Is Truck Capacity Back on the Roller Coaster?

Leave it to an audience member to sum up the issues for all of the economists. “A tractor exists for one reason, to pull a trailer,” said one truck manufacturer in the audience of the North American Economic and Commercial Vehicle Industry Review. “And a trailer exists to haul freight,” he continued. The conclusion: freight demand drives the need for tractors and trailers. But if it were that simple, the conference would have disbanded after just an hour.

In 1994, big fleets were buying, said Ken Vieth, co-principal of ACT Publications and partner and general manager of ACT Research, sponsors of the conference. This was followed in 1995 by the small fleets who had been unable to buy earlier. The following years were record production years for tractor and trailer manufacturers. Then demand was met and freight volumes were contracting. Fleet buys all but ceased, and carriers deferred their normal replacement cycle to postpone the expense.

David Teolis, senior economist for North America for General Motors Corp., noted that economic growth will moderate. Manufacturing is already slowing, he said. Speaking of both the growth in freight volumes and the potential for a slowdown, Teolis warned that one of the great dangers of extrapolating trends is in thinking that what is going on now will continue. His comments set the tone for the difficult task of analyzing what is happening in the truck and trailer markets.

One point drew unanimous agreement – there is a critical shortage of drivers. Patrick Casey, director of business forecast and planning for TTX Company, said that one estimate suggests drayage owner operators end up making about $6 per hour given the delays they must sit through at the Port of Los Angeles and on the surrounding highways. Though long-haul carriers compete with construction jobs that keep drivers close to home, drayage drivers are already close to home. And, at realized gain of $6 per hour, nearly anything else they could be doing pays adequately to lure them away.

Despite the drop in fuel costs just before the conference, fuel surcharges and fuel costs were among the concerns for shippers and carriers. This is due in part to the clean air initiatives forcing truck manufacturers to meet tighter emissions requirements. Those engines will be more costly to operate and offer lower efficiency, the manufacturers admit. Carriers are concerned that the reliability and maintenance will be issues on new designs. The last round of standards moved the needle forward for an earlier design change, but this time around, some significant changes are being made to the engines, not just exhaust or other components. This has caused a surge in fleet purchases in an effort to move the replacement cycle ahead and avoid being in the first wave of users of the new engines.

There is also a shortage of used trucks, and those trucks in the desirable mileage ranges are commanding prices close to a new truck. This also makes the price to finance a purchase higher for the small fleet and owner-operator customer who is the traditional market for a used truck. That raises questions on financing and creditworthiness and the ability of the owner to survive economically. This is one area where capacity will need to build to satisfy current demand, and conditions aren’t that positive.

The economy remains heavily dependent on trucks to move freight and capacity will continue to be an issue for the near term. One carrier said it has to reach 500,000 prospects to get 120,000 driver applicants. From that, it is able to get about 12,000 to 13,000 who enter training. Only about 10,000 emerge from training after getting a taste of the job and lifestyle. Driver churn, the 120% turnover rate, makes the 20,000 industry shortage of drivers seem larger, says the American Trucking Associations. But, if ATA projections of a shortage of 110,000 drivers over the coming years is accurate, and if the carrier experience recruiting drivers is any indication, the industry will have to approach 5.5 million prospects to fill the shortfall.
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