NASHVILLE – The trucking industry is facing a slow and volatile recovery over the next several months, according to experts speaking here at the TMW System’s TransForum 2009 user conference. The reason given for this volatility is that many of the business fundamentals within trucking are irrevocably changing, said David Wangler, TMW’s president & CEO.
“Manufacturers and retailers are still cutting back on inventories, trying to catch up with lower demand,” he said in his keynote speech at the conference. “Shippers continue to re-engineer their supply chains – decreasing lengths of haul and removing complexity, sometimes as part of a ‘sustainability’ initiative and sometimes just to reduce costs.”
In basic terms, Wangler pointed out, the amount of freight moving across North America‘s roadways is much less than it was just 12 months ago – and as a result, the carrying capacity of the U.S. economy for profitable freight movement has fallen dramatically.
“As an industry, we have no power to reverse it, we can only seek to adapt,” he explained. “In order to sustain our businesses in this new environment, we‘ll have to become more cost-effective, more nimble, and more competitive to make a profit moving the freight that is available. Growth may no longer mean doing more of the same things that we did before; it‘s more likely to mean reconfiguring our businesses to do new things in new ways.”
Benjamin Hartford, senior equity research analyst at Robert W. Baird & Co., said that while freight volumes should recover by mid-2010, the resulting growth will be slow and bumpy due to the reasons Wangler stated.
“The ‘new normal’ from where we stand is slower global economic growth over the next cycle, higher unemployment, de-leveraging, and higher capital costs,” Hartford said. “All the money the federal government injected to stabilize the U.S. economy is inflationary, and the only thing you can do to combat inflation is to raise interest rates. So for trucking, the cost of capital is going to rise – though a longer, slower recovery means it will take longer for those capital costs to go up.”
Fuel costs also remain a wildcard. In his remarks on global energy trends, Prof. Michael Economides from the University of Houston predicted that oil prices will reach $100 a barrel by the end of 2009 as petroleum production rates continue to fall.
“The International Energy Agency published a report in October 2008 that detailed a 9.1% reduction in oil production – the largest decline in world oil production history,” Economides explained. While there has been huge demand destruction due to the collapse of the world’s economies, he said, the recovery will drive the need for petroleum back up as oil and natural gas still provide 87% of the globe’s energy needs.
How this projected increase in oil demand affects diesel fuel prices will be critical, said Baird’s Hartford. “It all depends on how rapidly fuel prices escalate,” he explained. “If we’re talking five to 15 cent per gallon increases on a weekly basis like what occurred last year, it could be hard on trucking. If prices rise more slowly, there’s an opportunity for more control. We do believe fuel prices are going to be higher rather than lower over the next ‘up’ economic cycle.”
As a result, going forward, trucking companies must be “leaner” organizations, Hartford stressed, as any costs that can be extracted from their bottom lines now will help them maintain profit margins as the freight market recovers.
“We’re seeing stable and improving truck freight demand as well as for rail, so stabilization in the freight markets is clearly a key trend now,” Hartford noted. “While the strong stock market rally in recent months – up 83% between March and September this year, returning to October 2008 levels – suggests the worst is behind us, there are still significant headwinds ahead. Near-term freight demand will remain volatile until the second half of 2010.”
