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A Long Road Back
Friday, 22 January 2010 10:21

Trucking’s slump is now in its fourth year, and a recovery is still not clearly in sight. If there’s a consensus, it’s that things will be at least a little better by the end of 2010 than they are now.

For about three years now, analysts have been predicting that the business climate for trucking would be at least a little better a year later. And for about three years, they generally have been wrong. Freight volume remains soft. Pricing stinks. And there is still too much capacity.

Once again, the consensus seems to be that the situation a year from now will be better than it is today, although some analysts are only reluctantly optimistic. There is reason to be wary. A recovery in trucking depends on the balance between supply and demand, and we still have too many trucks chasing too little freight. Both elements—truck capacity and freight demand—seem to be moving gradually in the right direction, but it just isn’t clear how long the road to recovery will be.

“While certainly we’re not where we were a year ago, there’s nothing on the horizon to get excited about,” says Bob Costello, chief economist for the American Trucking Associations. Costello believes that 2010 will be the best year in a couple of years, but those were two very bad years. “I think that the end of the year will be somewhat better than the beginning of the year.”

“It’s going to be an interesting year,” says Eric Starks, president of transportation research firm FTR Associates. “In general, it will be a year of recovery. We will still have a few stops and starts, and it’s clear we won’t see a huge amount of growth.”

Others are even less confident regarding what 2010 holds for the trucking industry one way or the other. “There are a lot of question marks rather than answers for 2010,” says John Larkin, managing director and transportation analyst for investment banking firm Stifel, Nicholaus & Co. Will there be a recovery in 2010? “I don’t think it’s a slam dunk.”

Strengthening demand

Larkin is not optimistic about a near-term rebound primarily because of consumer spending. “Two-thirds of our economy is the consumer,” Larkin notes. “Until 12 to 18 months ago, the consumer was spending everything he had and then some. Consumers assumed that appreciation of their stock portfolios and home values would cover retirement, and now they realize that they can’t count on that.”

Larkin paints an ugly picture. People are saving more. The unemployment rate—if you take into account the people who are underemployed or have stopped looking—has hit about 17 percent. Those with jobs are afraid of losing them. And many companies have asked employees to take a pay cut, unpaid vacations or days off. On top of all of this, businesses are wary of making investments due to fears about the consumer, as well as developments in Washington.

“We have hit a stable depressed level,” Larkin says. “There’s a certain amount of freight that moves around the country just to support life. What makes the trucking industry healthy is all of the durable stuff.”

There are some factors pointing toward improvement in the economy and freight demand, however. The coming year should see modest growth in freight volumes, predicts Donald Broughton, managing director and senior research analyst for investment banking firm Avondale Partners. He cites several factors pushing higher volumes, including:

  • A weaker dollar that will mean more domestic manufacturing and exports;
  • A greater willingness of banks to lend, but continued low interest rates; and
  • Tight inventories that will mean more production and transportation once there is any increase in demand.

And there is another factor, Broughton says. “Improvements from where we have come are relatively easy.”

In other words, there’s nowhere to go but up. All of that translates into at least a modest increase in truck tonnage by the end of 2010, Broughton says.

But again, the base for that growth is very low, notes Costello, who points to Gross National Product, which grew a scant 0.4 percent in 2008 and was projected to have declined 2.4 percent in 2009, That compares to historical average growth of just less than 3 percent, says Costello, who expects that GDP will grow in the range of 2 to 2.4 percent in 2010. Likewise, industrial production fell in 2008 and 2009 and is projected to grow 3.5 percent in 2010. “We’re not making up the contractions from the year before.”

There certainly has been some good news on the economy. For example, the Bureau of Labor Statistics reported that the U.S. economy lost only 11,000 jobs in November a far cry from the hundreds of thousands per month reported earlier in the year. “While the latest unemployment reading is very surprising, I’m not hopeful that would stick,” Costello says.

Even if things are turning around, it will take time, Costello points out. The United States has lost more than 7 million jobs nationwide during the recession. Wages are down, and so are home values. And households are paying down debt. “That’s a positive factor in the long run, but not in the short run,” Costello says. “Household spending will remain muted in the near term.” Industrial production also has improved from its lows, but manufacturing output is at levels not seen since 2002, he says.

Another obstacle to a rebound in demand has been inventories, Costello says. “The main reason trucking didn’t lead was the unprecedented increase in inventories relative to sales.” While inventories have come down, they remain soft, he says.

