While co-hosting a CITT webinar on transportation trends in late January with Cormark market analyst David Newman, the issue of trucking industry consolidation and the subsequent impact on capacity, came up yet again. It’s an issue key to shippers who rely on truck transportation to get their products to market, particularly if other modes don’t make for viable alternatives, for the obvious reason that tighter capacity spells upward pressure on rates.
I’ve been forecasting a capacity crunch for a couple of years now but it hasn’t happened – at least not in a fashion significant enough to cause real concern over pricing. Our annual Transportation Buying Trends Survey, conducted in partnership with CITT and CITA, shows shippers already believe LTL and TL trucking will have the greatest pricing power amongst all modes in 2013. But so far, shippers expect increases to core pricing (excluding surcharges) in both the LTL and TL trucking sectors to be modest with about half expecting no more than a 5% increase and about a fifth expecting rates to remain flat with 2012. Motor carrier executives themselves expect rate increases lower than 4%.
These are certainly good times for purchasers of transportation services when the mode you feel has the greatest pricing power is unlikely to push for more than a 5% increase.
But there are some factors at play that could change that scenario.
Industry consolidation could play a role. The question is do the major Canadian motor carriers have the will, resources and, frankly, the guts to go for the big deals that would truly reshape their industry? So they’ve only been willing to tackle bolt-on type acquisitions too small to present any real risk if they don’t work out or have much impact on capacity. David Newman believes the LTL side of the business, which is difficult to scale down during economic downturns, is ripe for consolidation as a way to reduce fixed cost issues (see our cover story).
Personally, I think we could be in for a capacity squeeze even if trucking industry consolidation doesn’t catch fire.
Consider the hard numbers staring us in the face:
Last year will go down as the third best year for Class 8 truck sales since 1999. Yet our annual report on the capacity of the nation’s Top 100 carriers (completed just in time to be included in this issue) shows they are running fewer heavy duty trucks today than five years ago. Look stateside and you see the same thing but in greater measure. Large US TL carrier capacity is down 5% over the past five years and the same goes for small TL carriers. US LTL carrier capacity is down 12%. New trucks are being purchased to replace aging vehicles; they are not capacity additions.
Research also shows the recovery in freight volumes is not being equally shared. While large carriers in the US are doing better, small carriers actually experienced a 4.6% drop in freight volumes from September 2011 to August 2012. More than two years after the end of the recession and small US carriers are still seeing a drop in their business – and likely in their ability to finance additions to their fleet. It wouldn’t surprise me if we are experiencing the same trend in Canada.
Consider also the purchasing decision motor carriers looking to add to their fleet face these days compared to six years ago. Back in 2006, the average sticker price for a Class 8 truck was about $95,000. Used truck values for the 4- or 5-year old used truck the carrier would turn in was about $50,000, leaving the carrier with just $45,000 to finance. Today, that new truck costs $125,000 on average and the used truck the carrier would turn in would be valued at about $20,000 because carriers extended their truck replacement cycles by a couple of years during the recession. So the carrier is left with $105,000 to finance in order to purchase a new rig. Carriers are turning in two and three of their used trucks to afford one new one.
When you do the math, it’s clear: We are in for a capacity crunch.