2010 Trucking Outlook - Public And Private Fleet Contrarian Thoughts

Summary

Some analysts are giving thumbs-up for truckers in 2010, due as much to another exit of capacity as an improvement in freight demand. We are more cautious and the reference article seems to get it right from our perspective. It is about freight demand versus truck capacity - and we don’t see a big change in either.

Analysis

As written in these articles and noted by others, it seems we ended the freight slide about a year ago. Additionally now after 3+ years, the freight tonnage seems to be trending slightly to the positive. In the midst of all this, major truckload (TL) carriers like Swift Transportation, Werner Enterprises, JB Hunt and smaller ones have decreased their fleet sizes notably - either deliberately or as a result of business failures.

Rates are not only hurt by shippers re-bidding their freight lanes, but also by aggressive logistics providers bidding down rates - both non-asset ones and fleets with brokerages. It’s a good time for shippers from this perspective, but it’s proving to be difficult get truckers to do the work. All of this is a repeat of history. The ~$0.07 per mile base rate lost last year will be slow to come back (due to those already bid out for the year).

The wildcard thrown out by some is that there is another expected surge of trucking business failures coming that will notably reduce capacity in 2010 due to increasing fuel prices and repos. Business failures have not followed the traditional spike in fuel prices in large part due to the fact that fuel surcharges are fairly well accepted and offset most of the costs (otherwise the freight doesn't get hauled). Fuel prices are heading higher, which some believe will cause more business failures again. That history will be offset again with fuel surcharge ($0.28 per mile this week). Also, banks we work with are successfully rewriting terms to the back end of contracts.

When one looks at the financials and operations of hundreds of smaller trucking companies, one first sees that the personal attention drivers get offsets the need for matching wages and newer trucks at major fleets. When one looks at the mix of new versus older equipment, most trucks on the road at smaller operations are capital financed with a notable percentage paid off - effectively driving down the equipment cost per mile up to half that at fleets with shorter trade cycles. This is good for $0.10 or more per mile. A change of 10% in same truck capacity (utilization) only affects the bottom line a couple penny’s per mile so they keep them running.

As one dealing with mostly smaller fleets and financiers, we recognize that there are several hundred thousand good trucks parked or on dealer lots. Stories of trucks being cannibalized or shipped offshore are exaggerated - just look at secondary marketplace. Comparing new truck prices and accompanying maintenance costs to increased maintenance costs on older trucks is getting a lot of scrutiny today - and the math is much closer than one thinks.

Trucks are so well built today that they easily go 800,000 miles to major engine overhaul (largest expense) and there is considerable data in the marketplace regarding maintenance and repair data past 1MM miles. When one looks at real maintenance costs, it takes about $5,000 to put parked trucks back on the road. Maintenance costs double to about $0.08 per mile for trucks in their second life (500,000-1MM miles). Contrast that against new trucks with all the emissions-compliance engine changes and devices, where we have a $10,000 up-charge from ’07 (that amount doubled versus pre’07 engines) costing 3-4 cents per mile more. Maintenance costs for operating the new systems is a similar amount to add on.

Truck ages are only up a year from industry norms since we had the easy financing that was introduced in the early ‘90’s. We see smaller fleets planning for longer truck life’s - and we all must remember, it is miles that wear out trucks - not age.

The bottom line is that we see 2010 as iffy at best. If fuel prices increase much more (let alone other headwinds), the consumer will keep their hands in their pockets. Any uptick in truck sales is heavily dependent on financing (remember big fleets make up a small percentage of total), which is tough.

We’d suggest rethinking this capacity metric and positive net result as noted by others. I still like Swift, JB Hunt, Marten Transport and Knight Transportation for unique and different reasons than TL as a whole.