Trucking market shifts into its next cycle
After a truly bumpy road for the past 18 months, the trucking market has bottomed and is seeing signs of increased demand. Now, freight buyers should prepare for carriers to start looking to make back some of the rate they lost.
By David Hannon -- Purchasing, 11/19/2009 2:00:00 AM
What It Means to Buyers:
What It Means to Buyers:
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Increases in freight demand could cause some carriers to fail as lenders call in debt obligations. Find out as much as you can about your carrier's financial standing.
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You likely improved your rates with LTL and truckload carriers this year. Now focus on how much trucking capacity you'll need and where it will come from. Hint: It may not be from your current carrier base.
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Many companies that ran private fleets in the past are considering a move away from that model to provide more flexibility in increasing and decreasing capacity as demand trends dictate.
By nearly all accounts 2009 was an unprecedented year for the trucking industry. With demand crashing and shippers being pressured by costs at all turns, there was a record amount of bidding and re-bidding of less-than-truckload and truckload contracts. Some carriers chose to bid low and grab market share at the expense of margins. Others focused on maintaining margins and losing volume, while others just plain couldn't keep up and closed their doors.
But in recent weeks, there are signs that the demand dive has bottomed and overcapacity in the trucking market may have seen its most bloated days. And while that will eventually mean tighter capacity and higher rates, freight buyers have time to develop sourcing strategies heading into the next cycle.
Don't look back
For carriers and shippers alike, the past year has been a difficult one. Shippers had very low demand for both LTL and truckload due to the recession and carriers couldn't get enough capacity off the roads fast enough.
FTR Associates says the fury of bidding activity taking place during a time of massive excess capacity, "drove pricing down 3%–6%. As a result, the industry has little or no margin left for the average carrier."
"It's hard to talk about 2009 without an array of clichés," says Dan Van Alstine, senior vice president and general manager of truckload carrier Schneider National's van and truckload business in Green Bay, Wis. "I do think we as an industry have paralleled the economy but, unlike a lot of industries, we still have a lot more capacity than there is demand. Some other industries—manufacturing, retail—are more effective at pulling capacity out. But our industry has not been able to effectively calibrate capacity to the demand levels or dispose of obsolete equipment."
Other carriers confirm that assessment. "This year has been the most aggressive pricing environment that I can remember in my 22 years and we're trying to protect our market share and find new revenue streams like everyone else," says Mike Heaton, senior vice president at Southeastern Freight Lines in Lexington, S.C.
The tragic irony for carriers has been that the increased bidding activity creates more administrative work at a time when carriers have fewer resources available. Van Alstine says Schneider redeployed some customer service representatives to bidding activities during the past year.
"It has been a strain on staffing and no one was in a position to add staff," says Kevin Hartman, vice president of strategy for LTL carrier UPS Freight in Richmond, Va. "So we redeployed. We encouraged existing customers to be open to new ideas without rebidding, but it also opened us up to new business. We have seen customers now more open to giving us more data."
Capacity outlook
Today, it looks like the buyers' market for trucking may have peaked. Carriers are reporting that demand has shown some signs of life and capacity will eventually begin to tighten, although right now it's just getting "less loose" in the words of one analyst.
In LTL, for example, "It's still a buyers market but the pendulum is swinging," says Hartman. "Clearly there's still more supply than demand right now, but that will firm up. And buyers need to be sure to balance today's demands with where they want to be tomorrow. They should be reviewing total cost in selecting carriers and less focused on price. That's the way to achieve long-term cost savings."
Why is there so much capacity in trucking? Well, according to industry experts, the normal economic Darwinisms have not taken place in the most recent trucking industry cycle. Many lenders have been overly lenient to trucking carriers because the lenders really didn't want carriers to go out of business. If lenders have a tractor that's worth $28,000 on their books and the carrier is not making payments or goes under, then the options for the lender are to assume ownership of that tractor, which they don't want because they aren't a trucking company, or to sell that tractor which will get them significantly less than its worth in the current market (nobody's buying truck equipment in this market). So the lender is more lenient than normal and allows the carrier to keep the tractor on the road and hopes to get some money from it.
