As 2002 dawns, trucking faces a long stretch of rough road, full of blind curves and unpredictable grades. That's the consensus of a number of industry figures polled by Road King in late 2001.
All agreed the Sept. 11 terrorist attacks had derailed hopes for a swift rebound of the economy and thus of trucking’s fortunes for some months to come.
Even before Sept. 11, the picture for trucking was gloomy – gloomier than the last major turndown in 1990-91. Freight had slowed, trucking companies were failing at near-record rates, rising insurance costs were offsetting falling diesel fuel prices, and credit was drying up. The used truck market remained glutted, with more vehicles poised to roll in from fleets and prices still depressed.
Is there any good news besides lower diesel prices? The shakeout among trucking companies has effectively, if temporarily, wiped out much of the driver shortage of the 1990s. Freight capacity has shrunk because of the business failures, which could give fleets some leverage in trying to raise rates.
Like Darwinian evolution, the survivors of this exceedingly difficult period will become more efficient, more productive and smarter. That's true for everyone, from the biggest manufacturer to the newest rookie wheel holder.
Economist: “Where's the bottom?"
Industry analysts at the American Trucking Associations' annual meeting in Nashville, Tenn., in October painted a glum picture of 2002. Their predictions included more bankruptcies and mergers, low freight volumes, cuts in driver pay, tighter credit, higher insurance rates, and lagging sales of new and used trucks. About the only good news was that diesel fuel prices will probably dip lower.
Martin Labbe, president of Martin Labbe Associates of Ormond Beach, Fla., said the economy "is in uncharted waters, and we don't know where the bottom is." Consumer confidence is dropping, unemployment is rising and manufacturing is slowing down. It all adds up to less freight.
Trucking companies, especially small- and medium-sized ones, will continue to fail in large numbers, said Donald Broughton, a transportation analyst with the investment firm A.G. Edwards & Co in St. Louis.
Broughton predicted more than 4,200 companies will shut down this year. "That number would be even higher if the creditors knew what to do with the trucks," he said.
Many trucking companies remain in business today only because their creditors loaned them money last year to renew licenses, he said. It is not likely that will happen again in the present economic climate.
Credit requirements are tightening. Some lenders are asking for 20% down payment on the market value of a truck and proof of five years of profitable operation. "Five years of profitable operation would eliminate some publicly traded carriers, much less a lot of the smaller private ones," Broughton said.
Broughton predicted trucking company mergers would continue, with fleets getting bigger, while smaller and independent operators fail or align themselves with fleets. He and Labbe both said private fleets would grow, which could mean opportunities for common carriers to secure dedicated routes.
Broughton said driver pay – especially for new drivers – has begun to drop. This seems likely to continue, he said. But Labbe said he believes driver pay will gradually rise over the next few years, perhaps as much as 25% by 2004. At the same time, insurance will go up at least 15% a year.
Despite the bad news, Broughton said we could see some recovery in the general economy before summer 2002. But the bottom line, all three agreed, is gloomy trending toward grim for some time to come.
Truckload: "Significantly stormy seas"
Beset by driver shortages, depressed freight rates and intense competition in the1990s, the truckload segment was mugged by soaring fuel and falling freight volumes in 2000. While 2001 saw some relief on fuel prices, insurance premiums rose and credit tightened in a sluggish economy. Then came Sept. 11, and the bottom fell out, said Bob Hirsch, president of the Truckload Carriers Association (TCA).
"Everybody is still wondering what freight will be like this year," Hirsch said. "I suspect the ability of the economy to turn around will be based in the largest measure on what happens to consumer confidence.
"The stock market appears to be rebounding (in late November) but consumer confidence clearly is not there." The earliest hope for a rebound is in the second quarter of 2002, Hirsch said.
Meanwhile, fleets hope for some rate relief. "The old paradigm for rates was to go for an across-the-board raise. Carriers now have to be more analytical," and work with shippers on increases for specific routes.
"There's more of an understanding on the part of carriers and shippers that they can't continue to do business as usual," Hirsch said.
That's true in hiring, too. Carriers are focusing more on driver retention rather than recruiting. They can afford to be picky – and should be, he said. "The government keeps ratcheting up the qualifications and that affects the size of the available pool," but the industry has been slow to respond.
TCA is working with two groups – La Raza and The Urban League – to develop programs to attract Hispanics, Latinos, African-Americans and other minorities to the industry. TCA is also pursuing a controversial younger driver program that would create an apprentice-driver style program for 18-to-20-year-olds and allow them to drive interstate routes under close supervision.
