Where Has the Capacity Gone?
The market remains dynamic, with all sorts of discussions about rate increases, truck availability, and the underlying state of capacity. As one shipper said to another recently, “Find me trucks.” When asked “where?”, his response was “anywhere going anywhere.” It’s been that crazy with networks out of balance more than anyone has seen in decades, save for perhaps in the weeks after Hurricane Katrina.
“Where have all the trucks gone?” is one question we often get asked. Everyone knows weather’s disruptive influence, but there is an underlying sense that more has happened. We believe the cold weather has permanently “killed” some capacity, with trucks too old and too broken down to be repaired. Relative to warranty work, most dealerships have a huge backlog of work and it may take 2, 3 or 4 days to get a truck in and out of a shop. Many 2010-2011 engines haven’t performed well from the get-go and cold temps have exacerbated that, another reason healthy fleets are replacing trucks from those model years. Also, bio-diesel does poor in the weather.
On top of that, many fleets can’t afford the maintenance work nor the lost revenues, likely one reason in-house brokerage operations are seeing a shrinkage in the number of failed carriers in recent months. The growing complexity of new trucks comes when there is a shortage of technicians. All told, winter’s toll may have permanently removed 2% to 3% of capacity.
HOS (hours of service) hasn’t just cut functional capacity by ~3%, but by irritating drivers capacity is further pinched. Short haul carriers like a gas hauler or one focused on multi-stops in which drivers take several short breaks, but few that reach the 30 minute rule, add to the frustration. Lost times on the weekend tied to the restart along with restarts not occurring on weekends, in which the driver ends up 200 to 600 miles from home all add to dissatisfaction.
Bids done in the fall or early winter, but not awarded until February or even March are not playing out very well. Carriers believe the rates are stale and are exercising 30 day outs. Larger carriers are receiving much bigger awards than they expected, but often in undesired or new lanes. When many bids were done there was often little consideration given to incumbency and in some cases there was little discussion about potential awards. This dynamic has created friction.
Larger carriers remain bold. One demanded a 4% hike with payment terms reduced to 30 days from 45. Within the hour the increase was 4.5% (extra lanes added) and 30 days was granted. Another asked for an 11% increase on selected lanes, but the shipper agreed to 13% for an additional 3 trucks a day. It won’t be that way all year, but for now these anecdotes illustrate the “wild west” nature of freight. We know of at least two shippers who increased their fuel surcharges (the pattern in recent years has been to reduce it) as a way to show more moderate base rate increases to their bosses.
Produce season has the potential to be “late and lame” due to the California drought. It’s too early to tell if that will help capacity from late April onward. LTL general rate increases (GRIs) are the earliest seen in years, but the implication is they are seeing capacity tighten, too. The odds of a second GRI in late summer or early fall are better than 50-50, in our opinion. Two GRIs were last experienced in 2010.
How is the economy doing? The private sector of the U.S. economy posted its slowest growth rate in 4 years. In 2013 private sector GDP grew 2.84%, above overall GDP of 1.9%, but down from 3.7% in 2012. As one shipper said, “show me evidence the economy got a lot better.” The economy feels similar, but the trucking difference may be a regulatory driven capacity crunch that has begun, likely to get worse in 2015 and beyond.
By: BB&T Capital Markets