Truck and trailer demand should remain strong, but the market for them would be even better if carriers could find the drivers needed to operate them.
In a presentation at the Truck Trailer Manufacturers Association convention in Savannah, Georgia, analyst Thom Albrecht said that recent strong sales of trucks and trailers still have not overcome years in which sales were below what was needed to replace worn equipment.
Albrecht is a Chartered Financial Analyst (CFA) with the investment banking firm of Stephens Inc.
One of the biggest factors affecting carriers is the shortage of drivers. It's a problem that Albrecht said is bad and getting worse.
“Demographics for recruiting and retaining drivers will be awful between 2004 and 2007,” Albrecht said. “The number of people — male and female — between the ages of 20 and 44 will actually shrink, according to the U S Bureau of Census. If your primary pool for drivers is shrinking, you can see why carriers are not adding substantial capacity and are continually griping about the driver situation.”
Even when this demographic segment — the primary age group for truck drivers — begins to grow later in the decade, the growth will be insignificant.
And while this age group is shrinking in size, the need for drivers will increase because the economy is expected to continue to grow. At 3% annual growth in GDP, driver availability will actually be 34% worse by 2010, Albrecht said.
“Even if the economy grows at 3% a year, the population will be shrinking in real terms unless you can get productivity of the trucking industry to increase. And there will not be much possible increase in productivity as it relates to drivers.”
Like the equipment they operate, drivers are getting older, Albrecht said. The average Teamster driver today is 57 years old.
Could the driver shortage be alleviated by hiring more women drivers? Not likely.
“That group essentially has gone sideways the last several years, consistently representing between 4½ to 5½% of the driver base,” Albrecht said. “If you could get that to 10%, you could make a dent in the driver shortage. But the high-water mark was 5½%. Don't expect the recruitment of women drivers to be a panacea for the shortage of drivers.”
Fleets have attempted to make driving more attractive by reducing the length of the trips, Albrecht said.
“In 1990, J B Hunt's average haul was just under 900 miles, and Werner's was over 1000 miles,” Albrecht said. “By 2004, they had reduced the length of the trip to 540 and 583 miles, respectively. But reducing the average length of a trip has not helped driver turnover much. In 1990, the turnover at Werner was 100%. At J B Hunt, it was 105%. By 2002, Werner was down to 90%, and J B Hunt was at 95%.”
Other issues, including flat growth in business and higher compensation for drivers, have combined to help these fleets retain their drivers. By 2004, Werner was down to about 75% turnover, and J B Hunt was about 80%.
“While they have improved driver retention, they have not been able to attract new drivers very well,” Albrecht said.
In theory, the driver shortage could be improved if fleets could make the drivers they have more productive. But mileage utilization has been stagnant for about a decade, Albrecht said.
“Despite the red-hot freight environment we had in 2004, miles per truck per week actually shrunk 0.8%,” Albrecht said. “Thanks to hours of service regulations, we will not be getting any productivity increases from trailers — unless we can shrink the tractor-to-trailer ratios.”
Another way to get more drivers is to increase the pool of possible employees by lowering company standards. Albrecht mentioned several possibilities, such as raising the minimum age for drivers or by waiving their zero tolerance for drivers with felonies on their record.
“This is not practical,” Albrecht said. “The risk for carriers has gone up several fold in recent years. The average deductible for bodily injury in 1999 was about $440,000. Today it is $3.2 million. Carriers will not lower their standards a lot. If they pick the wrong crew of drivers, the costs can be horrendous.”
The shortage of drivers is even affecting the ability of fleets to merge with or acquire other carriers, Albrecht said.
“Drivers are one of the biggest impediments today for acquisitions,” Albrecht said. “Carriers want to acquire other companies, but if they do, they know that 100 out of 300 drivers will leave. Of those who remain, 80-100 may not be desirable. If you buy a fleet of 300 trucks but only retain 100 drivers, management must conclude that the acquisition is not worth the time or effort. That's why acquisitions are happening at a snail's pace, particularly in the truckload industry.”
Another approach to reduce the driver shortage is to get more owner-operators. However, the number of owner-operators has been shrinking.
“I don't see anything that is going to change that,” Albrecht said. “The reason is simple economics. Owner-operators at fleets that pay per mile are generally making 88-91 cents per mile. The cost per mile for fleets is about $1.30. Even with fuel surcharges of 15-20 cents per mile, how can owner-operators make it at $1.10 per mile?
Buying trucks early
Another major factor affecting fleets today is the tightening of diesel regulations that will go into effect in 2007. While some analysts dispute the idea, Albrecht is one who is convinced fleets are buying trucks now to beat the new regulations.
“You're darn right they are pre-buying,” he said. “They are scared to death of 2007.”
Albrecht deals primarily with carriers. He said that analysts on Wall Street who focus primarily on the equipment companies generally are the ones saying the current high sales of Class 8 trucks have little if anything to do with the approaching deadline for new restrictions on diesel emissions. It is in the best interest of publicly traded truck manufacturers to minimize the influence of this federal rulemaking on truck sales, Albrecht said. Truck manufacturers do not want shareholders to focus on what could be a “cliff event” in truck sales once the regulations go into effect in 2007.
Albrecht did say that while fleets are expecting the new engines to cost $5,000-$7,500 more than current models, fuel efficiency may be relatively unaffected. Fleets believe the new engines will be only 1% to 3% less fuel-efficient.
“So why not pre-buy if you are looking at an automatic price increase?” Albrecht said. Albrecht cited Schneider National, which told him the carrier would buy 50% more trucks in 2005 and 2006 than it otherwise would have.