Starks sees some other mild positives in the housing and automotive segments—mainly because those markets have been so bad in the recent past. “With regard to housing, we are at the bottom,” he says. “We won’t get to peak levels anytime soon, but there could be some modest growth.” The same is true for automobile manufacturers, Starks says. “The bleeding of the automotive market has stopped for the time being.”

But Starks agrees with other analysts that the consumer is unlikely to pull the economy through the recession. “The business sector will have to jump back in and start doing some investment.”

Shrinking supply

With truck capacity far greater than freight demand, pricing has been challenging for 2009, Larkin says. Soft pricing has taken various forms, from dramatically lower rates to revised fuel surcharge programs to payment terms of 60 to 90 days instead of 30 days, he says. “There doesn’t appear to be any catalyst short of a huge capacity reduction to change prices in the first half of 2010.”

Certainly on the surface, it would seem as if capacity should be fairly tight already. Payroll employment in trucking is down more than 200,000 from its peak in January 2007. During that same timeframe, about 6,350 trucking companies with five or more power units have exited the market, according to Avondale Partners.

The rate of trucking failures has slowed substantially since the third quarter of 2008, however. It was during the first three quarters of that year that diesel prices soared to unprecedented levels, causing many weak carriers to run out of cash as surcharge reimbursements lagged escalating fuel payments by 30 to 60 days or more. The reverse phenomenon benefitted carriers in late 2008 and early 2009.

Analysts generally agree that the dynamic keeping many carriers in business today is the unwillingness of lenders to take back greatly undervalued equipment. Broughton sees that dynamic changing now.

“In the first quarter, a lot of zombie truckers will finally give up the ghost,” he says. For starters, truck owners will face the usual annual renewals of insurance, licensing and registration. And with the door closing on the ability to buy 2007 emissions engines, used truck prices will start to firm up, making it more likely that lenders will start to foreclose on carriers that haven’t been paying their notes.

Lenders will have another reason to start getting tough, Broughton argues. They are facing annual audits where they will have to defend their decisions on bad loans. If they have written four 90-day forbearances, for example, they will have to explain why they are choosing to identify the loan as performing, he says.

Larkin sees the actions of lenders as absolutely key. “Short of a lot of capacity exiting, there will be a gradual volume recovery and no recovery at all in pricing,” he says. “And that won’t happen until financiers pull the plug on troubled companies.”

Starks sees the situation in much the same way. “We expect to see a surge in bankruptcies once there’s a firming of asset values.” And there’s another reason this may happen, he argues. Given the low retail sales volume for new trucks since 2007, later-model used equipment soon could be in demand, and even older equipment might be in more demand than people might think. “It’s getting older from an age standpoint, but it’s not getting a lot of wear and tear on it,” Starks says. “We have seen trucks age this much before. You are not aging it on a work-life basis.”

In addition to promoting domestic manufacturing and greater freight demand, a weak dollar could help with truck supply, Larkin argues. “It could mean higher demand for used trucks in Eastern Europe and Asia, thereby giving lenders a reason to shut down fleet owners who are not paying their notes.”

And not only will an uptick in freight demand signal lenders to get tough, it will put other pressures on weak carriers, Broughton argues. Carriers will need more working capital, and lenders won’t be too eager to provide it to struggling trucking companies, he says.

“When you park a truck, it’s a positive cash flow event,” Broughton says. “You continue to collect on receivables for four to six weeks without the operating costs.” Putting that truck back in service means carrying the driver, fuel and other costs for the same period without revenue. In addition, weak carriers presumably have deferred maintenance that must be addressed if they need to press trucks back into service. Given all of these factors, Broughton predicts large reductions in capacity in the first and second quarters.

Another potential ally in capacity reduction could be the federal government, argues Larkin, who lists a number of developments that potentially could shrink the driver pool in the coming years—changes to hours of service, mandatory onboard recorders, tighter rules on driver health, and the Federal Motor Carrier Safety Administration’s upcoming Comprehensive Safety Analysis 2010 program. “These efforts could actually bring around a tightening of supply and demand earlier than would otherwise be the case,” he says.

Some analysts aren’t so worried about the need for dramatic reductions in capacity, however. “I think some people have underestimated how much capacity has been taken out during this cycle,” Costello says. That means that freight demand doesn’t necessarily have to match the peak levels before the recession for carriers to realize the pricing and profitability they saw during those good times.

That might just be the best news trucking companies will hear for quite sometime.

