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Motor Carrier Segment Balancing Supply and Demand

When you want to determine the health of the motor carrier industry, it’s all about supply and demand, says David Ross, an analyst with Stifel Nicolaus.

Demand for trucking services has declined over the last couple of years due to a mix of secular and cyclical issues, says Ross. These include weak consumer demand, a weak US dollar, a weak manufacturing environment, smaller packaging and changing supply chains.

With too many trucks chasing too little freight, the result has been pressure on pricing. Supply needs to come down to meet reduced demand, and that is happening with some carriers (YRC recently announced it had accelerated the integration of Roadway and Yellow). Higher fuel costs have also accelerated "the exit of supply." That's a polite way to say carrier closures, but it also applies to carriers cutting the size of their fleets. On the exit side are Jevic and Alvan. But major carriers like JB Hunt, Swift and Werner have shed capacity. Ross reports Hunt cut capacity by 1,427 trucks, Swift by 2,735 and Werner by 950 for a total between the three of 5,112.

The forces driving demand are macro issues and won't turn quickly. Consumer spending and savings rates have been sliding. New and existing home sales continue to be weak. And auto and light truck production is weaker than the last recession and well below levels of a year ago. Even with a weak US dollar, exports have been struggling to grow.

Supply chains are being redesigned, says Ross. This could have a significant impact on frieght flows and demand for motor carriage. "But near term, the effects should barely be felt," says Ross.

Carriers were exiting at increased rates as demand slowed, but it was high fuel prices that triggered a significant reduction in capacity. Ross reports that nearly 2,000 fleets, accounting for an estimated 90,000 trucks, exited in the first half of 2008.

The modest growth in the US economy coupled with overcapacity in the trucking industry means the pricing environment could remain competitive. But almost in an homage to the old line, "what doesn't kill you makes you strong," Ross observed that "For both truckload and LTL, the worse this current economic downturn ends up being and the longer it lasts, the greater the upside will be for the surviving carriers who maintained good service levels, operating discipline, and strong balance sheets."

There's the rub. At least in the LTL segment, networks require density, and density requires volume. If overall volumes are low, it is very tempting to drive individual volumes higher through aggressive pricing or to build density in lanes by delaying departures until trailers are full. Those practices, if taken too far, run counter to what Ross suggests is needed for a carrier to come out of the current market a winner.

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