Andy Ahern Comments on the 2011 Economy and its Effect on Trucking
Andy Ahern Comments on the 2011 Economy and its Effect on Trucking
As a transportation analyst, I am often asked what the balance of 2010 may bring to the trucking industry, as well as my projections for 2011. In reference to the general economy. I believe it will continue to be sluggish, have spurts and will continue to work its way out, of the recession, but it will take a very long time.
However, for trucking, I believe the next 12 18 months will offer many opportunities for well positioned trucking and logistics companies, the supply versus demand, is in our favor, there is an existing driver shortage that is only going to get worse, and many trucking companies have excess freight, but not enough drivers.
For a trucking company, this is an optimal position to be in. Granted, you can't move some of your trucks because you don't have drivers, but the fact that you have excess freight allows you to do several things;
1. Focus on the highest rate of return, every time you dispatch a truck;
2. Maximize the utilization of each truck you have on the road, which can provide you the highest rate of return.
Is the trucking industry going to have its challenges? Yes! Changes to the Federal Driver Hour Rules are a huge issue, when the HOS rules change it will impact the industry, and when that happens, the trucking industry is going to have a big "fight on" their hands.
The implementation of CSA 2010, is obviously going to impact the trucking industry, which in turn, impacts "bottom line" profitability.
With all that stated, the truck market is strengthening, US truck sales (through August) climbed 16.5%, used tractors have seen a substantial increase in value, and until recently, 60% - 70% of finance applications ( in 2010) were for used equipment.
Freight rates are increasing within certain segments of the marketplace, refrigerated rates are still "weak" in some areas, but flatbed and van rates are moving upward.
That coupled with the fact that truck tonnage has risen by, 2.9% indicates that segments of the trucking industry are going to do well. Does that mean that we're not going to have our challenges? Of course not. Just when we think things are picking up, all of a sudden, freight demand softens there is no rhyme or reason why it happens, but all of a sudden, out of nowhere, growth slows.
As we know, the last 2 years have had a devastating effect on the trucking industry and the squeeze on profits forced many carriers to put off purchasing new equipment. What that means is that fleets are experiencing an increase in maintenance cost, and the increase in maintenance cost affects bottom line profitability!
What does all this rhetoric mean? It means that freight rates have to go up/rates will go up!
In order for trucking to make a profit and cover overhead, rates will increase; it's a fact of life. In the October 4, 2010 edition of Transport Topics, there was an article entitled "Executives Concern". In the article, it stated that TL rates are down 13% since 2006, operating costs are up, the squeeze on profits has forced many carriers to put off buying new equipment, the average age of fleets is the oldest it's been in history, and 270,000 units have been taken off the road since 2006.
There is no doubt that, as the economy continues to sputter; some marginal carriers will go out of business, creating additional demand for trucks. As the demand for trucks from shippers increase, prices will go up. Additionally there are a substantial amount of incentives, (now), to purchase new equipment. Western Star Trucks offers a no interest for the first 6 months, Daimler Chrysler has a guaranteed resale price program for specific customers. Daimler stated, in a Transport Topics article, that they allow 60 90 days before a first payment is due since some carriers need, at least, 45 days before their revenue stream is solid enough to make a payment.
My point; the trucking industry is adjusting to its challenges. The trucking industry and the ATA are taking an aggressive approach to secure trucking's future. Shippers will find themselves, at some point in time, with rising transportation cost. If I was a shipper, I would align myself with a strong network carrier that could handle my distribution needs because, when you least expect it, the inevitable is going to happen.
Recognizing the financial dynamics of the economy and the political turmoil that currently exists, prepare companies for opportunity. There is going to continue to be a driver shortage and a capacity shortage, in the near future. The problem we're experiencing is that we saw a strong freight demand for several months and, all of a sudden, the demand dissipated. The economy is going to continue to sputter but trucking is going to get stronger.
I've stated, on numerous occasions, that trucking is a pennies business, treat each truck as a profit center, balance your lanes, look for your highest rate of return, with each Shipper, and focus on increasing your average rate per mile on your back hauls, and 2011 will be a good year for trucking and logistics companies that practice cost control.
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