AS FREIGHT AND PROFITS SLOWLY RETURN, FLEETS CAN FOCUS ON GROWTH PLANS
If you read the headlines, you might think the U.S. economy is booming and generating strong freight growth that will help carriers cure inefficiencies. Stories touting the “tight trucking capacity” and “impending driver shortage” can lead you to believe that everything is rosy. That's just not the case.
The trucking industry is similar to the automotive industry in that carriers have reduced capacity in response to lower freight volumes just as General Motors reduced manufacturing capacity in response to lower auto sales. Auto sales are not booming and are not going to any time in the near future, but GM's profits will expand since the company has matched capacity to lower sales volumes, just as trucking's profits will expand due to lower freight capacity.
Supply chain indicators imply the growth rate of linehaul freight volumes will moderate during the second half of 2010 as industrial production aligns with the rate of final sales to domestic purchasers (Chart A). If production remained at higher growth rates for an extended period of time than final sales dictate, then the inventories of retailers and wholesalers would become excessive again. Industrial production (Chart B) can sustain strong growth rates during the second half of 2010 if the rate of final sales to domestic purchasers accelerates. Final sales to domestic purchasers will continue to expand at sluggish to moderate growth rates since consumers are shifting a portion of income to debt reduction and savings, resulting in tight discretionary budgets.
A moderate freight recovery alone does not imply carriers can shift their focus from a survival mentality to developing strategic plans. Carriers have downsized, just like the auto industry, and are now making profits on lower freight volumes. In the short term, moderate freight growth will lead to carriers' profits gaining momentum as higher fleet capacity utilization implies pricing power is shifting to carriers, resulting in higher profit margins.
Improved profits and an increase in the loads-available-to-trucks ratio provides carriers the opportunity to enact strategic plans, such as developing dedicated contract services, penetrating shorter linehaul applications, or developing/expanding brokerage operations. The increase in the loads-available-to-trucks ratio also provides opportunities for carriers to restructure customer bases by dropping less profitable customers or developing services that increase profitability, such as consolidating truckload shipments on specific routes.
In the medium term, the financial system will remain weak so credit availability will remain tight. Well-capitalized carriers can take advantage of this opportunity through strategic acquisitions of other carriers. This can help expand a carrier's geographic base, service offerings, or truck utilization by increasing penetration in specific regions.
In short, a moderate freight recovery is causing profits to gradually gain momentum; as a result, the focus of carriers is shifting to strategic initiatives. Carriers should begin to develop and execute strategic plans because competitors are already doing that. You do not want to be at a competitive disadvantage in the future due to complacency and satisfaction in just surviving the Great Recession.
Commercial Motor Vehicle Consulting publishes the monthly newsletter “Visibility of the Supply Chain” for general freight carriers. To order a copy, contact Chris Brady of CMVC at email@example.com or 516-869-5954.