recession and
has not fully returned yet.
Quinn of U.S. Xpress adds that
he’s definitely seen an increase in
economic activity, but that it’s
“difficult to tell how sustainable it
will be.” That’s because it’s unclear
whether the recent rise in industrial
demand—the U.S. manufacturing
index rose 0.9 percent in March, the
latest in a string of monthly increases—is
a sure sign of a solid economic
recovery or merely a restocking of
inventory from a very depressed basis.
“But it’s better than it was a year ago at this time,”
Quinn says. “Definitely, from the economic indicators,
there is a pickup in economic activity.”
Most years, trucking activity starts building in March
through the second and third quarters to a peak period from
August through November. Though nobody is certain, many
analysts are suggesting that 2010 could be one of those “classic”
years that follows that pattern. Already, some TL carriers
are reporting impressive rate increases in the spot market, if
not in their contract rates just yet.
“We have seen some spot market opportunities,” Quinn
reports. “Our volumes were decent in April. That’s going to
lend itself to some pricing power if it continues. As we get
into peak shipping months, there could be some shortages of
equipment.”
That’s because of what Quinn describes as a “substantial
erosion” of truckload capacity during the recession. That
— James Bozeman,
president and CEO of
J.M. Bozeman Enterprises
62S June 2010 • Logistics Management