Lock in 2006 Capacity Now

When Logistics Today reported truckload capacity could be easing, it drew an instant response from truckload carrier CFI.

In the delicate balancing act affecting truckload capacity in the last 12 months, pre-buys to avoid less efficient 2007 engines have inflated truck purchase numbers well beyond the replacement rate. After months at that level, equity research firm Morgan Stanley suggested those purchases and purchases by smaller carriers could increase capacity at a time when volume growth was slowing. Though it’s unlikely to cure the capacity problem, there’s a sense it could help moderate rate increases and even provide a little more breathing room for shippers trying to locate capacity. Of course, a number of other factors also come into play, including plentiful capacity on national less-than-truckload carriers that has attracted some of the low-end truckload shipments or moves that had been consolidated into multi-stop truckload.

Here’s what Herb Schmidt, CEO of truckload carrier CFI had to say:

“In my 21 years here at CFI I have never seen demand outpace supply to the degree it has the past eight months. The momentum began building in the last half of 2004 and after an average January and February, 2005 has been a barnstormer. With our load turn downs alone, we could have kept an additional 700 trucks busy. We have been virtually ‘maxed out’ system wide the majority of this year.

“For the first time in my tenure here, we have had a significant number of shippers contact us asking for us to ‘let them know in advance what our projected rate increases for 2006 will be so that they can budget for them.’

“Shippers are lining up capacity already, for next year. Some are foregoing the traditional bid process, not wanting to risk losing capacity from their core carriers. This is not an environment where it would be advantageous for a shipper to go rate shopping. I suspect many of the ‘aggressive’ rates will not include trucks and trailers if capacity is in as short supply as it has been this year. Seasoned shippers know this, thus, many are not bidding their business at this time, rather, are seeking to extend existing contracts with ‘reasonable’ rate increases.”

Morgan Stanley responded to Schmidt’s remarks saying they were consistent with reports of many of the larger, publicly traded carriers. “However,” the research firm stated, “we're on track to see over 700,000 class 8 trucks ordered for the years 2004/2005 and most assume (ourselves included) this many will be built in the 2005/2006 time frame.”

Replacement purchases were depressed prior to 2004 when volumes were static, so some of the purchases are, no doubt, pent-up demand. But even though most large truckload fleets say they are not adding capacity, they are, in fact, adding capacity, but at a low 3% to 5%. This corresponds roughly to increases in demand.

Schmidt had also commented that smaller fleets were having difficulty expanding due to the high cost of trucks and trailers, lack of drivers and financial institutions being reluctant to lend to trucking start ups because of high bankruptcy rates in the industry. Morgan Stanley agreed this had slowed the growth of those smaller carriers, but it saw many small fleets growing at a 20% to 30% rate. This compares with a rate of 50% to 100% expansion in prior cycle peaks.

In the end, some moderate capacity increases may be occurring, but the consensus is that it won’t lead to an overwhelming reversal of the capacity issues of 2005.

To read the article “Higher Costs Aren’t Dampening Shipper Confidence” in the November issue of Logistics Today, use the following link.

Higher costs aren't dampening shipper confidence

TAGS: Archive
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish