Don’t count on another 2004 or 2005, but a steady economic recovery and ongoing capacity constraints could make 2011 a good year.
Coming out of the Great Recession, just about any improvement in or even leveling off of business conditions feels like good times. For many trucking companies, 2010 was a transition year that started out almost as badly as 2009 – one of the worst years ever – but improved by the second quarter. As the year wore on, however, the recovery’s pace seemed to slow. “We have seen a slowing of our business since we had our highest volumes in June,” says Clifton Parker, president of Gaston, S.C.-based G&P Trucking.
In 2011, most analysts see the economy gradually returning to something approximating what we have come to think of as normal. Meanwhile, trucking operations are only just beginning to put idled trucks on the road and adding to their fleets, and the industry faces continued constraints on capacity, including a driver shortage and a greater focus on safety and compliance through the Federal Motor Carrier Safety Administration’s new Compliance Safety Accountability (CSA) initiative. As freight demand strengthens in 2011, the trucking industry’s survivors should enjoy the pricing and profitability benefits of all downsizing that occurred in 2008 and 2009.
“It will be A ‘Tale of Two Cities,’” says Donald Broughton, managing director and transportation analyst for Avondale Partners. With housing and employment weak and credit markets still mostly frozen, 2011 will start out as more of the same. As those factors improve, however, and trucking capacity holds steady, things will start to look very different. “By the end of the year, truckers will have the opportunity to capture the strongest pricing power in recent history.”
“I think it will get quite a bit better than we have seen in the past three or four years,” says John Larkin, managing director and transportation analyst for Stifel, Nicolas & Co. “That will become evident around the end of the second quarter.”
Many carriers are similarly upbeat, especially in light of CSA. “We are very bullish on 2011,” says James Towery, president of Springfield, Mo.-based flatbed carrier Steelman Transportation. “We have survived and now we are out selling on safety record, performance and stability.”
Not all carriers are so optimistic, but almost everyone sees that the greatest benefits will be on the capacity side, not demand. “I expect freight demand to grow somewhat faster than the supply of capacity, tightening things up a bit,” says Brian Kinsey, president of Lithonia, Ga.-based Brown Trucking Co. “But it will still not be robust either way.” Gary Salisbury, president of Hope, Ark.-based flatbed carrier Fikes Truck Line, sees a similar dynamic. “Freight volumes on a whole will remain flat,” he says. “However, because of a driver shortage, demand for truck capacity will continue to grow. I do see the overall economic picture improving throughout 2011.”
Starting out slowly
The last time the trucking industry enjoyed widespread boom times – roughly 2004 through 2006 – carriers benefitted from both strong freight demand and tight capacity. Consumer spending was high, and the housing market was surging, generating strong demand for construction materials and home furnishings.
Although the recovery is still young, this time around the freight market isn’t nearly as hot, at least not yet. Gross Domestic Product (GDP) likely will rise 2 percent or just slightly higher in the first half, growing to around 3 percent by the end of 2011, says Bob Costello, chief economist for the American Trucking Associations. By comparison, GDP growth was 3.6 percent in 2004 and 3.1 percent in 2005.
“The fourth quarter of 2010 is better than I thought it would be,” Costello says, adding that the job market is outpacing his expectations slightly. “There still are some headwinds – housing and the credit situation, which while improving is still not good.” The recent tax credit for buying a house expired in April, and it appears that it didn’t generate new demand but rather just pulled forward future demand, he says.
“The downside risks are starting to fade,” says Eric Starks, president of freight transportation forecasting firm FTR Associates. Housing doesn’t look to improve, but it’s not getting worse, he says. “It’s unlikely that the housing market will unfreeze in the first quarter, but it could accelerate in the second half.” Meanwhile, personal income levels are starting to firm up, and the bleeding in employment levels has stopped.
“The consumer is still holding back for the most part on spending,” Starks says. “If consumers want to go out there and spend, they finally have some cash.” Meanwhile, there are upside opportunities in the form of strong manufacturing demand, low inventory levels and pent-up business demand for equipment and parts replacement, he says. “As things start to improve, people will start upgrading. Businesses out there are flush with cash.” Freight is choppy now, Starks says, but he sees demand trending upward in the second half of 2011.
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