Fundamentals of Transportation Industry Still Strong

Year-over-year comparisons suggest the rate of price increases for transportation services may be slowing, but the sector is still seeing strong demand and tight capacity, says John Larkin, managing director and head of transportation capital markets research for Legg Mason Wood Walker Inc. Persistently strong growth in containerized imports and elongated supply chains, combined with only incremental increases in capacity and a continued driver shortage, suggest transportation capacity will remain tight.

Traffic managers are not fond of overpaying for transportation services, says Larkin. Therefore, when you look at first quarter truckload pricing increasing 7.7% year over year (excluding fuel surcharges) and rail freight revenues increasing 8%, it suggests shippers don’t see any short-term or medium-term relief from tight capacity.

Larkin also takes exception to the interpretation other analysts have offered on several points.

One argument suggests that Class 8 tractor orders and deliveries have been so robust that capacity must be expanding. Larkin says the surge in orders is an effort by carriers to reduce the average age of their tractors. Many carriers are also replacing tractors purchased before the October 2002 emissions standards went into effect. (Many waited for the new engines to work through initial bugs.) A similar pre-buy behavior is driving carriers to acquire tractors before the 2007 emissions standards take effect (those tractors will begin shipping in 2006).

A second argument Larkin attempts to rebut is that raising driver pay will resolve the driver shortage in the near to medium term. He points to pay increases that took effect over the past year and suggests this has increased the “churn” of drivers moving from one carrier to another to improve their compensation. A recent study by the American Trucking Associations indicates the driver shortage will worsen over the next 10 years.

Rather than seeing the economy losing steam, Larkin says the transition of regional supply chains into national and global supply chains has increased demand for freight transportation. Higher transportation costs are currently more than offset by lower labor costs, higher purchasing economies of scale etc., he says.

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