An overly long exposure to poor market conditions that were aggravated by an enormous run-up in diesel fuel prices during the year’s first half made 2008 about the worst of times for the U.S. trucking industry – and the rough going is not projected to end anytime soon.
“The recession in the freight market started almost three years ago, when U.S. economic growth slowed from 3% to 4% a year, down to between zero and 1%,” says Noel Perry, managing director and senior consultant at FTR Consulting Group.
A former chief economist with truckload-carrier Schneider National, Perry says the freight market has truly collapsed – possibly contracting a further 10% in 2009, and that is putting a lot of cumulative stress on trucking operators that already have been struggling through tough times for a long period.
“We’ve not yet seen the full trauma of this in the industry, because the decline in fuel prices in late 2008 created a lag in fuel surcharges, giving those that have fuel surcharges a nice bump in cash flow for the last quarter or so,” he says. “But that disappears in the first and second quarter of 2009. Then they’ll have to deal with the freight market without that benefit.”
Perry believes one result of the end of the fuel-surcharge benefit will be a disproportionate number of small and medium fleets continuing to go bankrupt. “The gap between low- and high-risk fleets is huge,” he says. “In downturns, large fleets tend to do better than small fleets because they have cash reserves, and most large fleets entered this recession with a lot in reserve.”
Yet, even large trucking carriers found themselves struggling through 2008 and into 2009 – even those with solid balance sheets.
“The fourth-quarter 2008 operating environment was challenging and reflected the broad-based economic weakness that is now widely known,” Kevin Knight, chairman and CEO of Knight Transportation, says in the company’s year-end earnings report.
“Typical seasonal shipping patterns did not hold, as volumes were uncharacteristically weaker in the quarter. This is the third consecutive year where a strong peak shipping season did not materialize and price competition remained intense as carriers struggled to maintain equipment productivity.”
Adds Bob Costello, chief economist for the American Trucking Assn.: “Motor carrier freight is a reflection of the tangible-goods economy, and the numbers leave no doubt that the U.S. is in the worst recession in decades.”
The ATA’s January 2009 for-hire truck-tonnage index declined 10.8%, compared with year-ago – only a very slight improvement from December 2008’s 12.5% year-over-year drop.
“This confirms the U.S. is in the thick of a recession,” Costello says. “It is likely truck tonnage will not improve much before the third quarter of this year. The economy is expected to contract through the first half of 2009 and then only grow slightly through the end of the year,” Costello says.
“Tonnage will not fall every month, and just because it rises every now and then doesn’t mean the economy is on the mend. Furthermore, tonnage is contracting significantly on a year-over-year basis, which is highlighting the current weakness in the freight environment,” he says, noting any sustained recovery in tonnage is months away.
John Wiehoff, chairman and CEO of third-party logistics giant C.H. Robinson, says on a per business day basis, “our North American truckload gross profits declined in December and have continued to decline so far in January 2009.
The environment remains unpredictable, and we do not know whether our experience so far in January (2009) is a good indication of what the full first quarter or the year will bring. A sustained, slow freight environment is the most challenging for growth,” he says.
“It’s a very weak freight environment, and the real savior has been the decline in oil prices – if we did not get relief when we did, I am not sure what would’ve happened,” says Kevin Knight.
“Still, as bad as December was, January turned out to be better than we expected. Things are going to be difficult for a while, but I think we’ll see an improvement by the second half of 2009 and a good, strong rebound. And I think we’ll have low-cost oil for the next two or three years, though we still need to become less dependent on foreign oil.”
While Knight admits the current economic situation has made it extremely tough for truckers to survive, the lessons learned during this rocky period are expected to help his company succeed when higher freight volumes return.
“We do not know what the future holds for our economy, and it is not within our means to foresee when industry supply and demand fundamentals will come back into balance,” he says. “But we believe this dynamic could eventually set the stage for tighter industry capacity and more favorable rates.”
Truck Sales Tank
The outlook is even bleaker for truck OEMs, as the cumulative impact of slumping freight volume, high fuel prices and the addition of expensive emissions-control technology mandated by the Environmental Protection Agency causes new Class 8 truck sales to crater.
Eric Starks, president of FTR Associates, projects Class 8 sales in 2009 to be about 135,000 units. Under a “worst case” scenario, they could average about 95,000 for the year, although he believes it might go even lower. In fourth-quarter 2008, monthly Class 8 sales indicated an annual rate of 119,000, dropping to a 104,000-unit rate in December, alone.
Class 8 total net orders for all major North American OEMs fell to 6,167 units in February 2009, however, the lowest order rate in more than six years, according to FTR’s tally – figures that included orders for the U.S., Canada and Mexico, as well as exports to other countries. All told, February’s orders declined 21% from January, falling some 60% vs. year-ago, Stark says.
“Until February, orders had held up fairly well in recent months, despite the rapid decline in freight. February’s low order activity highlights the already weak fundamentals in the market. We have been anticipating this slowdown in order activity for some time now and expect orders to drop to 5,000 units or below over the next several months.”
Stark also notes the average age of commercial vehicles is increasing in the U.S., and could overtake its 1992 all-time high sometime between 2010 and 2012. Along with that, the size of fleets is shrinking, down 8% in 2008, so some old trucks won’t be replaced at all.
The dreadful market conditions forcedTrucks North America LLC – the U.S. commercial truck subsidiary of Germany’s Daimler AG that also builds the Freightliner and Western Star nameplates – to eliminate its Sterling brand and consolidate ongoing operations.