Albrecht added that the pre-buying cycle this time will be much longer than the artificially high purchases that were made ahead of the 2002 regulations.
“Pre-buying in 2002 was confined to five months — from February to June,” Albrecht said. “And it largely was confined to the top 200 carriers. That was because there was a capital crisis during this period. Banks were not lending. Today banks are handing out money hand over fist.”
However, Albrecht does not expect truck sales to drop quite as severely as some might expect once the new emission rules take effect. He believes that either the government or the truck manufacturers will offer incentives designed to strengthen sales.
In addition, sales may remain strong because of the age of the equipment on the road. In 2000, the average age of a truck was 44 months. In 2003, that average age was 58 months. Trailers went into the first pre-buy cycle with an average age of 58 months, but the average age reached 72 months in 2003. Equipment aged significantly during the downturn.
“There is a natural replacement cycle at work,” Albrecht said. “This affected not only last year's numbers, but will improve this year's numbers, too. The catch-up demand for trucks is stronger than people realize.”
The normal replacement of the nation's fleet is 18,000-20,000 trucks per month through good times and bad, Albrecht said. But for 42 months beginning in September 2000, truck sales averaged 13,700 per month. If truck sales on average were 4,300 per month below what is normally needed for replacement, the U S has a pent-up demand for approximately 200,000 trucks.
Feeling the effects
The overall number of trucks and trailers in service continues to grow modestly, Albrecht said, but most of the orders for new equipment involve replacements for existing vehicles. Fleets have been returning to normal after some unusual circumstances that occurred between 1995 and 2002.
“When we look back at 1995 and 2000-2002, there were some extraordinary influences that are not there anymore,” Albrecht said. “In 1990, Freightliner had 18% of the market. Jim Hebe was boasting that Freightliner would get 33% of the market. At a peak in 2000, Freightliner actually got 37%. You don't double your share of an industry that is this cyclical without some very aggressive business practices. We all know what happened with those accelerated replacement cycles and guaranteed buy-backs.
“I don't see another Jim Hebe in the industry today. He almost single-handedly drove that phenomenon. And on the trailer side, Jerry Ehrlich at Wabash was doing much the same thing. Where are the Jerry Ehrlichs and Jim Hebes today? Volvo has gained market share in recent years, but much of that comes from fleets who felt burned as Freightliner reneged on those buy-backs and residuals that were promised them.”
Another factor was the Associates IPO that took place in late 1997.
“When you go public, you have a growth agenda,” Albrecht said. “The Associates' biggest portfolio was in the transportation industry, and they had an incentive to do irrational things. There was huge growth without recourse paper among dealerships. And the carriers themselves had to meet these growth agendas.”
Asking for answers
Much of the views Albrecht expressed were based on the results of surveys his company conducted with 19 public and private fleets. During the 1990s, these 19 carriers grew their truck fleet 13.2% per year. Since 2000, growth has slowed dramatically — below 5% per year.
“Some Wall Street analysts question the growth in the transportation industry,” Albrecht said. “The truth is that the industry has had moderate growth, but it seems small after the growth experienced in the 1990s.”
Albrecht's company currently is studying the size of major carriers. Here are some of the findings:
The top 60 dry freight carriers have 135,000 trucks.
Freight rates have been increasing sharply in recent years, according to an index Albrecht's company has been using since 1992. Using 1992 as a starting point, rates increased almost 3% in 1994, and then were flat for the next several years.
“All of a sudden, rates jumped 2.8% in 2003,” Albrecht said. “This was the greatest year since deregulation. Then in 2004, rates were up over 7%. This year will see another 5-7% increase. These are historically large rate increases, and they exclude fuel surcharges. You can keep this in mind when you are negotiating trailer prices with your customers.”
Costs per mile for these carriers rose 8% last year.
Refrigerated fleets have not fared as well. Since 1994, dry freight rates have risen about 16%. Reefer rates were up less than 9%, and most of that increase was in 2004.
Seven of the top 15 have gone out of business since the late 1990s. During the last downturn, only one of the top 25 dry-freight carriers went out of business — Burlington Motor.
Trailers trail tractors
In spite of increased sales of trailers in recent months, the ratio of trailers sold per trucks is lagging, Albrecht said.
“The last two periods in which fleets had excess capacity (1995 and 2000-2002) were preceded by a high ratio of trailers to trucks,” Albrecht said. “Preceding 1995, there was a 36-month period in which the average trailer-to-truck ratio was 1.3 trailers ordered for every truck. A lot of months had a ratio that was more than two to one.
“While trailer orders are up from the dog days of 2001-2002, we still have less than one trailer being ordered for every truck.”
In March 2005, there were 0.8 trailers being ordered for every truck. The 15-year average is 1.2, and in periods of rapid growth, that number goes even higher.
Albrecht's company interprets the low trailer-to-tractor ratio as evidence that fleets across America continue to have very modest growth. “Our key leads suggest that there will continue to be modest growth in capacity,” he said.
Among Albrecht's statistics:
According to the FMCSA and DOT registration of fleets, there are 524,309 fleets. Of those, 96% have 20 or fewer trucks.
Only 4.1% of the industry has more than 20 trucks.
Stephens believes that the largest 4% of the nation's fleets control 70-80% of the industry capacity as measured by the number of trucks.
There are 1,500,000 Class 8 trucks on the road that are eight years old or less.
About 58% of all trailers are dry vans.