Commercial Carrier Journal, 1/2010

 
Truckers Sue DOT for Record-Keeping Rule
Tuesday, 19 January 2010 00:00
Trucking group seeks ruling on proof of compliance with hours-of-service rules

The American Trucking Associations is suing the Department of Transportation in an attempt to force it to declare what supporting documents trucking companies must keep to prove their employees comply with federal rules limiting truckers' driving time.

In a lawsuit filed Jan. 19, the association asked the U.S. District Court for the District of Columbia to order DOT to issue a notice of proposed rule-making within 60 days on the supporting hours-of-service documents carriers must keep and how long they must be kept.

Typically, those documents include not only driver log books but fuel and toll receipts, dispatching records and many other papers and, increasingly, electronic data. DOT is working on a rule that could require electronic onboard recorders on trucks.

The lawsuit ratchets up pressure on DOT as its Federal Motor Carrier Safety Administration reworks the HOS rules and signals the importance of that effort to the trucking industry. The ATA supports regulations issued by the Bush administration in late 2008, which the FMCSA is revising. That could result in a shorter workday for truckers, and, many in the trucking industry fear, higher costs for carriers and shippers.

The FMCSA in November said it would release a proposed HOS rule this year and a final rule by August 2011.

The ATA's interest in the supporting documents issue is not new. "ATA has been seeking a fair and costeffective regulation, consistent with federal law, for more than 15 years," said Dave Osiecki, ATA senior vice president of policy and regulatory affairs.

This is the first time the ATA has sued the DOT over the issue since the department began to rework the HOS rules, which it has revised three times in the past decade.

"We have a tremendous amount of respect for the Department of Transportation and the work they do, but we had to show the department just how important the supporting documents issue is to our industry," said ATA President and CEO Bill Graves. "We hope this lawsuit prompts a greater focus on the issue and that the department will be willing to work with us to get the regulation out within a reasonable time frame."

Congress ordered the DOT to develop a rule on supporting documents in 1994, when it first ordered a revision of the decades-old trucking hours-of-service rules.

Instead of a formal rule, the department issued informal guidelines with a broad definition of supporting documents, ATA said, identifying 34 categories of records and ruling that any document "could" possibly be used to verify HOS records. Now the industry wants more clarity, especially as growing use of electronic devices and electronic data storage could change how many carriers keep their records.

"In order to comply, trucking companies need to know what the rules are," Osiecki said. "The requirements have never been established by regulation."

Journal of Commerce Online, 1/19/2010

 
No Gas Tax Hike in 2010, Says House Leader
Monday, 18 January 2010 00:00
Van Hollen says lack of political consensus kills increase supported by legislators, some carriers.

Congress will not raise fuel taxes this year to fund transportation construction programs, said a Democratic leader in the House of Representatives.

Chris Van Hollen, D-Md., told Bloomberg Television a gas tax hike for highway projects “certainly won’t fly this year, because we’re going to have to have some kind of bipartisan consensus before you move forward on any kind of funding mechanism like that.”

Van Hollen is chairman the Democratic Congressional Campaign Committee, which is charged with electing members of that party to the House. He made the remarks in a Jan. 15 interview that was broadcast by Bloomberg over the weekend.

The gas tax is usually shorthand for taxes on motor vehicle fuels generally, since Congress and the states tend to adjust taxes for diesel fuel used by truck and trains when they change the tax on gasoline sales.

Some members of Congress have called for raising the federal fuel tax to lock in a funding stream that would help pay for a range of highway, intermodal and other transportation construction projects for up to six years.

Several freight transport groups say they would back a tax increase as long as the revenue was targeted directly at improving the nation’s poor infrastructure.

Van Hollen also said legislation the House passed in December to spur job creation “does have a major infrastructure component to it to try and fast track, to put the accelerator on some infrastructure funding.”

But asked again whether there would be a gas tax increase, he said “not this year.”

Journal of Commerce Online, 1/18/2010

 
Diesel Hits 14-Month High
Monday, 18 January 2010 00:00

8.2¢ Increase Pushes Average Price to $2.879.

The average price of a gallon of retail diesel fuel in the United States rose 8.2 cents a gallon last week to $2.879, the highest level in 14 months, according to the Department of Energy.

Diesel has risen for three straight weeks by a total of 15.3 cents a gallon, DOE said after its Jan. 11 survey of fueling stations. A year ago, fuel cost $2.314, and the last time diesel was higher was Nov. 10, 2008, when the average was $2.944.

