ATA economist says tank fleets still outperforming other trucking sectors on the revenue front

TANK truck carriers continue to outperform the rest of the trucking industry, and 2012 should be a another good year for tank fleets, according to the economic reports presented during the National Tank Truck Carriers 64th Annual Conference May 6-8 in San Francisco, California.

The tank truck industry grew at just under 20% during 2011, and the industry is still growing in 2012, but at a somewhat slower pace, according to Bob Costello, American Trucking Associations chief economist. “We believe the tank truck industry will see growth in the 5% range this year, but the slowdown was expected.”

Tank truck fleets continue to benefit from strong activity in the energy and manufacturing sectors. Automobile sales are solid; plastics production should grow by around 2.5% for the next three years; chemical production should increase at about the same rate; construction is rebounding with cement demand up about 6.6% in 2012.

Still, Costello pointed to some storm clouds: Trucking companies that generate under $30 million in annual revenue are still downsizing. Cash flow issues could push some of the smaller carriers out of the industry. Inflation is rising faster for the trucking industry than it is for the rest of the economy. Fleets were 3.7% smaller in March of this year than they were in March 2011, he said.

“Why is this going on?” he asked. “I meet with a lot of carriers, and when I'd talk to the large carriers, we'd consistently hear, ‘We have to replace the bottom 20% of freight with good freight.’ We are starting to hear some of this out of smaller carriers. We as an industry have gotten more disciplined and smarter, and a lot of smaller fleets are doing this. I believe the equipment situation we are in today is as big a threat on small carriers as fuel is — maybe bigger.”

He cited replacement costs as an example: In 2006, a new tractor cost $95,000. If they had a three-year-old tractor to trade, they got $50,000 and had to finance $45,000. In 2011, a new tractor cost $125,000 (largely due to two EPA-mandated engines). If they had a seven-year-old tractor to trade, they got $20,000 and had to finance $105,000.

“Smaller fleets can't afford that, so they're holding onto tractors longer,” he said. “So they're getting nickel-and-dimed on maintenance costs. Some have turned more to leasing. We see more leasing out of smaller fleets than we've ever seen in the data, but leasing costs have gone up.”

He said that in 2009, there was an oversupply in for-hire truckload, with a lot more trucks than loads. Now, these two have come together.

“It is better than it was,” he said. “If I'm wrong and this economy surprises to the upside, things are going to get real tight real fast, because any capacity additions are matching demand growth.

“The bottom line on capacity is that we have a driver shortage, carrier fleet reductions, rising barriers to entry, regulations, aging fleet, equipment costs working together for tighter capacity. On the regulation front, sometimes we oppose regulations and sometimes we support them. But I've yet to find a regulation I can point to, whether we oppose or support it, where I say, ‘That's going to bring a lot of capacity into our industry.’

“My warning to you is on the cost side of the equation. We are seeing much higher inflation rates than in the macro-economy. There were double-digit increases in tire prices in the second half of last year. Regulations. Equipment costs going up. Fuel, drivers; it's all building. We have a lot of cost pressures on us right now.

“As of last month (April), the Energy Information Administration was forecasting $4.15 per gallon for diesel this year. I suspect that number will come down, but it still will be quite high. Last year, we spent about as much as we did in 2008 — just under $143 billion — buying diesel fuel. There are industries out there that don't even have revenues of $143 billion.”

Costello on other trucking topics:

• Quarterly truckload linehaul driver turnover.

  “It's a big cost for this industry. At 100% annualized turnover in the truckload industry, it's going to cost the industry $750 million to $1 billion. The low point for driver turnover was 39% in 2010, and we went back up to 88%. We won't get back to the 136% we saw in late 2005, but the numbers will increase.”

• Real average weekly truckload driver wages.

  “Adjusted for inflation, they have actually gone down. How much a driver can buy: in 2011 it was down 10.5% from 1990. This doesn't surprise a whole lot of you, but what I tell shippers and the federal government all the time is, ‘Hey, as you demand more drivers, you're going to pay them more.’ But this goes beyond just paying drivers more. The markets will figure it out. But what are your weekly earnings? It's not how much you make, whether per mile or load, but how much you're working. Our drivers are getting fewer miles than they used to. If they're getting paid by the mile, they're not getting as much as they used to. We track it. The supply chain has been changing for some time: shorter average length haul and so forth. But it's also tied to productivity.”

• Truck tonnage.

  “Tonnage continues to grow. Year-over-year growth rates are slowing down. I think this will be a normal year of somewhere between 3%-4% after two years of over 5.5% growth rates. Don't' be too alarmed by that. We fully expect it to happen. Tank loads — liquid and bulk — are leading the truckload. It has a lot to do with the makeup of your freight.”

