A mix of good and bad trends coming together in the next few quarters may create some positive karma for truckers, especially in the truckload sector, according to Donald Broughton, managing director-equity analyst and transportation, for Avondale Partners.
Speaking at the 33rd annual Truck Blue Book Workshop in Aspen, CO, this week, Broughton noted that lower fuel prices are giving carriers across the board much needed financial “breathing room,” but only for the moment as the continuing financial crisis on Wall Street hampers trucking’s ability to gain short term credit for operating costs.
“My, how the world has changed in the last few months,” he said. “From January through July this year, the trend lines were coming together for the first manufacturing-led recovery since 1983, with a boom in export volume fueling freight volumes. Then the wheels came off.”
Broughton believes the biggest short term issue now facing trucking is the unwillingness of banks to lend money. “We were coming out of a recession until Bear Stearns and Lehman Brothers went down,” he explained. “From January through June this year, exports from the U.S. were growing faster than imports, aided by fuel prices dropping significantly and quickly in late summer. But people who make and move tangible goods are capital intensive and need credit to operate. Without it, they pull back. That’s what’s put the economic recovery on hold.”
Longer term, through the end of 2008 and into the first half of 2009, Broughton feels those freight-friendly market forces should slowly reappear – and some, but not all, trucking segments should be poised to benefit from them.
“In the first two quarters of 2008, 88,000 trucks left the market from business failures due to high fuel prices – that’s 4.5% of the industry’s capacity,” he said. However, that means when freight demand eventually goes up, it’ll quickly exceed trucking capacity, which should allow for better pricing, Broughton notes.
Expedited longhaul TL carriers will recover the strongest by mid-2009, Broughton predicts, with team driver services being especially hot. Recovery in the LTL segment, however, could be rockier, Broughton feels most likely accompanied by another consolidation and failure of a major carrier. Drivers for once should be more available in the type of “jobless recovery” ahead for the U.S. economy, he adds.
Broughton also expects the balance of trade in the U.S. to improve once again thanks to rising demand for exports commodities produced by domestic manufacturers and assemblers. “Look at what was happening January through June this year – total export volume rose to $661.5 billion, with $473.3 billion coming from manufactured goods,” he explained. “Consumers in China, India, Vietnam, and other parts of the world want what we have – the lifestyle of the American consumer. That’s what is driving this.”
As a result, more manufacturing is starting to flow back to the U.S. – which should boost domestic freight volume significantly. “We were stealing jobs from Germany, France, and Italy – now we’re stealing jobs from Taiwan and South Korea,” he said, pointing to a respective 55.9% and 38.6% surge in export volume to those Asian nations in the first half of the year.
“Put a plant here – like Volkswagen and Fiat are doing – and suddenly freight moves multiply. Instead of talking a car off the boat and moving it to a dealership lot, you are delivering raw materials and components to plants, and then finished products to dealerships. That’s what’s occurring now,” Broughton said.
There are some downsides truckers must manage in the quarters ahead, of course, the largest being higher labor costs & equipment sticker prices – driven by stringent emission control mandates – and the ever more volatile world of diesel prices. “Look, if diesel prices moved around 5%, fleets could handle that – they can plan for that,” Broughton said. “When prices swing by 26% to 56% year over year, however, that’s crushing.”