Ringling Brothers and Barnum & Bailey Circus won't be the only road show adept at juggling acts this year. Managers of for-hire and private fleets alike will be keeping plenty of balls in the air as they stay on top of what's shaping up to be a most challenging year for trucking.
On one hand, the economy is projected to keep on slowing down and perform sluggishly enough to flat-line truck freight growth as the year unfolds.
On another hand, many fleets will find themselves casting about not only for the most profitable freight, but also for enough freight.
On still another hand, fleets will be dealing head-on with a dizzying array of cost pressures — everything from fuel to drivers to insurance to vehicle acquisition — that they can't magically absorb with rate hikes or surcharges.
Consider this remark by Bill Zollars, chairman, president & CEO of YRC Worldwide, parent of Yellow Roadway, as the keynote for the year ahead: “As widely reported by industry analysts, the economy has slowed significantly in the fourth quarter, resulting in lower volumes across all our asset-based business units. While the extent of the economic slowdown is uncertain, our business units are aggressively managing costs to create the best possible results for our shareholders.”
So, tune up the calliope of cost-consciousness, limber up the management chops and get ready for a turn under the harsh lights of the big top….
First, bone up on the economy. It's imperative to understand that the economic picture spells slowdown, but little odds of a recession. And barring unforeseen economic disruptions, the pace should pick up just as the second half arrives.
“The economic slowdown we see in 2007 will be a continuation of the ‘second-half 2006’ slowdown we have witnessed in the last two quarters of this year,” says Jim Meil, chief economist for Eaton Corp. “It will linger and get 2007 off to a slow start. In regard to economic measures, we predict that GDP growth year over year will be about 2.5% in 2007, compared to growth rates of about 3.2% in 2005 and 2006.” He notes that '06 saw “front loaded” first-half growth.
HOUSES AND CARS
“Even more important for truck freight is manufacturing sector output,” points out Meil, “That too will slow in 2007, to about 3% from about 4% growth in '05 and 5% growth in '06.”
He attributes the continuing slowdown to weakness in housing construction and automotive (light vehicle) sales and production and of closely linked industries to these key sectors.
Indeed, according to Ken Simonson, chief economist for The Associated General Contractors of America (AGC), “single-family home construction will remain in free-fall for several months [going into '07]… there is still plenty of life left in hotel, hospital, energy-related and public spending” to drive construction activity.
As for Detroit and its minions, “Ward's AutoForecasts” projects total auto output for '07 of 15.65-million units. That would be a 1.1% drop from the 2006 estimated total of 15.83 million, which itself would be 3% down from the 2005 sum.
“Home construction materials, appliances, automotive components and parts are all implicated,” Eaton's Meil stresses. A ray of sunshine for carriers: “Outside of these areas,” he says, “the slowdown will have fairly muted impacts.”
Meil says the root source of the slowdown is the “actions that the Federal Reserve took from June of 2004 through June of 2006 to raise interest rates to fight inflation.
“Unfortunately, higher interest rates tend to hurt goods-producing and goods-shipping industries, which are truck-intensive,” he explains. “They have minor effects on services businesses [such as health care, education, professional and personal services] which are not associated with the use of truck transportation.
“Key statistics on motor freight have been weak in 2006 and are likely to stay that way through much of 2007,” Meil continues. “Additionally, there may have been some share gain by rail (intermodal) to the detriment of truck. The net of it is that the slowing economy has put truck freight on a flat, no-growth trend line.”
The good news, Meil relates, is that by the start of the second half, things should be looking up. “The Fed has kept interest rates stable, that is no more increases, since June '06,” he says “Ordinarily, these rate-increase actions take three to four quarters for their impact to be fully realized on the economy. So we think by around mid-year 2007, growth will start to accelerate. And it will ultimately reach something close to a long-term trend — just above 3% growth for GDP and the overall economy — by the end of 2007.”
He does suggest keeping a wary eye on some remote possibilities. “Should we get a nasty surprise escalation in inflation statistics in the next few months the Fed might come back from the sidelines to renew the fight against inflation with more interest-rate increases,” Meil remarks.
“That could push an economy that right now is vulnerable into a full-scale recession. That is not a ‘most likely’ outcome,” Meil stresses, “but it must be considered a possibility. We would judge the probability of that kind of recession scenario to be about a 15% likelihood,” he estimates.
Of course, 85-to-1 odds pretty much takes the threat of a recession off the table. Bob Costello, chief economist and vp of the American Trucking Assns. (ATA) also does not expect a recession to roll in next year.
“While 2007 will be the toughest year for the economy and trucking since the recession period of 2000 through 2001, it shouldn't be as bad as the last recession,” states Costello.
“The housing and auto markets shouldn't send the U.S. economy into a recession, as strength in other sectors makes a so-called soft landing the more likely scenario,” he continues. “Still, motor carriers will have to be diligent next year to be successful.”
Costello hastens to add that it's also “important to remember that the long run looks very good for the trucking industry. ATA's annual Freight Transportation Forecast projects that truck tonnage will grow 31% from 2005 to 2017. Additionally,” he notes, “trucking will account for 69.5% off all tonnage hauled in 2017.”
Assuming the economy avoids even the hint of a recession, it would seem the real trick for truckers will be to get through this year's first half.
More specifically, according to analyst Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC), how the 30% dropoff in GDP growth in '07 “hits you will depend on your commodity base.
“Based on the GDP projection,” Brady continues, “we will see lower freight volumes. But the economy is not impacting all [freight] segments the same way.