To put this trend in perspective, consider the following data from a recent FTR Associates report: In the second quarter of 2009, 370 fleets went bankrupt, "a number similar to the rate at the peak of the last upturn. Lenders are reluctant to foreclose because of the extremely low prices for used equipment and to avoid having to book losses on sensitive balance sheets. It follows that the normal sharp reduction in capacity experienced at the bottom of a recession will be replaced by a slower and more drawn out reduction this time."
Of course, lenders are going to become less flexible with carriers if demand for trucking equipment picks up and, in an ironic twist, there could be more trucking companies going under in a growing market. Or in another possible scenario, if fuel costs spike unexpectedly, many of the carriers that are living on credit will also face serious concerns. Both scenarios could tighten truck capacity faster than expected.
The takeaway for freight buyers: Find out as much as you can about your top carriers' financial status.
"We expect a very slow and gradual increase in trucking demand," says Barry Mulkay, director of procurement and carrier operations at PepsiCo in Plano, Texas. "I don't expect capacity to get tighter until the third or fourth quarter of 2010. Fuel price is a major wild card on carrier capacity....and major increases will drive bankruptcies to record levels."
Van Alstine has a similar feeling from the carrier perspective. "I don't think we'll see any massive exodus of capacity soon, but at the same time I don't see fleets growing much. We don't plan on adding a significant amount of capacity next year and I think that's the case for most carriers."
The major unknown for LTL capacity specifically remains the future of giant YRC Worldwide. While its outlook may be the most hotly debated topic in trucking today, it has many shippers and carriers looking at a plan A and a plan B. If YRC were to close its doors, its massive capacity exiting the market could rapidly accelerate current capacity trends and tighten LTL in a single Chapter 11.
In a recent note, analysts at Stifel, Nicolaus and Co. said, "YRC is certainly trying everything it can to stay afloat...However, we believe the company is still likely to run out of cash in the next couple of quarters."
Rate outlook
Rates have to go up. If you're a freight buyer and you are still planning to get lower rates with your LTL or truckload carrier in the next six months, you may be disappointed. In fact, according to some reports, LTL and truckload rates are already taking small steps off bottom.
On the truckload side, analysts at Stifel, Nicolaus and Co. recently reported that "Shippers that have recently put business out to bid saw price reductions ranging from 5% to 10%, and in some cases more than 10%; however, bid activity seems to be slowing and pricing appears to be stabilizing at low rates.
"I don't think shippers see any more line-haul savings in freight rates," says Schneider's Van Alstine. "I think most shippers see that rates have bottomed out and in some cases we have been able to raise rates. They're talking to us about a bid, but I don't think they're expecting to see the same freight rate reductions—they're more concerned about getting the right capacity levels for the right price in the near future."
In an early October note on the truckload market, Longbow Research said, "carriers are increasingly become more constructive regarding pricing over the next six months as spot pricing has become 'less loose.' Some carriers noted receiving higher spot rates when covering loads for brokers."
By its own admission, LTL carrier Con-way Freight focused on market share during the recession. "We made a conscious decision this year to work aggressively with our customers and bring more of their volumes on to Con-way Freight trucks and we were successful in that," says John Labrie, president of Con-way Freight in Ann Arbor, Mich. "But some shippers may want to continue to seek lower prices so they can leverage the LTL market overcapacity, but that's a zero-sum game. If carriers can't make a reasonable profit then they can't recapitalize and reinvest in their networks. LTL buyers need to be sure that there is a financially stable company behind that rate."
"I don't think carriers can afford to cut rates any further and maintain a healthy balance sheet," says Southeastern Freight's Heaton. "As demand increases, our costs go up and we have to add capacity. When costs go up in this level of market you have to pass that onto your customer. So shippers that have been aggressively bidding on price should plan on prices to go up when capacity tightens."
Mulkay agrees that when capacity tightens the shippers that focused too much on rate with their carriers will pay the price. "We at PepsiCo do not alter our annual truckload pricing event unlike many shippers that break carrier pricing agreements to take advantage of current market price. I think when capacity gets tight, carriers will remember those shippers that have 'bid-integrity' issues."
Will the trucking market return to where it once was? Maybe not, says says UPS Freight's Hartman. And that might be a good thing for all involved.
"There's a new normal now. We're not going back to the old days and I think that reality is starting to creep into the conversations today. It's not the end of a cycle."
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