Thursday, August 7, 2014

It’s Time for the Trucking Industry to Get New Pants

Imagine a man who worked a desk job for the first three weeks of every month and then traveled to a jobsite and did exhaustive manual labor the last week. During that week in the field, he also had limited access to food. This guy would be able to predict his fluctuations in weight, and it would be easy for him to buy the correct size of trousers. All he would have to do is buy the size that fit right before he went to work in the field.  He would lose weight the next week and then gain it back again the next three weeks before repeating the cycle.

For the last several years, up until 2014, it was much easier for carriers to right-size their fleets.  There wasn’t the usual strong cyclical variations in freight demand that are common in the industry.  Freight growth was slow, and the small variations in demand were almost always downward.  So you size your fleet to handle slow growth.  The very few times you run out of capacity, it doesn’t hurt you much because the upturns are mild and short lived.

It was also important to keep your fleet right-sized due to risk.  After the Great Recession, risk management became essential in all industries, especially trucking.  Fleets that had over-extended their capacity died fast and hard.  With this recovery being so tenuous, and the world economy unstable, it was smart to keep your capacity as tight as possible with limited “flex capacity.”

The umpire was over-capacity
Now let’s say our worker’s conditions change. He no longer has to work one week a month in the field, so he doesn’t burn any additional calories and has access to all the food he wants for that week.  Over time he begins to gain weight.  In addition, the government requires clothes to be washed in hotter water than normal, and his pants shrink.  Suddenly all his pants become way too tight and he starts to split every pair of trousers he owns, causing him to buy many pairs of new pants.

Carriers were doing an excellent job managing their capacity and limiting their risk up until late 2013.  At that point, freight growth starting to push industry utilization levels higher.  In addition, the hours-of-service (HOS) regulations started to negatively impact productivity.  Fleets realized their pants were about to split. They were no longer right-sized, they were undersized.  They attempted to flex, but there was not enough flex capacity. 

First the large fleets began to place orders for new tractors, then the mid-sized, and now most everybody.  The orders started to ramp up in December and haven’t really stopped.  Of course this is not the only reason for the upswing.  Carriers have increased confidence now that economic growth will continue. This results in higher replacement demand that was delayed and pent up due to the risk factors.  Also, the energy boom is tying up rail capacity and shifting some freight to trucking.

This increase in truck buyer confidence is also an important factor in the amount of orders pouring in and the timing of the demand.  Fleets aren’t just ordering trucks to meet their current demand; they are buying trucks to meet the expected demand during the peak freight market later in the year.  Therefore, there was no need to take delivery in the first half of the year. This lack of urgency caused some industry players to doubt the substance and the size of this market upturn.  The uniqueness of this upcycle, and this delay in responding to it, currently has the industry playing catch up. 

Because the trucking industry has characteristic similar to many other industries, it is a good barometer to what is going on in the general economy.  If this boost in buyer confidence is happening in other industries, then we should see an increase in business investment.  Sluggish business investment is one of the things preventing GDP from exceeding 3%, so if this is a trend, GDP has a chance (though forecasts are lower) to get as high as 3.5% in 2015.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)