a percent higher than it was compared to the same period in 2012. Carriers retired and trucks weren’t replaced when freight volume decreased during the Great Recession and when the price of trucks increased as a result of EPA regulations. Now for the good news. Both
economists agree a capacity crunch is coming at some point in the future that will cause shipping rates to rise. The cause of that crunch is simple supply- and-demand economics: The nation’s insufficient supply of trucks will meet an increasing demand in the improving economy. Costello said coming economic
growth will be driven in part by increased consumer spending. As the economy has recovered from the Great Recession, consumers have been active in high-tonnage sectors by buying hous- es and replacing aging cars. Now that housing growth will slow and auto sales have peaked, consumers will be ready to purchase smaller items. That should be good news for dry van haulers that experienced a flat first three quarters of 2013 and disappointing back-to-school sales. He expects volumes will increase but tonnage growth will slow after a 5.2 increase in 2013. Perry is less optimistic when it
comes to dry van haulers. He believes much of the year’s economic growth will be in the service sector rather than in consumer purchases. The two economists agree the
economy has yet to fire on all cylinders. Perry cited a weakening export market and stagnant incomes as causes of slow- er economic growth in 2014. “We’re talking about three percent freight growth, but it’s not as good as the five percent we’ve had before,” he said. Costello said the economy hasn’t
been terrible, but it has been incon- sistent. Freight loads surge and fall, making carriers reluctant to commit to adding assets. When the economy’s choppy performance stops, shippers will be looking for carriers. “I think the economy is going to be better this year, but the key is it’s got to be consistent,”
ARKANSAS TRUCKING REPORT | Issue 6 2013
“IF WE INDEED GET THIS RUSH OF REGULATION LATE NEXT YEAR, I THINK THERE’S GOING TO BE QUITE A CRISIS, AND WHEN THAT CRISIS OCCURS THERE
WILL BE GOODS THAT DON’T MAKE IT TO THE SHELF. AND WHEN THAT HAPPENS, CUSTOMERS WILL PAY
ALMOST ANYTHING TO GET A TRUCK.” —NOËL PERRY, PARTNER, FTR ASSOCIATES
Costello said. “But I suspect it’s going to catch a lot of people off guard. It’s just going to pop one day.” If and when it pops, shippers will
be looking for carriers, but carriers will have neither the drivers nor the trucks available to service them. Perry said carriers have been operating at high levels of utilization at the expense of the industry’s surge capacity. If there’s a surge, rates will increase. “If we indeed get this rush of regu-
lation late 2014, I think there’s going to be quite a crisis, and when that crisis occurs there will be goods that don’t make it to the shelf,” he said. “And when that happens, customers will pay almost anything to get a truck.” For the carrier industry, this will
represent unusual territory. According to Perry, the industry has seen sig- nificant rate increases only four years in its history: 2004-2006 and 2010. Otherwise, it’s made money by becom- ing more efficient. Carriers and ship- pers have trained each other to expect rates to fall when a shipper asks for a discount or threatens to find another carrier. “Four years out of the last 100, we’ve been asking for aggressive rate increases,” he said. “We don’t know how to do it very well.” Not only is the nation’s fleet small-
er than it needs to be, but it’s also older than it’s been in the past. Industrywide, the average age of a truck is now seven years, said Costello, though trucks aren’t driving as many miles as in the
past and therefore don’t need to be replaced as often. Some publicly traded companies are averaging about three years, giving them a sizable competitive advantage in fuel efficiency and main- tenance costs. Some smaller fleets are struggling with the high costs of new trucks and find it difficult to obtain financing. “Bottom line, there’s a lot of pent-up demand, but margins have to improve, and if they don’t improve fast enough, you could see where some of these smaller fleets go out of busi- ness because they’ve just simply gotten nickeled-and-dimed to death on their maintenance costs,” he said. So profit margins will compress in
the short term because of higher driver wages but then expand in the long-term because of economic growth and the coming capacity crunch. What could be wrong with this picture? Unfortunately, there are some wild-
cards. Perry believes that financial mar- kets are becoming wary of the Federal Reserve’s purchase of long-term bonds, and when that happens, interest rates could rise. He said a 100-150-basis- point interest rate increase is a “high likelihood” over the next couple of years, but there is “a smaller, but dan- gerous possibility of a 3- or 400-basis- point increase.” One hundred basis points equals one percent. “In the next year or two, there’s a significant risk of interest rates ris-
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