“Residential construction will decrease and, as already seen in the second half of '06, auto parts hauling will drop as the Big 3 automakers struggle.” Brady especially cautions fleets reliant on hauling building materials that they will see an “actual decline” in that freight. “Housing starts have been trending downward, which implies lower construction activity in 2007.”
On the other hand, freight driven by capital goods and goods that are being exported — which are always capital goods — will remain relatively solid.
“So, for example,” he says, “if you're hauling for Boeing, your outlook for '07 will be pretty positive. And if you're hauling general freight, you'll still see [tonnage] growth but at a much slower pace.
“As there will still be growth in freight volumes,” he continues, “the key will be to shift capacity from weak to strong segments. That's the nice thing about trucks — they can go to the work.”
The flip side of that is fleets already in the more lucrative segments will face increased competition, at least through the first half if not all year. “The main difference from '06 to '07,” advises Brady, “is that the sluggish freight volumes and segment-switching will reduce the pricing power of carriers. Rate increases will be harder to obtain.”
And of course that means carriers will have to manage costs better and smarter than they've really had to over the past several years.
The driver turnover strain on fleets won't be going away soon, certainly not this year, but “with the economy slowing a bit, the need to expand capacity declines,” Brady points out. “This year they might not have to grow 5%, but say maybe just 2% to meet shipper requirements. In that sense, the driver crunch will be eased a bit.”
Not surprisingly, Brady concurs with the experts that fuel will remain a costly wildcard (see sidebar). “There's at least one bright spot in the fuel situation,” he notes. “Tank operators will be in high demand as hauling ethanol is a growth segment now, as this gasoline substitute can't be moved by pipeline. A lot of farm cooperatives are building ethanol plants and they need raw materials hauled in and the finished product hauled out. Bringing the agricultural products into the plants is an especially good opportunity for small fleets.”
Addressing the prospects for '07 head on, analyst Satish Jindel, president of SJ Consulting Group Inc., declares, “even the rails are showing flat volume growth. The first two to three months of '07 will be a slow period for the country” and fleets must adjust to that.
“Some carriers may go against this general direction [yet succeed],” Jindel reasons. “But only if they planned effectively — and if they execute their plans effectively.
“Those who have planned,” he continues, “will be in the best possible position this year. However, there is still time to put things in motion to help control [operating] costs. In '07, fleets must focus more on the cost than the revenue side. Shippers control the revenue but the fleet has direct control of their costs.”
Specifically, Jindel advises this is not the time to add fixed costs. “If there is demand, handle it on a variable basis. For example, where possible use temporary workers or pay overtime wages. It really comes down to following the basics of how to manage in a soft economy,” he adds.
Richard Howard, the vp who heads DaimlerChrysler Truck Financial, concurs that the main element of success for carriers this year will be their “ability to manage through a soft period.”
He says the finance lessor works closely with fleets and sees its customers placing greater focus on increasing utilization and shifting capacity to “adjust to the freight environment” in '07.
“We certainly expect an uptick in leasing activity and bundled maintenance services as fleets seek to keep vehicle lifecycle costs in line,” relates Howard. “We also see a potential for longer lease terms, which can enable fleets to keep their cash flow similar to what they'd been experiencing [before the slowdown]. However, we have not seen any material increase in fleets' requested terms.”
While for-hire fleets are in for a year of holding back costs and seeking revenue where they may, the ranks of private fleets will be growing, say Mike Lewis, president & gm, and Hal Booth, senior vp, of PHH FirstFleet, which provides financing, asset management and other services to private fleets.
“The driver shortage afflicting for-hire fleets has crimped outsourcing by private fleets,” points out Booth. “The need for reliable, dedicated service is driving private fleets to proliferate. Simply put, they can better control their destiny and this trend will continue into 2007.”
According to Lewis, the EPA '07-compliant engines that will start to appear in fleet equipment this year may work just fine in fleet service but there's “uncertainty about their effect on residuals.” However, he is “fairly certain” that impact will be minor.
As for buying equipment, “we recommended and still do that our customer stick with their regular trade cycles-that is, not to pre-buy,” says Lewis. “Given that, we will be in the market this year buying trucks.”
Lewis and Booth also stress that fleets will have to keep an especially close eye on a costly trio — fuel, insurance rates and risk-management efforts — if they want to stay profitable in '07.
Gary Petty, president & CEO of the National Private Truck Council (NPTC), also sees '07 as a year of expansion for private fleets.
TOLLS VS. TAXES
“Some fleets are projecting to grow the size of their fleet by 5 to 10%,” Petty relates, “and most of the fleets in our benchmark study projected growth in '07 in terms of capacity. The trend is generally toward growth.”
Of course private fleets won't be immune from costs pressures. “Some of the cost increases to be felt in '07 are by necessity, such as fuel and equipment purchasing, and others voluntary, such as to improve driver recruitment or boost vehicle productivity.”
Petty notes that a cost issue of import to everyone in trucking may be headed on a different track thanks to Democratic control of Capitol Hill.
“The Democratic leadership is less inclined toward tolls than the GOP was and might lean toward higher fuel taxes [instead],” he observes. “That could be an important change.
“There is certainly an understanding among Democratic leaders that the transportation infrastructure needs work,” Petty adds. “On the other hand, with the Democrats in charge, there is no short-term likelihood of getting uniform size and weight reform that would put more productive trucks on the road.”
All told, '07 is shaping up as a year that will test how well fleet managers can juggle their way through a slowdown while keeping everything crucial in forward motion.