Without higher rates, there's little hope for better driver pay, Hirsch said. "I don't think there's a carrier out there who doesn't want to pay drivers more money. The shipper community needs to recognize they are also in the boat with us, and we are all dealing with significantly stormy seas."
LTL driver shortage?
Timothy P. Lynch, president and CEO of the Motor Freight Carriers Association (MFCA) thinks the next big driver shortage could come in the highly unionized LTL segment. Many drivers are nearing retirement, and Lynch said it will be hard to replace them.
"Traditionally people looked at LTL, particularly the unionized area – as not having a driver problem. But now it is increasingly facing the same challenges as other segments," Lynch said.
MFCA, the national trade association representing unionized general freight carriers, doesn't see much of a rebound until at least the end of the second quarter of 2002 or even into the third quarter. The outlook for LTL freight is iffy, he said. The overnight and two-day delivery segments are growing, but long-haul LTL looked stagnant.
New and used trucks: Rerun of '01?
New truck production continued to sag in 2001 as orders fell and dealers sold down inventories. The outlook for 2002 is complicated by the sluggish used-truck market and uncertainty over what effect the new low-emission diesel engines will have on vehicle design, fuel economy, maintenance and, ultimately, price (see "Oil Change" on page 22).
As Road King went to press in December, the EPA had not issued final rules on the technology. The EPA's delay threatens engine and truck builders' ability to meet the deadlines and to price trucks, said Ed Caudill, general manager, Kenworth Truck Co. and vice president, PACCAR.
"A lot of fleets are looking at taking all their new trucks before October, while others want to wait until 2003 to see what happens," he said. Fleets are also considering either running older equipment longer since used truck prices remain depressed, or buying late model, low-mileage used trucks instead of new ones.
“We could see used truck values improve with low-mileage trucks with pre-2002 engine in demand,” Caudill said. With this in mind, he said North American Class 8 production for 2001 would be near 150,000, with the same in 2002.
Caudill expressed worries about the general health of the trucking industry. "There are so many marginal fleets now. We are very concerned about an increased failure rate in the first quarter when taxes and licenses and insurance premiums come due for a lot of these fleets," he said. Lower fuel prices might offer them a reprieve if the prices continue to drop as they were in late 2001.
If there is a surge in trucking company failures, there could be a shortage of freight-moving capacity later in the spring, Caudill said. Freight rates may rise, due in part to "the demise of owner-operators. It’s really a question of demand and capacity. Nothing indicates a swift resurgence of owner-operators, because they can’t get trucks financed."
As truck sales have fallen since 2000, new model introductions have dropped dramatically. However, International Truck and Engine is continuing to roll out new "high performance" models to replace its current line (see "Driving International’s 8500," page 10).
The new models have proved popular. Still, International saw its hopes to net a profit in 2001 dashed by the Sept. 11 attacks.
"Demand for heavy trucks has been down this year. While things have been better on the medium side of the business, we have started to see some erosion in that area as well," said Steve Keate, president of International’s truck group.
"The truck market in North America remains weak, and this trend is expected to continue for at least another 12 months," said John R. Horne, Navistar chairman, president and CEO, in early December. The used truck glut has affected International somewhat, but not as much as others, Keate said.
Truck sales in 2002 will likely be a repeat of 2001, said Michel Gigou, president and CEO of Volvo Trucks North America. As one of the first builders to reduce production in 2000, Volvo's new truck inventories shrank to acceptable levels by the end of 2000. It is not burdened with excessive numbers of used trucks, he said.
However, he noted the many "fresh, low-mileage" used trucks available compete with new trucks – and used Volvos – and will do so for some time to come. To offset this, Volvo has launched "Generation 2," a used Volvo program offering 1998 and younger Volvos with less than 500,000 miles with generous financing.
Volvo, which also builds its own engine line, has focused on integrating its low-emission "V-Pulse" engine technology with vehicle chassis design to avoid a last-minute scramble to fit everything under the hood, Gigou said. Cummins Engine, which has partnered with Volvo to develop truck power plants, has also coordinated those efforts with chassis designers, he said.
Gigou noted there would be some loss of fuel economy and a price "surcharge" to pay for the new engines. Still, he said, "Our product will be a huge surprise to the market in its overall efficiency."