In doing so, Daimler’s plans call for closing its Portland, OR, and St. Thomas, ON, Canada, plants and move production of Western Star trucks to a new facility in Saltillo, Mexico, which already was slated to take over some manufacturing of the Freightliner Cascadia model in 2010.
The moves cost the company about $600 million and resulted in the loss of 1,200 salaried positions and as many as 2,300 hourly jobs.
“U.S. truck market conditions changed dramatically, and the moves are necessary to get DTNA back in fighting shape,” says Andreas Renschler, board member responsible for Daimler Trucks.
He points to the overall U.S. economic conditions, high fuel prices, the cost of meeting diesel-engine emissions standards and industry overcapacity as creating “a fundamental change in the U.S. truck market.”
An anticipated pre-buy of heavy-duty trucks in 2009 ahead of 2010 emissions changes also evaporated, forcing DTNA’s hand.
“Plans based on an expectation of brief, sharp market events driven by regulatory change, followed by periods of reasonable growth, are out-of-step with the emerging realities of the latter part of the decade,” DTNA President and CEO Chris Patterson adds.
Discontinuing the Sterling brand will allow DTNA “to adjust our business model with a 2-brand strategy,” Renschler says. The remaining Western Star and Freightliner brands had “substantial overlap” with Sterling medium- and heavy-duty models. Additions will be made to both brand offerings to address those niche markets left uncovered, he indicates.
The plant closings will reduce DTNA’s manufacturing capacity of 177,000 units by 20%, Renschler estimates. The Sterling plant in Ontario closed in early March 2009, when the Canadian Auto Workers union contract expired. The Portland facility, maker of Western Star and certain Freightliner military trucks, is slated to cease manufacturing operations in June 2010 at the conclusion of labor agreements there.
New Emissions Hurdles Ahead
The costliness of the final round of big-rig engine emissions-control technology upgrades in 2010 also is a source of concern to heavy-truck makers in 2008 and 2009.
Volvo Trucks North America, for example, announced it would add a $9,600 charge to the price of its 2010-complaint trucks, equipped with either its own engines (the D-11, D-13, or D-16) or Cummins Engine Co.’s ISX powerplant – all of which use selective catalytic reduction to meet the upcoming emissions standards.
The manufacturers hope customers won’t alter their buying plans too much based on the economic conditions and the extra cost for new emissions-compliant equipment.
“We recommend that customers try to maintain their equipment replacement cycles, and not disrupt their business and capital expense plans,” says David McKenna, manager of powertrain and engine marketing for VTNA’s Mack Trucks division.
“Our industry is still experiencing the impact of pre-buying ahead of the U.S. 2007 emissions rules. The trucks Mack is bringing to market next year will have the same MP engines we offer today – the only difference being one more year of real-world experience backing them up,” he says.
OEMs adopting SCR for 2010 – including Mack, Volvo, DTNA, andInc. – all stress there will be an economic advantage that didn’t exist during the 2007 emissions rule changeover: better fuel economy.
“For the first time, we can meet an EPA emissions hurdle with a net fuel economy improvement right out of the gate,” McKenna says. “For example, our Mack U.S. ’10 trucks also will come with up to 3% better fuel economy – and that’s on top of the improvements customers have already been seeing since we introduced the Mack MP series nearly three years ago.”
Allen Schaeffer, executive director of the Diesel Technology Forum, says one of the toughest things to realize as the industry heads down the home stretch towards the 2010 rules is how poor-market conditions in 2008-2009 could significantly delay the economic and environmental advantages the new technology brings to the table.
“All of this is pushing the benefits of 2010 technology back many years,” he says. “We’re delaying the benefit of cleaner technology because no one can afford it due to the economy. That also means the industry will be passing up the economic advantages, too, leaving fuel-economy benefits on the shelf. Instead, we’ll be burning extra gallons of fuel.”
More Carriers Could Close
With the deepening of the recession, more carriers are expected to consider leaving the market, while it seems likely others, with firmer financial footing, will take the opportunity to expand via acquisitions. Either way, the number of customers buying trucks will drop, further dampening expectations for a sales rebound.
According to a February 2009 national carrier survey conducted by Transport Capital Partners (TCP), 22% of carriers indicate they are giving serious consideration to leaving the transportation industry or liquidating if tonnage does not increase in the next six months.
However, 36% of respondents say they are interested in buying a company in the next 18 months, indicating many carriers feel that a down period economically is a good time to expand operations.
“It’s interesting that such a high proportion of people are saying they are considering getting out of the industry, but so many are also considering buying,” says TCP Managing Partner Richard Mikes. “I was really surprised at the number of people who said they would consider buying a company in this environment.”
In addition, 58% of respondents say they expect freight rates to drop over the next 12 months, compared with 20% who felt that way in November 2008. And 37% say they expect volumes to decrease during that period.
Mikes says the number of carriers whot answered “no response” to questions about freight volume dropping from 12% in November to 0% in February, which he attributes to people being firmer in their beliefs and, therefore, more willing to share it.
However, the overall tone is still overwhelmingly negative, he says. “People are very pessimistic right now. A lot of people are pressured and tired of the state of the economy.”
Sixty-two percent of carriers indicate a majority of their shippers are seeking a reduction in rates, while 64% say shippers are trying to redefine their fuel-charge formula. In addition, 42% indicate one or two of their major shippers have either gone out of business or are operating under bankruptcy protection.
Nearly half of the carriers surveyed say they have not reduced their non-driver staff since September 2008, while 26% have cut more than 5%, and 27% have cut less than 5%, TCP says.
Needless to say, 2009, like 2008, will be a very tough haul for the U.S. trucking industry.