It's bad news for buyers of truckload services, but the current market looks to continue for much of 2006. Tight capacity, more frequent rate increases and higher fuel surcharges will continue to plague truckload buyers for the foreseeable future.

According to a late 2005 survey from Bear Stearns, truckload capacity is expected to remain tight through 2006. In the survey, 53% of shippers polled said that truckload capacity in 2006 would become tighter than 2005 and 13% expected it to be "extremely tight." A hopeful 3% expect truckload capacity to increase in 2006.

"Expectations for tight capacity are still at a fundamentally elevated level as the large truckload carriers have not made meaningful capacity additions in recent years and face a continuously difficult driver environment," the Bear Stearns report says.

Thom Albrecht, an analyst with Stephens Inc. that tracks the truckload sector, tells Purchasing that after having a "nirvana" year in 2004, truckload carriers followed it up with a surprisingly strong fourth quarter in 2005. For example:

• In the fourth quarter, truckload carrier J. B. Hunt reported a 6.9% increase in its rate per loaded mile at $1.87, compared with $1.75 in the same quarter 2004, which more than tripled its fourth-quarter net income in 2005.
• U.S. Express reported an increase of 6.9% in truckload rate per loaded mile.
• Temperature-controlled truckload carrier Marten Transport's CEO Randolph Marten said that "The combination of solid freight demand [in the fourth quarter of 2005] with limited industry-wide capacity and strong freight selection by our sales and operations team contributed to a 6.6% increase in average freight revenue per total mile."
• And Werner Enterprises said its fourth-quarter freight demand was "as strong as the strong freight demand during the same period of 2004." In its most recent earnings statement, Werner said that "a solid freight shipping market...combined with an extremely tight truck capacity market, created the strong fourth quarter 2005 freight market."

Albrecht points to three main points giving carriers the leverage they currently enjoy: Lack of incentive to add capacity; extremely tight driver market/shortages; and ability to increase rates because of short capacity and strong demand.

"Our forecasts call for truckload rates to increase 4-6% on average in 2006," says Albrecht. "It could be higher if more carriers have to raise driver pay twice. That would kick it up to 6-8% and that all varies based on lane and time of year, and negotiation."

Driver retention and pay is a major issue in truckload, mostly because of the shortages carriers see. Marten Transport says its annualized driver turnover rate has remained near 70% in comparison to an industry average that is estimated at 135% by the American Trucking Associations.

In its earnings statement, Werner said, "The driver recruiting and retention market remains more challenging than ever. The supply of qualified truck drivers continues to be constrained due to alternative jobs to truck driving that are available in today's economy. The company continues to focus on driver quality-of-life issues such as developing more driving jobs with more frequent home time, providing drivers with newer trucks, and maximizing mileage productivity within the federal hours of service regulations."

According to Albrecht, pay increases right now are only effective in retaining drivers. Carriers see turnover rates decrease with pay increases, but none of the money allocated to pay increases is helping recruit new truckload drivers.

"The Monday morning recruitment classes are still pretty quiet," he says, adding that demographics show an upcoming decrease in the general population for ages 20-44 in the next four years.

Trucking buyers know that fuel is another major issue in the market right now. Carriers continue to increase fuel surcharges and the current gas prices show no signs of letting up. Albrecht delivers more bad news for shippers: "While the larger carriers are implementing the fuel surcharges, the smaller carriers are getting put out of business by their inability to recoup their fuel costs. So at the end of the day, when fuel prices finally drop, shippers will see even less capacity in the market."

One piece of advice Albrecht offers for buyers is to know that demand for truckload services may dip slightly if GDP growth slows in the first or second quarter. Buyers should not confuse this demand dip with increased capacity. When demand picks up again, the same capacity issues will surface.