By Jeff Thomas, May 15, 2008

Although the data is sending mixed signals, there is currently a general consensus among leading economists that we are in a freight recession.  Freight is a leading indicator of the economy as a whole, and freight volumes have consistently dropped in the US domestic market over the last 22 months. Let’s look at some of the impact of those reports, first with the less-than-truckload (LTL) industry, then truckload (TL) and Intermodal (IM).  We will address the impact of fuel on each market separately.

We have seen fallout and consolidation in the LTL carrier market during this period as trucking companies compete for market share at marginally profitable levels.  Smaller carriers are being purchased by larger providers if they offer enough of a niche or are strong in a particular geographical area that fills a need for the larger company.  Those that are not financially strong are either out of business or teetering on the edge.  Recent pullbacks in area of service by brand names like Jevic and USF Holland and USF Reddaway are proving that trucking companies must readjust to this changing marketplace and cannot afford to offer service in an area where they do not have the freight density or revenue to support operations.

With the global economy now in full swing, we are seeing a shift in US domestic freight volumes.  Long-haul freight volumes are down and not expected to recover as more and more companies have moved to regional distribution of imported goods, and even those that continue to manufacture in the US are creating a more efficient supply chain by using TL or IM providers to move their product across the country or from region to region and then relying on regional distribution for final delivery to the customer.  As a result freight volumes on regional LTL carriers are up and those that have a good business model are doing fairly well (i.e.: Southeastern Freight lines, A Duie Pyle).

The real toll is on the traditional long-haul carriers.  With the acquisition several years ago of Roadway by Yellow,  the newly formed YRC group (now including USF Holland, Reddaway and New Penn) combined the two largest long haul providers.  The strength of these two companies is a longer length of haul, the exact segment of business that is disappearing from the market, and there is much skepticism as to whether they can adjust their business model to accommodate the growth of the regional model.

The new breed of ‘national carrier’ is born out of each company’s evolution from being a regional carrier.  And while several companies now cover all 48 contiguous states, they still operate under a mentality and business model more suited to a regional carrier.  These ‘super regional”’ carriers ( Estes, R&L , ODFL , Fed Ex ,UPS ) are able to be more price aggressive than the traditional national carriers by offering a mix of competitive next-day transit times, as well as providing speed to market on longer haul and transcontinental freight movement.  The immediate future seems to belong to the more agile and dynamic regional and super-regional carriers.

We will discuss with Truckload capacity momentarily, so it is important to keep in mind that the LTL industry will be forced to ‘right size’ its capacity.  The impact of that on the shipper market will mean fewer carriers in the marketplace and a very limited selection of providers in certain lanes where density is typically lower and segments of business require specialized services.

Truckload transportation is a much more diversified market than LTL, and there are far more providers available in the market.  However, the same supply and demand factors are currently impacting the TL market as well as some unique pressures that impact TL providers.  Hours of service regulations, increasingly restrictive environmental regulations, the Mexican trucking market impacting the Southern California trucking economy, driver retention, the number of trucking companies that are small business (owner operators and fleets less than 100 trucks), and the major shift to IM transportation for longer hauls, are all having a reverberating impact on the TL market.  Truckload providers are dropping out of the market at an alarming rate as the industry struggles to align its capacity with the continually shrinking pool of available freight.  While this does not differ greatly from any other industry that would right itself by matching supply and demand through downsizing, the numbers are quite significant.

A recent article in Transport Topics listed the number of trucking company failures for the first quarter of 2008 at 1155, second in history only to the 3rd quarter of last year when 1320 companies went under.  In the article, the American Trucking Association (ATA) stated that those companies represented approximately 48,000 or 2% of the total class 8 trucks in operation in the US.  Sources stated that the number would have been higher had creditors allowed additional companies to fail.

Many smaller companies are simply unable to float the cost of fuel that must be purchased to move the load today, but will not be funded by the customer for 30 to 45 days.  The impact of these smaller companies’ failures will be felt as the year progresses.  The question looms in many industry experts’ minds as to how many folks will be willing to reinvest in existing companies, or invest in a start-up company with the increasingly smaller margins available.  

Over the last year, M33 Integrated Solutions has been working to build strategic partnerships with many of the larger truckload carriers.   Our thought process is that those larger companies have historically been much better equipped to ride out the storms of market variations and unpredictable fuel costs.  Their cash flows allow them to float fuel costs and operate with economies of scale that generate profits.

We feel that the industry will continue to purge itself of capacity, and that we will begin to feel a fairly significant surge in pricing pressures from the TL community as early as late summer or early fall of this year.  The current ‘Catch 22’ situation of excess capacity pushing pricing down while costs escalate will force this process to move forward rapidly.  M33 is building relationships with those carriers that will continue to be a force in the marketplace now while capacity is abundant in return for recognition as capacity tightens and carriers pick and choose what businesses they will handle.

While there are other factors impacting both of these market segments, diesel fuel at $4.14 a gallon as of April 21st (up from $3.27 on Jan 21st of this year) is having far reaching effects on transportation companies and the shippers who use their services.  Most industry experts I have spoken with expect to see $5 a gallon this summer, and a “new normal” that will see $4 plus a gallon remain.  Fuel surcharges are spiraling with these dramatic increases in fuel and trucking companies are also reducing the maximum speed of their trucks .  One national carrier confided that they are moving down from 63 mph to 60 mph, and they expect to see as much as $1 million per month in cost reduction as a result.   Additionally, as more emissions restrictions are placed on new truck engines, fuel economy continues to fall.  2007 engines are producing sub-5 mph fuel economy.

M33 is committed to both our carriers and clients to provide a fuel surcharge schedule that fairly compensates the trucking company while insuring that any fuel surcharge is not a profit center for the carrier.  The goal of M33 is to maintain an excellent working relationship with each and every viable LTL and TL carrier in the marketplace, and to identify those areas where the power of the Collaborative Client Network and the infrastructure that M33 provides through technology and expertise allow the carrier to perform at a high level at a market-driven price.  We will continue to temper our decisions and suggestions with a long term view and the most up to date information available.

We appreciate your trust in our partnership and will strive as always to keep you well informed and on the cutting edge of advancement in supply chain solutions.

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