In this column last year, FTR predicted a bumpy ride for 2014 in trucking, using phrases such as “modest growth meets static capacity,” “it’s all about drivers” and “it’s not a wave of regulations, it’s a storm surge.” Now, with 2014 in the rearview mirror, we can say our outlook was fairly on the mark. So where do we see things going for 2015, and will the coming months see a repeat of 2014’s stormy conditions?
It’s a tough call, because the current balance is precarious, so swings of just a point or two can make all the difference. To put it metaphorically, when you are standing on the edge of a cliff, just one more step can result in a radically different outcome. Our current view is that things won’t fall off the cliff in 2015, but given the current trajectory, 2016 may be another story.
There is no question that capacity is tight and that the driver shortage is real. FTR estimates active truck utilization is running about 97.5 percent. Critically, this level, although very high, is down a bit from the heights seen in early 2014. The difference, although small, is enough to keep the situation below the tipping point where shippers need to scramble to obtain capacity. It’s high enough, however, to keep upward pressure on rates.
FTR has consistently maintained that the major capacity risk for trucking has been regulatory. It’s the regulations in the pipeline that eventually will cause the truck capacity situation to turn critical. The important question is when? This is a political question and a risky one to answer, but it’s safe to say that things won’t happen any sooner than current expectations and perhaps will get pushed back.
Some may say that with Republican control of both houses of Congress and an acting administrator in charge of the Federal Motor Carrier Safety Administration, we should expect a dramatic slowdown in regulatory activity and perhaps a rollback of current hours-of-service regulations. Although possible, FTR doesn’t agree with this thesis and believes the major items in the current regulatory agenda have a great deal of momentum and are unlikely to be waylaid. Even so, despite all the regulations in the pipeline, 2015 is shaping up as a relatively quiet year in terms of actual implementation.
The FMCSA has pushed out a few of the major programs by six to 12 months. Some blockbuster items remain in the regulatory pipeline, most notably electronic logging devices and mandatory speed governing. When implemented, ELDs will have the near-term effect of reducing capacity as carriers that have been shading the rules with paper logs are brought into line with the hours-of-service regulations. Speed governing will bring an immediate and permanent reduction in capacity as trucks and drivers slow down and generate fewer miles per day.
It’s important to note, however, that these are now programmed for 2016 at the earliest, and implementation could slip further because of the normal variations in the regulatory process or court challenge.
So if regulation won’t provide further tightening of truck capacity in 2015, what about economic growth? Our expectation here is also muted. It’s true that economic growth rate has picked up lately, but this isn’t translating directly into equivalent growth in demand for truck transportation.
The complexion of the economy’s growth is changing, morphing from a manufacturing-industrial mix to a more varied composition including greater slices of retail and services. Although important in generating personal income and improving employment, growth in these sectors doesn’t produce the same kind of increase in trucking demand as growth in manufacturing does.
The net result is continued but modest growth in truck loadings in the vicinity of about 4 percent a year, a rate with which truckers can keep pace. The combination of the lack of new regulatory drag and good-but-not-great growth in demand will mean capacity utilization will remain at current levels in excess of 97 percent.
Although not high enough to spark a capacity crisis, utilization at these levels is more than enough to support rising rates. This is required because the truckers have been busy raising driver compensation in order to place more drivers behind the wheel, with limited success. These rate increases will continue unabated through 2015. The financial performance of the big carriers has been improving and they have responded in recent months by placing orders for huge amounts of new tractors and trailers. This doesn’t reflect intent to increase fleet capacity, but rather to freshen up the fleet after a number of years of increase in the average age. With values of late-model used trucks at high levels and new trucks offering big improvements in fuel mileage, the true cost for replacing a tractor is quite low.
When capacity utilization is running this high, even normal seasonality or weather disruptions can cause brief periods of increased tightness. A repeat of the polar vortex would qualify. Barring that, the early months of the year should be quiet, but the normal seasonal increase in March will see capacity concerns return. In such instances, rates could spike temporarily.
Small carriers, the backbone of the U.S. truckload fleet, will feel the biggest pressure in the coming year. Ever-increasing regulations and the difficulties of sourcing drivers will drive more of these carriers to hang up the keys, either in the form of being acquired or by simply turning off the lights. In the short run, however, plunging fuel prices will provide some near-term financial relief, because it will take fuel surcharges some time to catch up with the new, lower-cost reality, creating a near-term cash windfall for carriers.
Another wildcard will be the intermodal situation. Thanks to the rail service crisis, intermodal has switched from a potential safety valve to a potential additional source of pressure on truck capacity. Tight highway capacity is keeping shippers on the rail despite poor service. If intermodal service doesn’t improve, dissatisfied users could snap up any incremental highway capacity that frees up.
Drayage carriers won’t be immune from these issues. The traditional advantage they enjoyed in driver retention because of their family friendly, home-every-night lifestyle has been more than offset by the frustration and financial implications of the port congestion crisis. If a driver who’s paid by the load can’t make enough daily turns to earn a decent living, he or she will certainly find another job where that’s possible, within the trucking sector or elsewhere.
As a result of these cost and capacity pressures, we’ll see increasing collaboration between savvy shippers and their carriers. The driver hour is quickly becoming the most precious commodity in transportation, and carriers will be most interested in working with shippers who maximize the productivity of each of those hours. Shippers will find a widening rate gap between the costs to move good and bad freight. Good freight is predictable, low-touch, moving in lanes where the carrier has available capacity and to destinations from which follow-on loads are available nearby. “Bad” freight fails one or more of those tests.
Looking beyond this year, based on our current reading, the full capacity crisis will hit in 2016, when some of the aforementioned major regulatory items in the pipeline will be implemented. If nothing changes, demand will exceed 100 percent of available capacity and a true trucking shortage will result — something without precedent in our history. Of course, a lot could and probably will change between now and then. But prudent shippers should be putting a contingency plan in place now.
Lawrence Gross is president of Gross Transportation Consulting in Mahwah, New Jersey, and a partner at FTR Transportation Intelligence. A veteran with 34 years in the transportation business, he covers freight transportation, concentrating on the intermodal and trucking sectors from a transportation and equipment perspective. He is a frequent speaker at industry events. Contact him at ljgross@optonline.net and follow him on Twitter: @intermodalist.