Good News for Carriers is Bad News for Shippers

Equity research firm Morgan Stanley issued its review and outlook for the motor carrier industry, and the report spelled out good news for carriers and investors, but a mixed view for shippers.

With demand for freight services still growing faster than capacity, motor carriers have been able to increase pricing at or above historic levels and, with the exception of USF and Swift, the companies are enjoying their best margins and returns in over a decade, according to Morgan Stanley. The analysts firmly believe carrier cost inflation in the truckload sector will continue to be absorbed by shippers. Real shipper rate increases should be in the range of 4%-9% as 2004 comes to a close and should be in the 4% to 5% range in 2005. This compares with the 1% historical annual truckload inflation, reports Morgan Stanley.

Carriers are also taking advantage of the tight capacity conditions to improve their freight mix, shedding unprofitable or low margin freight.

Regional less than truckload (LTL) carriers were expected to report tonnage increases of 7% to 15% during the fourth quarter of 2004 and nationwide LTL carriers were expected to achieve 5% to 9% increases. Morgan Stanley’s forecast for 2005 is that tonnage will grow 5% to 7% for regional LTL carriers and 3% for nationwide carriers.

Unionized labor costs are a drag on financial results for nationwide LTLs, but the current tight truckload market has benefited carriers like ABF, Roadway and Yellow. Over the longer term, Morgan Stanley expects the lower cost modes (i.e. non-union regional LTL) will add capacity, providing more alternatives for shippers.

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