Trucking Industry Insight (Spring 2016)

This document focuses on a number of topics that affect the trucking industry as a whole, including factors that affect profitability, the recent passage of the Fixing America’s Surface Transportation (FAST) Act and the implications of new rules that will require truck operators to use electronic logging devices to keep records of duty status. It also includes a brief summary of trends in used equipment values.

Hot Topics

Earnings of Large Trucking Companies Decline from Year-Ago Results: In April, three large publicly held trucking companies (Knight Transportation Inc., Landstar System Inc. and Werner Enterprises Inc.) reported first quarter earnings with all showing a decline in profits from a year earlier due largely to a softer freight environment. Primary factors contributing to the decline include excess trucking capacity, higher inventory ratios, weak U.S. industrial production and higher driver wages for the first quarter of 2016. During the same period, freight volumes and revenue per loaded mile remained relatively stable compared with the 2015 quarter. Looking ahead, expectations are that pricing conditions for truck services in the 2016 second quarter will continue to be impacted by more readily available truck capacity as compared to the year-ago quarter, and a relatively low per gallon cost of diesel fuel. While excess trucking capacity is currently present in the market, many expect an improved environment later this year due to significantly declining new truck orders, the recent expansion of industrial production, and increased regulatory burdens projected to phase in over the next several quarters that are expected to tighten industry capacity.

Trucking Tonnage Index Reaches All-Time High in February: In March, the American Truck Association (ATA) reported that its advanced seasonally adjusted For-Hire Truck Tonnage Index increased 7.2% in February to an all-time high of 144, exceeding the previous high of 135.8 reached in January 2015. The monthly increase is the largest since January 2013 (11.4%) and the largest year-over-year increase since December 2013 (10.4%). Year-to-date through February, compared with the same period last year, tonnage was up 4.8%. While pleased with the strong February performance, ATA Chief Economist Bob Costello cautioned against being overly optimistic noting that January was weaker than usual due to inclement weather. He also expressed concern about elevated inventories throughout the supply chain. “The Census Bureau reported that relative to sales, inventories rose again in January, which is troubling.” he said. “We need those inventories reduced before trucking can count on more consistent, better freight volumes.” Trucking serves as a barometer of the U.S. economy, representing 68.8% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled almost 10 billion tons of freight in 2014, while motor carriers collected $700.4 billion, or 80.3% of the total revenue earned by all transport modes.

Average Diesel Prices Expected to Remain Low: The Short-Term Energy Outlook released by the U.S. Energy Department on April 12 calls for on-highway diesel retail prices to average $2.11 per gallon during the summer driving season, down from an average of $2.74 last summer. The department defines the summer driving season as April through September. Diesel prices are expected to increase slightly as 2016 moves forward, hitting an average of $2.15 per gallon in the final quarter of the year. The actual average for the first quarter of the year was $2.07 per gallon. The price is expected to average $2.11 per gallon for all of 2016 and $2.33 per gallon in 2017.

FAST Act Advances Trucking Industry Priorities: The December 2015 passage of the FAST Act brings $305 billion in total authorized funding to the nation’s transportation programs and was welcome news to the trucking industry. It takes critical steps to improve trucking safety and efficiency. Notably, the bill takes steps to reform the Federal Motor Carrier Safety Administration’s CSA safety monitoring system, opens the door for the use of hair testing for federally mandated drug tests, makes it easier for veterans returning from service to enter the trucking industry and sets aside dedicated funds for important highway freight projects. By mandating that the Department of Health and Human Services set standards for hair testing, Congress has given trucking companies a powerful tool to keep habitual drug users out from behind the wheel. Other positive aspects of the bill include an enactment of a full study of the impacts of raising minimum insurance limits and a clamping down of a program to allow the conversion of untolled Interstate highways to toll roads. While the ATA is generally pleased with the bill, there also are a number of disappointing aspects. The bill misses opportunities to further improve safety and efficiency in trucking — particularly in the case of allowing younger drivers to operate in Interstate commerce. Additionally, the bill does not address the potential patchwork of state rules brought about by allowing California and other states to impose their own work and rest rules. While not perfect, the ATA believes the bill is a tremendous step forward for trucking in many respects.

