The seasonally stronger traffic pattern that precedes the Memorial Day holiday at the end of May is typically followed by a weaker beginning for June, says Morgan Stanley analyst Chad Bruso. But for 2006, the post-holiday period remained strong, bringing the proprietary Truckload Freight Index closer to 2005 levels.
If the strength in truckload volumes relative to capacity continues, carriers could report “upside surprises” in earnings because, “TL carriers earn an overweight portion of second-quarter profits in the much of June,” says Bruso.
Equipment pre-buys to avoid less-efficient engines in the 2007 model-year tractors mandated by the Clean Air Act, continues to push the capacity side of the index. However, orders are expected to fall back to a 7,000-10,000 per-month range (below the industry replacement rate), which could led to some tightening of capacity.
Motor carriers are also facing a requirement to start using ultra-low-sulfur diesel fuel (ULSD) in 2007 and later model engines by January 1, 2007 and in all Class 8 trucks by December 1, 2010 (except in California where the cut off is September 1, 2006). Morgan Stanley reports that early estimates indicate ULSD could add four cents per gallon or more to fuel costs.
The combination of factors could put upward pressure on rates.