Rebound coming with record rewards for surviving carriers, analyst predicts

The Slowdown in the truckload segment is ongoing and will continue for the next year or so. But for those carriers that can survive the stagnation, the reward opportunities will be “unprecedented.”

That was the prediction of John Larkin, managing director of Stifel Nicolaus, a full-service retail and institutional brokerage and investment banking firm, in his industry outlook presentation.

“Trucking demand is as weak as it has ever been and makes it very difficult for carriers, especially those relying on brokers and backhaul lanes,” he said. “At the same time, there is a lot of price pressure out in the marketplace.”

To deal with current market conditions, the larger truckload companies are moving into shorter hauls, more regional hauls, and more dedicated operations to take some of the cyclicality and seasonality out of their business. That is pushing some of the smaller carriers into longer haul markets.

“The smaller carriers are having a tougher time competing because they don't have the sales force to get their trucks back, and often have to rely on brokers,” said Larkin. “That's putting additional pressure on the small carriers -- as if they didn't have enough already.”

He said average fleet size is shrinking. Small truckload carriers have been reducing size since the end of 2004 and are down an average of 12%. Large carriers are down about 4%.

“If you assume that 50% of industry capacity comes from each of the two sectors, you can conclude that about 8% of the industry has gone away through fleet downsizing,” he said.

He said about 130,000 trucks went out of the industry last year just due to trucking company bankruptcies -- about another 7%.

“Add in owner-operators going out of business and repossessions, and that brings the total of the fleet gone from the industry to about 17%,” he said.

“That would be a great thing if freight was down 13 to 14%, but freight is down about 20% across the board, and that's creating a glut of supply.”

Class 8 retail sales have been declining and it doesn't look like there is going to be a pre-buy this year to avoid having to deal with the 2010 EPA emission-compliant diesel engines, said Larkin, “so there's no need to worry about a lot of new trucks chasing less freight.”

He believes most trucking companies will be very disciplined about adding new equipment, and will mainly continue to acquire new vehicles to replace older equipment to maintain their fleet.

“This will help us come into supply and demand equilibrium faster than we otherwise might,” he said.

Economic stimulus

Demand will gradually rebound over the next several years, helped along by President Obama's massive economic stimulus package that is intended to jump-start the economy, Larkin said.

“While it contains a lot of pork, it also contains some truck stimulus, and that should start to have an effect over the next couple of months,” he said.

Another positive market effect should come from “more accommodating interest rates, especially as banks regain their confidence and get the toxic securities off their balance sheets. When that happens, banks should start to lend to those with good credit.”

He noted, however, that financing and credit are still not broadly available “because a lot of bankers don't want a bigger trucking portfolio right now.”

Larkin anticipates more failures by small carriers, and by possibly one or two large carriers.

“That could help tighten up supply and demand pretty dramatically,” he said. “That will hinge on whether banks want these companies to go out of business or not.

“With rolling stock having lost so much value on the used- truck marketplace, it's not the best time for banks to be liquidating a fleet,” he said. “It seems banks are giving these companies a little more wiggle room than they might otherwise to try and let them and work their way out of difficult times.”

Rebound ahead

The combination of more stringent government regulations, fleet downsizing, fleet failures, and deteriorating driver demographics “will prevent supply from rebounding in line with demand, whenever that happens,” said Larkin. “There is light at the end of the tunnel. Things are going to get better, but it's very difficult at this juncture to tell exactly when.

“We think it could be as early as the end of this year, or as late as early 2011, but most likely will be mid-2010, so prepare to hang on for a while.”

When the rebound begins, Larkin expects that carriers “will have the opportunity to align themselves with shippers who are true partners and are willing to work with them to improve utilization, reduce empty miles, and get paid appropriates for the service provided.

“It will feel like 2004 and 2005 — if not better — when things finally come back. For those carriers that have survived to that point when demand rebounds, the financial rewards should be unprecedented.”

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