Trucking Hopes to Thrive in Economic Recovery, Overcome Anticipated U.S. Regulatory Onslaught
By Daniel P. Bearth, Staff Writer
This story appears in the Jan. 4 print edition of Transport Topics.
With the worst of the steepest economic downturn in decades apparently in the rearview mirror, trucking executives are shifting their focus to the recovery in 2010, while also bracing for what could be an onslaught of new safety and environmental regulations.
This year also will mark the introduction of cleaner-burning, but more expensive, diesel engines as equipment manufacturers comply with the final phase of current emissions reduction targets set by the Environmental Protection Agency.
For freight carriers, the pace of business recovery will be crucial. A weak rebound would perpetuate excess hauling capacity and keep freight rates down, while a strong one could create an almost instantaneous shortage of capacity and sharply higher rates, according to analysts.
Fitch Ratings said recently that while demand for truck and rail hauling services is expected to be positive in 2010, overall freight demand “is not expected to return to pre-recession levels until sometime in 2011 at the earliest.”
Officials at Fitch said the forecast for gross domestic product is a relatively tepid 1.8% and that the U.S. economy will remain pressured by high unemployment and reduced consumer borrowing.
“Essentially, we have been bouncing along the bottom,” said John Larkin, an equity analyst for Stifel, Nicolaus & Co., in a forecast presentation to the Ontario Trucking Association late in 2009.
Looking ahead, Larkin said, manufacturing activity should pick up and exports likely will grow as the value of the dollar declines, but high unemployment will keep a lid on home building and retail sales, two of the most important sources of truck freight.
At Credit Suisse Bank, analyst Christopher Ceraso said he ex-pects freight tonnage to grow 1.3% this year, up from his earlier forecast of 0.8%.
Ceraso’s forecast is based on an improved outlook for inventory restocking, residential investment and fiscal stimulus in the first half of 2010 and annual GDP growth of 3.5%.
But the economy is only half the story.
“The biggest risk on the horizon is what’s happening in Washington, D.C.,” said Larkin. “We have had a big shift to the left, a big increase in the federal deficit, discussion around tax hikes on the rich, increased regulations, talk of cap and trade on energy . . . and fiscal policy stimulus that has not seemed to add much true stimulus, in our opinion.”
The Federal Motor Carrier Safety Administration, headed by Anne Ferro, former president of the Maryland Motor Truck Association, is expected to issue a regulation requiring many companies to use electronic onboard recorders.
The Department of Transportation also has begun to implement a new Comprehensive Safety Analysis rating system for carriers (see story, p. 1; click here for story) and promised a review of driver hours-of-service regulations by the end of the year, along with a ban on texting by commercial drivers.
“If the HOS rules were modified to cut the number of driver hours from 11 to 10 [per day], you all know the impact that will have on effective capacity and trucking economics; it will not be good,” Larkin said.
Notwithstanding a predicted upturn in freight tonnage, Eric Starks, president of FTR Associates, a firm that tracks equipment trends, said that he expects
purchases of new trucks to remain constrained.
“The increase in freight in 2010 will not be enough to entice fleets in large numbers to buy new, more expensive technology,” he said.
However, “carriers are sensing an improving environment,” said Richard Mikes, a managing partner at Transport Capital Partners, a consulting firm that
helps carriers with acquisitions and financing.
In a survey of carrier executives by TCP, almost a third of respondents said they most likely will add capacity only when the current fleet is fully utilized and rates increase sufficiently. A quarter said they will not add capacity until the economy improves.
The survey also found fewer carriers interested in selling their company.
“Many carriers are asking themselves, ‘Why sell now? when a better time may [come] in a year when credit and volume conditions and pricing are improving,’” said Lana Batts, another TCP managing partner.
“Clearly, carriers believe they will make more money by raising rates than by adding capacity.”
If the economy gains momentum, carriers could begin to
raise freight rates, said Michael Regan, CEO of TranzAct Technologies, a firm that helps shippers and carriers to negotiate terms of service and rates.
“Most carriers don’t have a lot of room to keep cutting rates,” said Regan. “We expect consolidation as some carriers exit the marketplace.”
With a modest improvement in economy, Regan said less-than-truckload rates could increase between 2% and 3%, dry van truckload rates could go up by 3% to 5% and flatbed rates could rise by as much as 8%.
If the recovery is stronger, Regan said that carriers could raise rates as much as 7% and will likely boost accessorial charges “to pass along increases in the cost of doing business.”
Regan said most carriers don’t expect any “meaningful” rate increases until the second half of the year.
“They expect the first two quarters to be more of the same,” Regan said.