Meanwhile, gasoline also rose for the third consecutive week, this time by 8.6 cents a gallon to $2.751. The last time the national average for regular gas was higher was in October 2008. A year ago, it cost $1.784.

The retail diesel increases, which started in late December, followed a surge in the price of crude oil on the New York Mercantile Exchange. Oil had soared 19.7% in less than 3½ weeks to $83.18 a barrel on Jan. 6, although since then, it fell back below $80, closing at $79.39 on Jan. 14.

The price increases are making fleet executives nervous.

“We’re all fearful of another price surge after the way we were slapped around a couple of years ago. You have to be more conscious and attentive,” Robert Ragan, senior vice president of finance for flatbed carrier Melton Truck Lines, Tulsa, Okla., said, referring to 2008 when fuel set a record of $4.764 a gallon.

“As a specialized, heavy-haul carrier, we have higher rates of empty miles than dry van fleets, so an increase hurts us more directly,” said Michael Card, president of Combined Transport, Central Point, Ore. “Diesel may not be as high as two years ago, but compared with three or four years ago, it’s very high, and we’re concerned.”

Card said his business plan assumes diesel will continue to increase in cost.

“I think that by the summer, it will jump because of some economic improvement. We’ve got auxiliary power units in 100% of our fleet, and I think that will prove to be a good decision,” Card said.

Melton’s Ragan said his company also uses APUs and pays bonuses to its most thrifty drivers.

“All of this helps to hold the bottom line, and shippers expect that of you,” he said.

Ragan said Melton’s sales staff keeps shippers informed of its efforts to control fuel costs.

“I don’t know if the customers really care about these actions, but I do know that if you don’t do them, they will care. They want to support and work with stable companies,” Ragan said.

Tom Kloza, chief oil analyst for the Oil Price Information Service, said he thinks trucking and other users of petroleum products will benefit soon from a switch in market dynamics. During the second half of January and throughout February, he said, oil and diesel prices should be set by supply, which is high, and demand, which should stay low. In contrast, Kloza said, financial and investment concerns whipsawed petroleum prices from mid-December through the first week in January.

“In late December and early January, billions of dollars get put into stocks and commodities as investment strategies change,” he said. “It’s a false start or a sugar rush.

“But I think that’s over now. Wholesale diesel prices are already back-tracking, and you’ll see prices on the street drifting lower during the second half of January and February, which are usually very poor months for petroleum demand,” Kloza said.

The U.S. Energy Information Administration issued its Short-Term Energy Outlook on Jan. 12 and predicted retail diesel would average $2.87 a gallon this quarter, and rise to $3.04 by the fourth quarter. In 2011, diesel will average $3.14, the report predicted.

First-quarter crude oil prices would average $77 a barrel on the spot market and rise to $81.33 in the fourth quarter, EIA said. Crude averaged $61.66 a barrel last year.

Transport Topics, 1/18/2010

 
HOS sessions begin
Saturday, 16 January 2010 00:00

The first of four public listening sessions to gather information for a proposed hours of service rule by the Federal Motor Carrier Safety Administration will be Tuesday, Jan. 19, from 9 a.m.-5 p.m. EST in Arlington, Va. The session will be at the Doubletree Hotel Crystal City National Airport.

This will be followed on Friday, Jan. 22, from 9 a.m.-5 p.m. CST at the Hyatt Regency Dallas Fort Worth Airport, Irving, Texas. The third session will be Jan. 25, 9 a.m.-5 p.m. PST at the Doubletree Hotel Los Angeles International Airport.

A fourth session was added that will accommodate owner-operators and other truckers. It will be Jan. 28, 1-9 p.m. CST, at a Comfort Inn Hotel and Suites in Davenport, Iowa. The hotel is near a Flying J Travel Plaza, which has 146 parking spaces for big rigs.

The agency wants to hear from commercial drivers, carriers, safety advocates and others about topics such as rest and on-duty time, sleeper berth use and the effect the current hours-of-service rule has on loading and unloading times for drivers.

Truckers can participate in any of the sessions through audio conference by dialing toll free (866) 216- 6835 and entering an access code for each location. The access code for Jan. 19 is 394089; for Jan. 22, 215765; for Jan. 25, 617416; and Jan. 28, 223256.

For more information go to www.fmcsa.dot.gov and click on the Hours of Service Listening Sessions icon.

eTrucker.com, 1/16/2010

 
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