Truckload capacity expands, shippers reap the benefits
By David Hannon -- Purchasing, 3/1/2007 7:00:00 AM
The pre-buying frenzy of trucks prior to the 2007 EPA engine regulations going into effect hit truckload capacity harder than expected in late 2006, carriers report, and the impact on truckload capacity and pricing could last well into 2007.
In its recent earnings statement, truckload carrier Werner Enterprises of Omaha, Neb. reported that "Many carriers took delivery of more new trucks than normal in the second half of 2006 to delay the purchase of more costly new trucks that are required to meet federally mandated engine emission requirements beginning with engines manufactured in January 2007."
Approximately 331,000 Class 8 trucks were built in 2006, compared to a normalized build level of approximately 230,000 trucks. Werner reported. The increase in trucks on the road flooded the market with truckload capacity in late 2006 and created a decline in spot-market truckload freight rates, "as the pendulum for spot market pricing swung from truckload carriers to shippers in fourth quarter 2006," Werner reported.
Covenant Transport in Chattanooga, Tenn. confirmed the trend in its recent 2006 earnings report, saying demand during the fourth quarter was "much less than expected," and rates were down 1% vs. the fourth quarter of 2005. "The combination of lower rates and utilization produced a 4% reduction in average freight revenue per tractor per week," Covenant said.
U.S. Xpress, also in Chattanooga, reported a fourth-quarter drop in truckload demand and rates. "The very strong spot market experienced in 2005 was virtually nonexistent in 2006, which resulted in lower rates and utilization within our U.S. Xpress truckload operations," the company said.
USA Truck CEO Jerry Orler called the fourth quarter "the most difficult operating environment that we have seen in several years due to the deteriorating demand and the absence of the normal peak shipping season. We also experienced more pricing competition as the quarter unfolded, which created an increasingly challenging environment to generate the necessary revenue volume." Van Buren, Ark.-based USA Truck held firm on its pricing through the third quarter and says its fourth quarter rates were not competitive enough.
 Perry: More capacity has translated to better service levels. |
Swift Transportation, which agreed to a buyout offer recently (see story, p. 30), reported a major slowdown in its fourth-quarter shipments. CEO Robert W. Cunningham said "We were also impacted by the downturn in the housing and automotive markets, and the increase in Class 8 truck builds prior to the new 2007 EPA requirements, both of which added capacity to the market."
And while carriers are hoping the impact is temporary, market analysts say the effects may linger with truckload rates lower much of 2007. In a late 2006 report, Bear Stearns says, "What feels to most public truckload providers like weak demand and a delayed 2006 peak season is, we believe, mostly the impact from a four-year unprecedented ramp-up in over-the-road Class 8 truck builds, into a modestly decelerated economy."
In a recent note to clients, Thom Albrecht of Stephens Inc. points out that a year ago there was a truckload capacity shortage of approximately 5–7%. By the third quarter of 2006, supply and demand were in equilibrium, and today there is modest excess capacity.
Stephens projects that truckload rates in the first half of 2007 could be down as much as 3%. "As industry consolidation occurs and as the market works off the excess supply of trucks associated with the 2005–2006 pre-buy, equilibrium should be re-established by summer. Rates, in turn, are likely to advance modestly during the second half as capacity tightens."
Bear Stearns goes on to say there is a "several-quarter lag before increased truck capacity is fully reflected in pricing, so we expect the [downward] trend in truckload pricing to likely continue through at least 2007. We believe an increasingly unfavorable supply/demand environment will continue to force the large, public truckload carriers to drive more empty miles and trade in unseated tractors earlier than normal to maintain their discipline on yields. We expect these trends to continue through at least the first half of 2007."
The impact of these trends on shippers is materializing. Shippers are now and will continue to put truckload contracts out to bid in the first half of 2007 to take advantage of looser capacity, Stephens says.
Evidence to that fact is Victor Perry, director of customer care for Celebration Foods, a maker of frozen desserts (think Carvel) in Rocky Hill, Conn. Perry is in charge of the company's logistics operations, 90% of which is truckload shipments. "At this point we don't typically have to go looking for new truckload carriers as we are solicited on a regular basis," he tells Purchasing. The increased truckload capacity has allowed Perry to bring more carriers into the mix and achieve some cost savings in certain lanes.
"Our biggest savings has been in long-haul truckload lanes going from Ohio or Maryland to California," Perry says.
Celebration's trucking requirements are unique in some ways, as most of what it ships is frozen. So, "Before we do business with a carrier we typically will talk with someone in their organization about our expectations as a customer and what our needs and requirements are," Perry points out. "Since our product, ice cream cakes, has such a low temperature requirement we'll always ask about their ability and experience in handling that type of commodity. We'll also send them our blank rate sheet that has the origin, destination and the number of miles in between and have them quote a rate to do that run."
Perry also reports a slight uptick in service levels from truckload carriers, which he suspects is "driven by the fact that we now have the ability/luxury of picking and choosing carriers, whereas in the past we gave the loads to whoever would take it."
Watch the second half!
Truckload capacity may tighten back up by the end of 2007
| 2006 | 2007 | |
| Source: Stephens Inc. Truckload capacity could tighten as much as 7% during 2007 depending on market factors, demand and economic growth. |
||
| Estimated demand growth | 2% to 3% | 2% to 4% |
| Estimated capacity growth | 6% | 0% to -3% |
| Estimated capacity impact | -3% to -4% (loosening) | 2% to 7% (tightening) |
Now Playing:
Truckload rates continue downhill
09/03/2009DRAM prices fell 40% in fourth quarter
02/19/2009Truckload capacity growing
12/14/2006