• Class 8 truck retail sales.

  “They will be about 200,000 this year and 220,000 in 2013.

Most of the trucks are going for replacement, rather than adding capacity. Carriers with at least $30 million in annual revenue have added some capacity. The rate is slowing and this group is still not where it was prior to the recession. Even though they're operating more trucks than they were in 2010 and early 2011, there are still less than there were in 2008.”

Overall economic summary

Last fall, when Costello told people that the chance of a recession was 40%, they got nervous and asked, “Are we slipping back into recession?” He told them, “No, I don't see it, because trucking's not showing that we're going into a recession. Tonnage has been a very good predictor of a recession, and if it fails, it tends to over-predict.”

Now the chance of a recession has been cut in half to 20%.

“Freight is slowing, but has not gone south,” he said. “The remaining recession risk is primarily from external factors. We're getting a nice lowering of oil prices. The eurozone — the government in France, and who the heck knows what's happening in Greece? … If in fact we have a complete collapse of the European zone, that would be enough to throw us into recession. But assuming they get their act together, it's not.

“The economic data in 2012 has been mostly encouraging, but I'm not surprised that the economy has slowed from late last year. Everybody got worked up about the first-quarter GDP number, but it was exactly what I expected. Trucking had showed that things had slowed down from the rapid pace of the fourth quarter, but it's still growing. I think this year actually will be a little more consistent than last year.”

His other observations:

• Manufacturing is leading the recovery.

“Believe it or not, we have a nice recovery, a systemic change in manufacturing in this country. We’re not quite back to where we were prior to the recession, but we have gained ground. It’s projected to go up 5.5% in 2012, or 8.9% in durable goods only, and then 3.6% and 6.3% in durable goods only in 2013. In the long term, I think US manufacturing can have a resurgence. The reason is because labor is becoming less important in the manufacturing process. When you take labor out of the equation, guess what? Our manufacturing plants not only look good, they look great compared to places like China and India. What we ultimately care about in this industry is what we’re producing, not necessarily how many are employed.”

• Housing is turning the corner.

“Projected for 2012, multi-family dwellings will be up 44.6% and single family 11.7% for a total of 21.2%, and in 2013, multi-family up 27.4% and single-family up 40.7% for a total of 36.1%. After falling 8.1% last year, we can grow as much as 12%. We’re not going to get back to that two-million-starts level in a long time, if ever, but we’re moving in the right direction.

“The important thing that’s going on in the housing sector is that there is more pent-up demand. This is tied to labor markets. A lot of kids are moving back home, and Mom and Dad are not happy about that. They couldn’t move out because they didn’t have a job or had one that didn’t fit their educational background. Have these people given up on getting a better job, or a job, and finding an apartment eventually, settling down and having a family? No, they have not. When the labor market improves enough that it absorbs these workers, demand for housing is going to go up significantly. We’re not quite there yet, but we’re turning the corner. 2012 is a transition year.”

• The consumer is hanging in, but is not leading the recovery.

“Real consumer spending has been up 2.1% and 2.2% in the past two years, after adjusting for inflation. Headwinds include a labor market that’s not growing as fast as we’d like. Energy prices were climbing, but oil and gas prices are coming back down. But savings rates are starting to come down a bit and consumers are bit more optimistic about the future. What would make 2.2% go higher? Certainly the job market.

“The unemployment rate is projected to drop to 8.2% this year and 7.9% next year. Businesses don’t want to add a bunch of jobs. They’re nervous about the strength of the economy, and definitely nervous about the election. The rate has slowed the last few months. We were over 200,000 jobs per month created, and in April it was only 115,000.

“My advice to you is, don’t pay much attention to the unemployment rate. Look at how many jobs we’re creating. When we get closer to 200,000, we will feel a lot better. Even if the unemployment rate starts to go up, don’t get nervous. If we’re creating between 175,000 to 200,000 each month, that is an excellent sign about this economy.”

• Light auto sales are forecasted to grow from 12.7 million units in 2011 to 15.7 million by 2014.

• Plastics production is expected to grow about 2.5% per year over the next three years, including a 3.5% gain this year.

“We’re not quite to where we were prior to the recession, but we’re moving in the right direction.”

• Chemical production continues to rebound after bottoming out in 2009.

“We expect annual average growth of 2.3% per year.”

• Cement production grows 5.8% per year on average over the next three years, including a 6.6% gain this year.

• Food production is expected to grow 2% annually over the next three years.