Comments during a conference call hosted by Stifel Nicolaus reflect the ominous tone of the day, Friday the 13th of February
“The spreads between diesel fuel and gasoline prices and between wholesale diesel and retail diesel prices have never been as wide as they have been at times over the past year or so. These trends have distorted truckload operating results positively or negatively at various times over the past 12 months,” commented Stifel Nicolaus analyst, John Larkin. At times, the fuel surcharges have helped bolster carrier results, while at other points in the last year, fuel surcharges weren't moving fast enough to keep pace with actual increases. One positive result of lower fuel costs is a slower rate of carrier failures.
Speaking at the conference call, Lana Batts, managing partner of Transport Capital Partners and former president of the Truckload Carriers Association, suggested that even with fuel costs stabilizing, the issues of surcharges haven't gone away. Among the concerns she expressed was a question of whether transportation brokers passed on to carriers the full amount of surcharges they collected from shippers. Going forward, carrier financial results will come out from under the halo of fuel surcharges that helped sustain profits or moderate revenue declines that came with lower freight volumes.
Those drops in freight volumes have led many shippers to reconfigure their supply chains and have also caused many carriers to restructure their networks. This has stripped some capacity out of the market (along with failures and closures) but not as quickly as freight volumes have dropped.
According to Batts, these supply chain redesign efforts could have as much impact on the trucking industry as deregulation had in 1980. Carriers who are not working with their customers to squeeze costs out of their customers' supply chains may be left behind as this mega-trend picks up steam, she commented.
While attention is focused on the economic stimulus process, the regulatory environment for the US motor carrier industry is shaping up to be more challenging. Batts warns of more restrictive proposals on hours of service, requirements for on-board reorders, the requirement of factory-installed speed governors, enhanced health standards for drivers, more thorough training for new truck drivers, stricter driver drug testing laws and a wider application of the driver identification card (i.e., TWIC or Transportation Worker Identification Credential).
“All of these measures, in one way or another, impair productivity in what will almost certainly be a capacity-constrained industry once demand levels begin to rebound,” observed Larkin.
As all of these factors—industry downsizing, restrictive regulations on drivers and measures that constrain productivity—a recovery and the attendant rise in freight volumes could find an industry that is capacity constrained on the labor side more than on the equipment side, according to Batts.
A survey Batts conducted of 100 carriers added to the view of an industry that faces more change than at any time since deregulation in 1980. She noted that only 23% of respondents said they believed freight volumes will grow over the coming 12 months (60% said volumes would decline further). More than half of shippers are seeing rate decreases. And 60% of carriers reported that one or more of their major customers were in bankruptcy.
Speaking to the issue of industry consolidation, 21% of carriers indicated they would consider liquidating in the coming six months and 23% of carriers said they would consider selling their businesses in the next 18 months. Just under half of the carriers (40%) said they would be interested in making an acquisition in the next 18 months if demand increases, so some of that capacity could remain in the industry.
The carriers experiencing “financial trauma” exhibit many of the same characteristics of carriers that failed in prior downturns, say the analysts. Those under the most pressure are: 1) Often small carriers, 2) Ran at an operating ratio of 95 or higher when market conditions were respectable, 3) Have older management teams and/or management composed of individuals from the same family, 4) Have no succession plan in place, 5) Have traditionally operated in longer-haul segments of the truckload market, 6) Have experienced higher-than-average driver turnover, 7) Differentiate themselves in the market on rates and 8) Have not adequately invested in information technology systems.