Electronic Logging Device Mandate to Take Effect December 2017: A new federal rule published late last year will require truck operators to use electronic logging devices (ELDs) to keep records of duty status. The rule will take effect December 16, 2017, giving carriers and drivers a two-year window to comply with its requirements. Upon beginning use of an ELD, drivers will no longer be required to keep and maintain paper logs. They will, however, be required to maintain and submit supporting documentation to their carrier or, for owner-operators, to keep such documentation on file. The rule requires drivers currently required to keep paper logs to use ELDs, with the exception of drivers who (1) keep records of duty status in 8 or fewer days out of every 30 working days, (2) drivers in drive-away and tow-away operations and (3) truckers operating vehicles older than model year 2000. The rule also spells out safeguards against driver harassment via the devices, hardware specifications of the devices and the supporting documentation drivers must continue to keep after the mandate. The Federal Motor Carrier Safety Administration expects the rule to save the industry $1 billion a year, mostly in time and money saved on paperwork. The agency also expects that the rule will save 26 lives and prevent 562 injuries a year.

Trends in Used Equipment Values

The trucking industry is inundated with change. Understanding what is on the horizon for the industry can be invaluable in helping to develop long-term plans in related businesses (including equipment sales) in the months and years to come. Six trucking industry trends to watch in 2016 are as follows:
Continued Industry Volatility: If a consumer or business buys something, chances are it was transported by a truck driver at least once, if not more, before it arrived at its final retail outlet. According to the ATA, almost 70 percent of all freight tonnage moved in the U.S. is transported via truck. Consequently, volatility in the market equates to volatility in the trucking industry.

Increased Pressure to Fill Driver Shortage: A recent report issued by the ATA suggests that the U.S. trucking industry is currently 50,000 drivers short, a number which could rise to as high as 175,000 by the year 2024. Increased pressure to resolve the truck driver shortage is likely to result in higher average starting wages (and higher wages overall) as well as increased benefits and perks that make the job more appealing.

Higher Costs: Despite low fuel prices, carrier costs may well be significantly higher, given the strategies that will be used to address the driver shortage and the ever-increasing costs of doing business. Higher costs for carriers and owner-operators will mean higher prices for the manufacturers, distributors, retailers and others who need to move freight. This in turn will require that consumers pay more for associated goods. In addition, the new ELD mandates mean carriers will have increased costs when adding new fleet trucks or retrofitting equipment with the technology needed to comply.

Greater Focus on Safety: A high-profile safety incident has the ability to end a driver’s career and put a carrier out of business. Given the world we live in where anyone with a smartphone can take a photo or video that captures actions of an unsafe driver and instantly share it online, it is imperative that carriers pay more attention to safety than ever before. As part of the FAST Act, carrier safety ratings are currently not provided to the public, pending changes in how ratings are assessed. Once new rules have been approved and ratings assessed, this data will once again be in the public eye. Bad ratings have the potential to damage a carrier’s reputation; conversely, positive scores could be a deciding factor in helping carriers win new business and contracts.

Countless Opportunities: The transportation industry offers countless opportunities for entrepreneurs. From women who are looking to become drivers, to innovators who can improve logistics processes, to new trucking companies that use emerging marketplace trends to develop unique business models, the industry offers tremendous room for growth and change.

Increased Need for Working Capital: Industrial change rarely occurs without the need for working capital. Growing trucking companies have used invoice factoring companies to expedite cash flow in order to take on new business or reinvest in their organizations more quickly. The trucking industry is the lifeblood of the American economy, but cash flow is the lifeblood of a trucking company, especially for those that want to grow.

Considering the above trends, the higher cost of new trucks stemming from more stringent emission standards finalized in May 2010 and August 2011, and tighter truck emission guidelines recently proposed by the Obama administration, it is likely that the strong desire for used equipment will continue for the foreseeable future.

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